Xperi Inc. (XPER) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Briona and I will be your conference operator today. At this time, I would like to welcome everyone to the Tessera Technologies Third Quarter 2015 Earnings 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 conference over to, Mr. Don Markley. Please go ahead sir.

Thank you, Briona. Good afternoon and welcome to Tessera Technologies third quarter 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, November 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 September 30, 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 third quarter financial results news release issued earlier today. Now I would like to introduce Tessera's Chief Executive Officer, Tom Lacey. Tom?

Don, thank you very much. 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 third quarter 2015 results, as we head into the home stretch and the final corner of the year. We will provide an update on our key growth initiatives, our Q4 guidance and 2016 recurring revenue base line as its stands today. During our next earnings call we look forward to providing you more details on 2016 as we are currently preparing for our annual planning session with our Board of Directors schedule later this quarter. As you will again here today we remain very positive on the developments of the company and we are optimistic about our future. Due to the continued excellent contributions of many of our employees and contributions of our customers Q3 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 seventh consecutive profitable quarter on both a GAAP and non-GAAP basis. Our financial management continues to be strong. As Robert will detail we significantly exceeded earnings per share forecast in part due to higher revenue, lower litigation expense and because of the reduced share count as a result of our buyback activities during the quarter. Our operating margin on a non-GAAP basis was an outstanding 71% for the quarter. The company is operating well. Our recurring revenue grew 40% in Q3 ’15 versus Q3 ’14. Our capital allocation program continues as announced. During the quarter, we paid our new quarterly dividends of $0.20 per share for the third time. Recall the previous dividend was $0.10 a share. Also, during the quarter, we bought back almost 1.2 million shares of our stock at an average cost of $33.62 per share for a total cost of approximately $40 million. The $40 million represent a record amount spend in any quarter in the company's history for buybacks. Our investments in R&D and technical collaborations with our customers progressed well throughout the quarter and continue to bode well for our future growth. During the quarter there was a positive development and our outstanding UTAC contract legal matter which I'll describe momentarily. Lastly, during the quarter we formally welcome the Ziptronix team to Tessera. Given we have place to great deal of focus on ensuring a smooth and rock solid integration of the Ziptronix employees, products, customers and capabilities I'm very pleased with the progress thus far on the internal integration and with the interest level from current and perspective customers. We are off to an excellent start and continue to have high expectations from this foundation or important 3D IC di-stacking [ph] technology. Moving to the business details let me provide an update on our primary organic or home grown growth initiatives. Which include our semiconductor packaging technology FotoNation emerging products and DRAM and non-DRAM new customer pattern licensing opportunities which we've virtue as our green field initiative. I will discuss each growth area. Let me begin with semiconductor packaging with a special call out to our newest edition, the Ziptronix team and technology. On the Invensas semiconductor packaging front we are making good progress on our commercialization efforts with leading customers on both our xFD and BVA platforms. We are also very excited about our latest edition of Ziptronix foundational inventions in the 3D IC di-stacking area. As previously mentioned we see such technical engagements as a priority for the organization and an important element of our strategy to successfully developed and commercialize our expanding portfolio of semiconductor packaging and interconnect technologies. Again regarding our newest edition the integration of Ziptronix has gone very smoothly to date. As we mentioned after the acquisition was announced we see ZiBond and DBI low temperature bonding as enabling technologies for 3D stacking. The technology has already been licensed to Sony in the image center space but it also has significant benefits for stack memory, MEMS, RF and logic applications. We've successfully transitioned the Ziptronix and technology teams in the Tessera and they are now actively working as one team to drive the technology development programs and key customer engagements that will allow us to demonstrate this capability and value to our customers so that they can integrate ZiBond and DBI technologies into their factories. We recently announced the collaboration with the Fraunhofer institute that will allow us to demonstrate DBI capability on their 300 millimeter line and we are engaged in early stage discussions with several key customers. As we mentioned after the acquisition we see Ziptronix technology as a multi $100 million revenue pathway over the next decade. We're very pleased with the integration, the way the integration has progressed, the talent of the team the positive customer feedback we have received and we are just thrilled to have Ziptronix as part of the Tessera family. Regarding BVA, we have been developing these technology as a versatile vertical interconnect platform with our first targeted application being a high density package-on-package or PoP solution primarily for smartphones and tablets. This technology enables higher bandwidth between processor and memory and smaller physical size by utilizing existing and readily available wire bonding manufacturing equipment. Our BVA technology qualification efforts with one of the four leading OSATs is progressing well. Their qualification lot builds look very good and initial reliability results are on track for Q4 of this year. We believe that successful qualification will provide a springboard for customer engagement and evaluations in 2016. In addition efforts to apply BVA to new applications such as MEMS and system-in-package continue to make headway and resulted in the signing of our first commercial BVA license agreement with [indiscernible], a mid-sized Taiwanese provider of microelectronics packaging and substrate manufacturing services for applications including wireless communication, MEMS and image sensors. We built the strong collaborative relationship with [indiscernible] and are excited about the prospects of continuing to work together to apply our BVA vertical interconnect technology to a wide array of new applications. Switching to xFD, after completing our internal build of functional DDR4 SRAM test units last quarter we've not built functional modules, verified basic functionality and performance at the module level and have subsequently delivered them to our customer for system level tests. Results are expected in the coming weeks and if they meet or exceed our customers' requirements we expect to see first commercial products with xFD technology available in the market in 2016. Although this is later than we had hoped for the beginning of the year we believe this will represent a significant inflection point for the xFD platform. On to our Greenfield engagements, I mentioned in our last call that the process to license a new customer it could take 12 months to 24 months to complete and the process involved is complex on both the Tessera and customer side. We continue to make good progress in moving these discussions forward. In our Q2 conference call I mentioned that two of our Greenfield customers were in the process of performing their own analysis of the portfolio. We currently expect that at least of these customers will complete their analysis this quarter and we’ll move to the next phase of our discussion. We also recently closed the new portfolio license agreement with Socionext in Japan. Socionext is a joint venture established in March 2015 between Fuzitsu, Panasonic and the Development Bank of Japan and integrate Fuzitsu and Panasonic's LSI businesses. The agreement will allow Socionext to manufacture the products and grow their business under a TCC license agreement and their decision to sign a license with Tessera reflects the continuing strength of our portfolio and the value it brings to our customers. We look forward to a long and productive relationship. As I mentioned earlier Socionext is already a FotoNation customer. Speaking of FotoNation let me provide an update on related activities during the quarter. FotoNation delivered another solid quarter just shy of a record. Gauging by current and potential customer interest from a variety of vertical markets such as sports cameras, drones, automobile, surveillance products, smartphones, citizen identification and the like we continue to believe we’re well positioned with the employee’s products intellectual property, that remains bullish on our growth prospects. Providing a bit more detail our leadership with FacePower continues and this is now growing into a more general purpose object detection stage with human body being the first objective interest for the computer vision used cases. Our ability to produce a market leading solution for video stabilization has also gain traction riding on our low power low latency and high performance mantra in video application markets for real-time videography and decision making as require. The mobile business continues to be the main study for FotoNation and where we expect the most opportunities for now. We continue to have substantial efforts towards continuing to grow our business by expanding the number of customers with whom we partner. During the quarter we announced an important design win with Huawei, where product shipments and associated royalties have commenced. Similarly, we won an important design win for life, focused fast focused technology for a flagship phone for one of the top smartphone providers based in Asia. We continue to pursue SoC design wins where by our RTO code is embedded on leading SoC chips. During the quarter we made solid progress on one such import silicon provider where we recently announced the design win in partnership with Socionext. Via continued customer and ecosystem interactions we continue to believe that biometric technology will continue to be an important capability for computer and handheld wireless devices. Authentication technologies will be an important part of overall identity theft reduction on computers and wireless devices. As such our face authentication developed from our leading face detection technology and IP and a recently Iris biometric authentication technologies continues to be a strategic growth opportunity area for FotoNation. Just last week we produced our first form factor demo that incorporate face and Iris authentication into a smartphone. We believe this proof of concept demonstration is an important and significant step in ultimately securing subsinet [ph] of design wins. Overall authentication market is huge and growing and competitive and the fact we have a lengthy heritage strong IP and now have form factor demonstration capability in this space gives us reason to be optimistic about our ultimate success. Our automotive efforts although longer from the time to market perspective than smartphones continues to make solid progress as we work to secure commitments from leading Tier 1 systems providers. These Tier 1 customers would be our go-to-market partners. Lastly, under the direction of our new CTO, Steve Teig, we have substantially increased our focus on machine learning and neural network technology. We expect this technology to ultimately make substantial additions to our capabilities that currently part of our FotoNation technology in addition to other significant market opportunities. Next I would like to talk briefly about our inorganic growth opportunities specifically M&A. given the strength of our management team which exuding very well, our balance sheet continued strong profitability, we continue to explore M&A opportunities. These opportunities include a wide variety range of options, including smaller tuck-in acquisitions, like we did in the fourth quarter of 2014, with smart sensors and iris biometrics company to moderate size transactions like we just did with Ziptronix to larger transformative opportunities and sizes in between. We continue to look at options versus overall strategic vision for the company, Robert, the Board and I all share exactly the same philosophy regarding M&A. We have a very discerning approach to acquisitions with an eye towards shareholder value creation. We are very through and the vast majority of opportunities, we look at don’t pass our criteria. This is an area where patience is simply a virtue. And I am pleased with both the overall activity and the quality of opportunities we are exploring. In summary, although my staff can attest although I want things faster and cheaper and better, given the complexity of a number of our initiatives, I am pleased with the overall progress on our growth initiatives. Our internal R&D efforts, our Invensas semiconductor packaging, our new Ziptronix initiatives and our FotoNation imaging technologies continue to make solid progress as we work together with our customers and partners. Similarly, I am pleased with the volume and quality of M&A options. Before turning the call over to Robert I’ll provide brief update on our outstanding litigation matters. As those of you who have followed Tessera know, we have successfully settled almost all of our outstanding litigation over the past two plus years. As I have said before we continue to view litigation as a last resort, but sometimes litigation is necessary to protect our rights and ensure that our stockholders receive a fair return on our valuable inventions and intellectual property. In the UTAC Taiwan, breach of contract case, the court has scheduled the trial to begin in February 2016. In October, just last month the court denied UTAC’s motion for partial summary judgment which sought to limit the geographic scope of a licenses agreement. The court ruled that agreement in fact covers both U.S. and foreign patterns and that any royalty should be calculated on a worldwide basis. We view this ruling as very positive development in the case; obviously there remain variety of factors that could change in the case including a number of matters that are currently under consideration by the court. We remain confident, our position in this case. With respect to the Toshiba breach of contract case, the case is still in the early stages. The first case management conference with the court was held in October. The court set a trail day for June 2017, with an initial summary judgment hearing in September 2016. The remainder of the case schedule be determine by stipulation of the parties, we will now proceed to the discovery phase of the case. One last matter, in connection with our acquisition of the Ziptronix, we inherited a litigation matter that was already pending at the time of the acquisition between Ziptronix on the one hand and TSMC and Omnivision technologies or OVT on the other. Ziptronix filed this case in December 2010 in federal court in the urban district of California, alleging at TSMC and OVT infringed nine of Ziptronix zibond patterns. TSMC also asserted counterclaims alleging that Ziptronix in fringes certain TSMC patterns. There is no trial date set in the case, the party have been engaging in mediation discussion before the acquisition and after and are planning to continue do engage in such discussions. As we have demonstrated numerous time over the past two years, our intent is to reach a settlement that enable a closer technical working relationship and collaboration between the companies. I’ll now -- turn the call over to Robert who will address our excellent Q3 financials and financial matters. Robert?

Thank you, Tom. As Tom noted we had a solid quarter both in terms of our result and in progress on our growth initiative. For me the Ziptronix acquisition was a particular highlight in the quarter to technology system very well of our current 3D development efforts and has current applicability into the market. The Ziptronix's people, to the persons are great folks, have blended seamlessly into Tessera and the technology is very well positioned in the market. And as Tom mentioned early feedback from customers is very positive. With that let me cover the quarter's results. Total revenue for the quarter was 67.4 million of which 66.4 million was recurring revenue compared with the third quarter of 2014 recurring revenue grew by 19.1 million or 40% due mainly to recurring base settlements along with revenue growth in FotoNation. GAAP operating expenses for the quarter which turn 27.6 million, a reduction of 3.7 million from the third quarter of 2014 due principally to reduced spending on legal expenses. Our litigation expense for the quarter were $2.9 million, representing a decrease of $2.9 million or 50% from the third quarter of 2014 due to reduced case activity. Litigation expense declined by 600,000 from the second quarter of this year due to the lowered cycle of case activity and open matters. Amortization expense for the quarter increased by 600,000 from the third quarter of 2014 and by 500,000 from the previous quarter both due to the Ziptronix acquisition was completed in late August. GAAP net income for the quarter was $32.5 million, or $0.62 per share on a diluted basis. Earnings per share exceeded the high end of our Q3 guidance range due to several positive factors including higher revenue lower operating expenses a reduced common share count $0.6 from the tax valuation allowance reversal in Ireland and other onetime tax reversals. The non-GAAP net income for the third quarter of 2015 was $34.8 million, or $0.65 per diluted common share. The EPS number was $0.9 better than the midpoint of guidance due primarily to higher revenue, lower operating expense, reduced common share count and approximately $0.3 in the certain onetime tax allowance reversals. Non-GAAP expenses were $19.5 million for the quarter. The tax adjustments for the non-GAAP items in the third quarter of 2015 totaled 6.2 million. Non-GAAP results exclude discontinued operations, restructuring and other exit costs, stock-based compensation, charges for acquired in-process research and development, acquired intangibles, amortization, impairment charges on long-lived assets and goodwill and related tax effects. We have included a 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 $387.2 million in cash, cash equivalents and investments, a decrease of $44.7 million from the prior quarter as the $45.4 million of cash generated from operating activities was offset by $40.2 million common stock repurchases, $10.5 million in quarterly dividend payments and the $38.6 million used to purchase Ziptronix. As Tom noted earlier, common stock repurchases in the quarter totaled 1.2 million shares pursuant to our stock repurchase program. Reducing our quarterly weighted average diluted shares outstanding to $52.5 million a reduction of 538,000 shares from the second quarter of 2015. Looking back over the past eight quarters, we have purchased 6.6 million shares of our stock for $183.3 million. As of the quarter’s end, we had approximately $51.1 million remaining under our program for future share purchases. On October 28, 2015, the Board of Directors approved a regularly quarterly dividend of $0.20 per share of common stock payable on December 15, 2015 to shareholders of record on November 24, 2015. In terms of financial guidance, for the fourth quarter of 2015, we expect revenue to be between $60 million and $62 million. The sequential decline in revenue from the third quarter is typical for this time of year due to the way our contracts are structured. We expect GAAP earnings per share of between $0.39 and $0.41 and non-GAAP earnings per share of between $0.50 and $0.52. A detailed reconciliation between the GAAP and non-GAAP measures is provided in the earnings release. We are raising our 2015 baseline recurring revenue outlook to 2,240 million. So far for 2016 we have enough visibility at this time to see a base line for recurring revenue of 240 million, a number from which we will grow. Our analyst has been asking what we have in clear contractual obligations as of the date of this call so we are providing that number. We planned to give a complete picture of our full year 2016 revenue growth range on our Q4 call. With that, let me turn the call back to you Tom.

Thanks, Robert. That concludes our prepared remarks. Now, we will open the call up you’re your questions. Over to you Briana, for Q&A.

[Operator Instructions] And your first question comes from the line of Richard Shannon with Craig-Hallum.

Thank you for taking my questions, and nice quarter and guide here I did want to start off with the question on recurring revenues. You just mentioned Robert to the number of 240 as the base line, expect to update that in a quarter. Wondering if you can give us a sense of your assumptions built into that, what kind of growth from the newer initiatives, like FotoNation, BVA, xFD, et cetera. What have you built in for those assumptions please?

It's fair to say that we’re still working through our plan for 2016 right now. So I think as we've looked at this we have obviously contractual baseline and that’s how that’s usually described as a baseline, which is, this is what we have very clear visibility to at this point. I think that one thing that’s worth noting is while there is growth in our business, we do have a legacy FotoNation license agreement that includes a unit based cap on an older and specific version of the technology, and that will impact us in mid-2016. Cap doesn't apply to new versions of the FotoNation technology, that we believe the customer will commence shipping towards the end of 2016. So that’s one of the -- I guess you could say puts that we have on 2016 at the moment. So that’s one of the reasons why the numbers are fairly leveled at this stage.

I think you mentioned you're expecting to ship some excess xFDs, I got to check my notes here, but I think you mentioned expecting few more ships some xFD late this year and hopefully the shipping volume earliest in next year. Does that mean you've got any xFD built into that numbers?

There is no BVA or xFD built into that recurring revenue at this point.

That’s the whole notion rather of the baseline is that we do have growth initiatives. Tom talked about several of them, but we haven’t built them into any kind of range for next year, rather we’re just giving what we have clear visibility to today.

And in our conference call, Q1 conference call we’ll give our revenue range on top adjustments upwards to recurring revenue if that’s in order. And on top of that we’ll give what we see as growth opportunities during 2016, but we’ll do that in our Q4 call. We thought it was wise to do it then versus before we've talked about it with the board, which we’re in the process to doing that later this year. [Multiple speakers]

Maybe just a couple of more questions from me. In FotoNation seems like you’ve had a reasonably good year, can you help us try to place some quantification on the kind of growth you're expecting for this year. I think you mentioned $23 million for last year what should we think about a number for this year?

We haven't given a specific number on FotoNation nor are we breaking out just yet. I think you'll just have to wait till we do our Q4 call. I'll give the number for the year at that point, and you can get a better feel for it. It has been sequentially up, sequentially up slid quarter and each one if you go back and listen to the conference call. So a solid growth again, very solid this year.

And my last question related to your Greenfield opportunities. Tom you mentioned some updates there with at least customer potentially finishing its analysis, you did repeat what you said last call about 12 month to 24 month process. How far along are the leading edge of these customers down this process? Are they half way through or more than half way through can you help us understand that.

More than half way. Call it March-April last year somewhere in that time. I will have to go back and look at my exact notes, but more than half way. We would expect to have some updates through that process mid-16 --. And as I mentioned being through on one of them when it says we’re into the next phase of the discussion, that’s -- suffice to say we think we’re getting to the point where we start talking about commercial discussion that’s really the next phase. We've gone through the asset identification or patent examination back and forth between with at least two Greenfield companies as we've said and one is through that phase -- that last phase.

And your next question comes from the line Krish Sankar with Bank of America.

I had a couple of them, Tom and Rob. First, I understand you're not going to give guidance for calendar 2016, but is expecting recurring revenue growth in 2016 a fair enough assumption?

Yes, absolutely. I think that’s -- I think we absolutely expect there to be growth and I think that’s what we’ll give in a more fulfilled manner, when we do our Q4 call and we finished our fiscal 2016 planning. We've been asked by you and several others what the baseline looks like for 2016 and I really tried to emphasize baseline as what I am giving today, so a contractual baseline. And I think that’s helpful, but it's probably better to get a more fulsome view once we've done our work and have finished the year and come through with our Board.

And I did understand thanks for the clarification on the legacies FotoNation contract. I'm just wondering if you didn't have that, what would the growth for next year or in the future have come more from semiconductor packaging or FotoNation?

I think it's both.

Absolutely right answer.

I think in terms of magnitude probably a Greenfield initiative that’s substantial a bit probably larger, but FotoNation defiantly has a significant growth each and I would expect that to be the case next year and in this instant but for that contract that will work through.

Got you.

And we will work through that contract, we are just reporting it as we sit here today before the year started, so we will work though that contract as we head into '16. And I emphasis in my remarks that it is a legacy contract some years ago.

Got it, got it. Then two quick questions, one is on the Q4 guidance, I understand that the seasonality on the recurring revenue base, is the seasonality pedant in the semiconductor packaging side or does FotoNation has seasonality as more than Q4?

In this instant, it's on the semiconductor packaging side. FotoNation has some seasonality, to a typically the fourth calendar quarter strongest which we report during Q1 since we report one quarter in [indiscernible].

Got it, got it. And then just a final question [multiple speakers] Fair enough then the final question from my end, on your semiconductor packaging side, is there any color you can give on when or how many years are we away from the next license renewal for one of the top 5 customers?

The only one we have talked about Chris publically is Hynix which runs through 2020 and the other one we have talked about are just multiyear, what you just learned today is there is certainly no renewals in -- that expand in 2016.

Right but the next upcoming renewal in 2017 or 2018 or 2019?

We haven't said.

It's not something we are going to about publically Chris.

Got you, thanks a lot guys thank you very much.

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

I want to start off by asking about new base line recurring revenue guide for 2015, it's 5 million above the prior guide and in the third quarter you delivered about $1.5 million above side to recurring revenue related to your original guide does implied there is 3.54 million of incremental upside related to the original guide in Q4 coming. So I am just wondering if that is a function of the recent Ziptronix acquisition or is it a function of FotoNation or any other factors and that is enough?

Good question, Gary. I would said that the main component of FotoNation in that -- there is very little Ziptronix, we are still in the process of licensing that technology, so FotoNation would be the key growth component.

Okay. You mentioned that Ziptronix is in mediation with TSMC and in OVTI was that an element of the company that attracted you giving your history and how patent enforcement and negotiating related to that and does the fact that a big strong company with respect to the balance sheet and very profitable company buying Ziptronix does that change become at the mediation at all?

Gary very interesting question. Number one is, we preferred not to be in any litigation matters if we cannot avoid it. But we did think and the folks said Ziptronix felt the same way is by being part of Tessera and having our scale and balance sheet and our Invensas organization in 3D-IC platforms and test labs in much larger customer reach that we could scale this technology and we really think it’s important technology, foundation of 3D-IC dice packaging technology into the market, and much broader than can ever happen in the smaller company. But with respect to the lawsuit itself it's started in 2010, it’s been in mediation and we would hope our just experience in this area -- lost count I think we settled 12 in the last couple of years, we would expect to bring that same kind of attitude towards this relationship and we hope we come up to the same result as we have in the others that can we deepen partnership, relationship we get into technical collaboration with OVT and TSMC. So you know me, I am always an optimist about this staff and so far we have had a pretty batting average, we would expect to be able to precipitate that, but we didn't look at that outstanding lawsuit as mean of some kind of good thing. We see it -- we preferred to get it resolved and move on to. What I consider more productive engineering and business discussions.

Okay that’s helpful. You talked about DDR for IC and then in module you are going to test as it relates to your expecting packaging.

Yes.

And I am seeing that’s with Micron and I am wondering if we should think of that is incremental regular opportunity with something like Micron or whether or not it already covered in existing patent licenses or is it more of a lever point for the next wave of negotiating with somebody like Micron?

All good questions. First of all, recall I think it was last quarter might be in the quarter before we've said we had multiple people playing on xFD. If Micron was your initial partner, you are right, but then there has been a second member to the party if you will. So it's not necessarily -- I'm not saying -- I'm just clarifying your point there. In terms of what the revenue opportunity for us, we see revenue opportunity in two forms. We see it one in, recall know-how transfer agreement where we can receive upfront payment because as we've talked about before we’ve put our engineers into our customers factories and teach them how to do it, in exchange for that typically we’ll get some onetime payments, that's one way to get paid and then there are per unit royalties once these get into volume production in some cases that might be an offset against an existing agreement and others have might be incremental it really depends on the structure of the contract.

Okay. That's helpful. Thanks. That's it from me guys.

And to your last point, of course it would help in any subsequent discussion or relicensing discussion because the technology would be broadly deployed so you are right on that as well.

Alright. Thanks guys.

[Operator Instructions] And your next question comes from the line of Ted Moreau with Barrington Research.

So just a quick question on Q4 the revenue stream is there any episodic in there or is it -- I'm assuming that's -- there is a little bit maybe 2.5 million of episodic there?

We don’t break that out in our guidance numbers, but I think it's fair to assume that any type of episodic forecast for Q4 would be very minimal.

Okay. And then so in the semiconductor packaging world we've seen several companies on the advance packaging side reporting pretty good numbers while the primary wire bonding players are struggling so just curious is that. How does that kind of environment impact your BVA business?

The BVA business, we’re getting more bullish the more we get into this. We've got the first characterization turn as I mentioned on the call, we think we are getting to the point where we have an opportunity if this passes and next phase, if you will, to get into production with customers including important folks and it since its initial market target market is the handset market there are some fairly large players in there and getting thinner devices is an important thing and our ability to get sub one millimeter in thickness with BVA is an important development we believe. So the other point I guess I'd made Ted is the fact that people have in some cases tens of thousands of wire bonders fully depreciated and the fact that we can produce very competitive state of the art technology art technology with BVA on fully depreciated equipment not requiring any additional CapEx is being well received, but we will start the ensing [ph], if you will, or celebrations once we clear these next hurdle and we are into true customer volume production, so far so good.

Sounds good. And then FotoNation, a quick question there is the deal with Huawei, looks like they are taking a portion or utilizing a portion of the FotoNation technology capabilities. So can you kind of break it down as far as -- are each of the capabilities from a revenue perspective equal and waved or are certain technologies more valuable than others?

Yes, good question. So in some cases the people are software only products and FotoNation, those typically are going to carry a smaller royalty rate than those that are embedded into the hardware in the RTL form fact, in which cases the royalty rates are typically higher. Were happy with either the combo [ph] because it's nice to be engaged with these big customers and in some cases we get both, people want both the software product and the hardware product in which case the royalty is even higher.

Okay I'm sorry I didn’t catch -- is Huawei considered a hardware or combo or?

We haven’t said.

Okay. Thank you very much.

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

So I guess given that your buying into a litigation with Ziptronix can you maybe sort of step back and talk about your process of getting comfortable with buying into that kind of situation given that you work so hard to get out into litigation.

Yes, great question and guess what that was the heavily, heavily, heavily diligence item because it’s something, one we understand quite well. Some would say it’s going to be times of core competency for us, so that was something we looked at very, very carefully. And as I said on the call, what we aimed to do is what we’ve done with I guess 12 out of the last 13 of these matters is get it resolved. And am I'm optimistic let's put it that way that we’ll get it done. We looked at it heavily, heavily, heavily.

And then I guess you talked about the proof of concept -- demonstrating the proof of concept for iris authentication on smartphone form factor. Can you just talk about what your time to revenue of getting that into shipping models is?

Let me explain what it is for those people not familiar with it, but in order to get somebody -- get our iris biometrics information, you want it to work in multiple lighting conditions, so you'd need a different kind of a camera that would ultimately be in people's smartphones call NIR device. So that’s part of this form factor demo that we have, is we have a different camera technology that we would never implement, that it's very readily manufacturable and available in the market but any smartphone manufacturer will have that and in fact many of them are looking at doing that, thus they've asked us to build what we call this form factor demo. So we can actually hold up a smartphone in front of your eyes and it can identify, one, your eyes, two, your face, meaning we know not that it's a face, we know that Matt's face and then also it can identify your unique biometric information. And in terms of when do we expect, to answer to your question, to get this technology into the marketplace. It depends on people's adoptions it's possible in 2016, it’s more likely in 2017 and this really has less with us and more to do with the timing as the cell phone manufacturers bring this technology into their platforms.

And maybe one more question on that, is there any need for the platforms whether from an Android or iOS perspective to allow iris authentication on to the platform or do you have sufficient access to deliver the functionality to the OS?

You can do it both ways and it depends on what level of security somebody wants on it. You can do it in pure software in which case -- and some manufacturers which used to do that, some would like the more securer solution and they’ll want that in combination of software plus RTL, meaning some part of the algorithms will run on physical hardware. I would expect to see both. And that’s, your time to money. You have the software only, you can get to the market faster, for obvious reasons and silicon solutions or combo solutions are going to take longer.

And you've a follow-up question from the line of Richard Shannon with Craig-Hallum.

Maybe just one last question. Tom you mentioned the hiring of your new CTO and if I wrote down my accurately, you said you’re going to increase your focus on machine learning and neural network or something along those lines. [Multiple speakers] I got a general idea of what it means, but kind of curious what that means in terms of the end markets you're addressing. Is it something that could impact hardware developments and from Robert's perspective what could this do to your trajectory of R&D.

Our trajectory of R&D is not going to change materially and it’s certainly not going to move outside of the model that we've presented. So this is something as we started the year and did our plan and set our model we expected to invest in some additional areas, at the time we haven't identified, but we did plan for it. So what we've communicated to you guys in terms of our operating model isn't going to change, so that’s point one. Point two, in terms of the technology itself it clearly has a place an in fact there is machine learning technology in today's FotoNation technology, we think we can improve it, we know we can improve it, point one. Point two we see an opportunity which will we refer to it is what we call smart objects everywhere whether it be IoT or another way of thinking about it is computing on the edge i.e. independent of cloud computing. And by having very, very efficient low power accurate neural network machine learning algorithms embedded on those IoT devices, we think there is a number and number of interesting alternatives. Our first play we expect to play in to continue to augment our FotoNation technology, but we see opportunity beyond that too. That’s one of the reasons I wanted to mention that on the call. Because it wouldn’t surprise me if in future calls we’re talking more about this technology.

At this time there are no further questions. I would now like to turn the call over back to Tom Lacey for closing remarks.

We want to thank you. And thanks again for everybody for your interest in Tessera. We very much appreciate you spending the time to learn more about the company, for those of you who are new to the story. In summary we’re 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’re able to convey to you today, we’re as optimistic as ever about the grow prospects for our company, we look forward to the fourth quarter conference call and thanks again for joining us and be good. Thank you.

Ladies and gentlemen this does conclude today's conference call you may now disconnect.