Thomas Lacey – Chief Executive Officer Robert J. Andersen – Chief Financial Officer.

Krish Sankar - Merrill Lynch Global Securities.

Good afternoon. My name is Heather and I will be your conference operator today. At this time, I would like to welcome everyone to the Tessera Technologies First Quarter 2014 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions). Thank you. [John Markley], you may begin your conference..

discontinued operations, stock-based compensation expense, acquired intangibles, amortization charges, charges for acquired in-process research and development, impairment charges on long-lived assets and goodwill, restructuring and other related exit costs and related tax effects.

On the call today from management are Tom Lacey, Chief Executive Officer and Robert Andersen, Chief Financial Officer. I will now turn the call over to Tom Lacey.

Tom?.

Thanks a lot. Whether live or via the webcast recording, thanks very much for joining us on the call today. What an amazing quarter. I know let's just do it again and again why don't we do something likely. But seriously that continues to be a great deal going on as a company and I welcome the opportunity to provide update during today's call.

We fully understand that the company is completing a substantial transition and is important to current and potential shareholders to learn more and more about our changed company. As you will hear from us remainder and positive on the developments at the company and remain optimistic about our future.

Before I get into the details, the high level massage I hope you take away from the call is that after years of challenges and under performance, the company is producing tangibles results and is well position to profitably move forward. I view our first quarter as transformational one for the company.

The important achievements include exiting our DOC manufacturing operations, substantially restructuring the company, lowering the overall operating expenses levels, continued share buyback resulting a lower basic share count for the first time in the Company's industry, completing in internal reorganization to better align our remaining resources around our growth initiatives, completing several important settlements and license agreements, returning to profitability, achieving greater than 60% operating income including restructuring charges which is the second most profitable quarter in the company's history and finally the highest revenue quarter in five years.

All these accomplishment positioned the company to move forward in 2014. Now, some details on the many developments during the quarter. First of all, it's clear that, our partnership approach with customers and our practice of using litigation as tool rather than a strategy is bearing fruit.

We have demonstrated an ability to reach fair value for fair value transactions with multiple customers. Recall in Q4, we successfully reached agreement with Sony and ChipMOS. During Q1, we reached additional significant settlements in license agreement.

These include our license agreements with Samsung and Renaissance and our settlement with PTI and ASD. In addition to receiving upfront payments in some of these agreements, these agreements in total increased our projected recurring revenue by approximately $30 million commencing in 2015. We also settled our litigating with Qualcomm.

Several agreements we reached included technology engagement component which we view as a significant step in strengthening our partnership with our customers. This increased recurring revenue establishes a terrific platform from which to continue our profitable growth.

All in close of the quarter, we announced the signing of definitive agreement with O-Film that includes multiple elements. At a high level, there is agreement which we expect to close later this year profit contemplates us selling some of the MEMS discontinued manufacturing equipment and selected non-core patterns.

Additionally, for the agreement, we expect to receive our first MEMS intellectual property non-exclusive license and a $20 cash payment which represents three years of prepared royalties for our FotoNation imaging software technologies for operation on both MEMS and voice portal technologies.

We also had a record revenue quarter our FotoNation technology and continue to make solid progress in several areas. Next, I'd like to provide some additional insight into primary identified growth opportunities. During the quarter, we organize the company to provide laser focus and clear accountability on our growth initiatives.

Continue to grow our core IP semiconductor DRAM business remains a focus and this includes an ongoing effort to secure license agreement with Micron. As many of you aware, we had active multi-year recurring licenses in place with the other two large DRAM supplier SK Hynix and Samsung. Securing on license with Micron remains a priority for the company.

Additional growth area our Invensas technology including SSD, DDA and the longer-term 3D-IC focused on both DRAM and mobile market. The DRAM market continue to move from sing chip packaging to next generation multi chip packaging and our SSD technology addresses this segment.

In the future, as DRAM move to 3D we're positioned with our 3D-IC inventions patents and technologies. We expect to sign additional agreement in the near-term with compensation expected in terms of upfront one-time licenses fees and per unit royalties.

We expect to reach similar agreements on our BVA technology by targeting potential customer products that are utilized in smartphones. These will be new customers for us.

Recently, we announced an agreement with solo South Korea base STS Semiconductor & Telecommunications, a leading semiconductor assembly and test solution providers specializing in mobile and communication devices to validate high volume manufacturing capability for our BBA technology for next generation smartphone and tablet customers.

Turning now to our FotoNation technology. We remained very excited about the growth opportunities in this set of advanced technologies. For those of who are not familiar with FotoNation, it is comprised of world-class of human sciences and mathematicians who specialize in important product in system-level imaging technology.

This include computational imaging, face detection, blink detection, smile detection, face beautification, red eye reduction, video stabilization, panoramic photography, 3D content generation, fast focus, auto focus and other important imaging capabilities.

These features are important in highly competitive market for mobile devices and our technology is world class. As I mentioned introduction, FotoNation had a record revenue quarter on the strength of increased royalties from smartphone customers. As previously mentioned, we expect FotoNation to contribute at least 15 million revenues this year.

Based on current agreements and discussions, we anticipate the FotoNation has a potential to grow significantly over the next few years as our premium imaging technology is a key differentiator for end user in the mobile and adjacent markets.

As mentioned in the recent announcement, for the singed agreements, we expect to receive $20 million in prepaid royalties upon closing of a transition, which will be recognized over a three year period. We expect to receive additional software royalties with other camera module and smartphone manufacturers.

Although we've receive offers to purchase our DigitalOptics patents, we've elected to keep the core assets and we'll seek to modify as part of our normal course of business including receiving higher per unit ASPs as part of our FotoNation product offerings.

Last but not least, in addition of growth opportunity was disclosed in the announcement of the signed definitive agreement with O-Film. Upon the closing of the transaction later this year, we'll receive a one-time license payment for our MEMS technology and a per unit royalty for MEMS base camera modules manufactured by O-Film in the future.

We will continue to look for avenues to license our MEMS intellectual property and are pleased to have our first customer in O-Film. Next I’d like to provide on our previously discussed litigation activities.

Fortunately, there are far fewer cases to talk about than in the past, but let me both provide some insights into why our quarter-on-quarter litigation spending is projected to increase and to provide a high level summary of our outstanding litigation.

Regarding our spending, there are some reason for the increased Q2 litigation spend most related to the timing of events in multiple cases. For example, we have trial scheduled in June in our arbitration with Amkor. We also have a hearing at the patent office in May and an internal prioritized review initiated by Amkor against one of our patents.

In addition, in the AMD case, some re-judgment and claim construction hearing is scheduled for June also our case against UTAC, Taiwan may become much more active starting this month.

Worth noting is our litigation spending would have been higher than currently are projecting because the PTI case which recently settled was scheduled for trial in April and the Renesas case which we also recently settled was scheduled for trial in May.

As we demonstrated consistently over the past year, we're laser-focused on both our overall litigation spend reaching fair value for fair value settlements when possible and on obtaining an maximum return on any litigation expenditures. Now let me provide some inside detail into our litigation activities.

First of all, in the AMD consolidated cases in Northern District of California, we've recently reached settlements with both Qualcomm and ASE. In addition, 600 defendants that previously settled so believe or not now only one remains -- the case is currently scheduled to trial in November 2014.

In the Amkor arbitration, Amkor made some public statements regarding the current phase of the arbitration during their recent conference call. Amkor said, they expect a tribunal to issue a damages reward in Tessera's favor during Q2 of $113 million excluding interest.

Amkor also stated they intend to challenge the damages reward and won't pay the damages reward when it issues. We obviously don't agree with Amkor's attempt challenge the reward and we believe Amkor should pay Tessera the full amount upon issuance of the reward. I'll view the situation quite simply.

The Amkor and Tessera entered into a licensed agreement in 1996, which included an read upon dispute resolution process. The companies have had several disputes which are triggered the dispute resolution process in the agreement.

These disputes are being handled by a tribunal and deemed under the rules of the International Chamber of Commerce has agreed to by parties in the license agreements. When this tribunal issues it's decision, we expect to file decision and we hope and expect Amkor will do same.

We remained confident that, we will ultimately receive a substantial reward and believe that this reward including interest will approximately what our previous estimates have been.

In spite the issues between our companies in the past as we have accomplished with other customers, we remained open to future partnership opportunities with Amkor as I believe both of our mutual shareholders and customers will benefit from closer technology collaboration.

With that update, what I'd like to do is turn the call over to Robert who will discuss our financials and future guidance.

Robert?.

Thanks, Tom. As Tom just noted, this is certainly eventful and transformative quarter with settlements, business changes and key new customer contracts. From a revenue perspective which was driven by product events, we had third highest quarters since the company went in public in 2003 and our highest quarters in five years.

These developments provide both foundation for business growth and profitability. I'm personally very optimistic about our business and ability to grow and the ability to provide value to our customers.

Before I cover the financial results, I would like to highlight that, the discontinued operations now include the mems/cam manufacturing business that was closed at the beginning of first quarter and the prior period that re-classified to reflect this change.

Also given a significance to mems/cam business closure, we'll not be reporting separate operating segments at this point. We will evaluate the nature of product FotoNation as a separate business segment as that business grows. Let me now cover financial results for the first quarter 2014.

Total revenue from continuing operations for the first quarter 2014 was $88.3 million. In comparison to the first quarter of 2013, revenue increased by $59.7 million or 209%.

The key reasons for the year-over-year increase was the significant change in episodic revenue, which increased by $58.4 million from $6.5 million to $64.9 million at the current year's first quarter and a $1.3 million increase in recurring revenue was mainly for the strong quarter for FotoNation.

Total GAAP operating expenses from continuing operations for the quarter were $33.6 million, consisting of the following.

Constant revenues, $0.6 million; R&D, $8.6 million; SG&A, $15.3 million; litigation expense, $7 million and restructuring and impairment of long-lived assets and other charges $1 million; Fees relating primarily for the personnel and cost reductions in the company's corporate overhead expense.

The GAAP operating expenses from continuing operations in the first quarter include amortization of acquired intangibles of $4.6 million and stock-based compensation expense of $3.5 million.

First quarter total GAAP operating expenses from continuing operations was lower by $13.7 million or 30% compared to the first quarter of 2013 due to a 6.8 million decrease in the SG&A spending and $7.1 million reduction in litigation expense.

The SG&A reduction is a result of significant personnel reductions and other savings measures undertaken over the last year. Litigation expense declined due to the timing of our cases and the settlement of the key matters over the past year including Sony and PTI. Other income for the quarter net of expense was $330,000.

GAAP tax provision on continuing operations was $22.7 million for the first quarter of 2014, due mainly from foreign recalling taxes incurred during quarter. GAAP income from continuing operations for the first quarter of 2014 was $33.4 million or $0.63 per basic share and $0.62 per share on a fully diluted basis.

Now turning to discontinued operations. For the first quarter of 2014, GAAP net loss from discontinued operations was $12.5 million or a loss of 20% for both basic and diluted shares.

Compared to the first quarter of 2013, the net loss from discontinued operations declined by $20.8 million since the $33.3 million loss in last year's numbers included in our Micro-Optics business located in Charlotte, North Carolina and a camera module manufacturing facility in Zhuhai, China. Now to our non-GAAP results.

Total non-GAAP operating expenses from continuing operations in the first quarter of 2014 were $24.4 million as follows. R&D of $6.9 million, SG&A of $10.5 million and litigation expense of $7 million.

First quarter total non-GAAP operating expense excluding litigation is level by $7.6 million compared to the first quarter of 2013, primarily due to lower salary and benefit cost related to employee reductions, reduced spending on the outside services and a reduction in depreciation expense due to the impairment of fixed assets.

Litigation cost declined by $7 million compared to the same quarter as a result of decreased case activities including the recent settlement activities.

Non-GAAP results exclude discontinued operation, restructuring and other asset cost-stock based compensation, charges to acquire in process research and development, acquired intangibles, amortization, impairment charges along with assets and goodwill and related tax advantages.

We have included a detail reconciliation between our GAAP and non-GAAP net income or loss in both our retained earnings release and our website for you with graphics. There were no tax adjustments in the first quarter of 2014 for non-GAAP items.

Non-GAAP net income from continuing operations for the first quarter of 2014 was $41.6 million or $0.76 per diluted common share. So, now turn the discussion to the balance sheet.

We ended the first quarter of 2014 with $379 million of cash, cash equivalents and investments, an increase of $19.4 million from the prior quarter, which is consist of $33.7 million in cash from operations in the first quarter and brought $9 million from the exercise of stock options all of which was offset by a $14.2 million in stock repurchases, $5.3 million of dividend payments and $3.1 million of patent purchases.

Next, let me give you an update on capital allocation activities including dividends and share repurchases. On March 26, 2014, $5.3 million was paid to stockholders of record as of March 5, 2014 with a quarterly $0.10 per share common stock cash dividend.

During the first quarter of 2014, we repurchased 726,000 shares pursuant to our stock option repurchase program for an aggregate amount of $14.2 million. Our Board has authorized a total of a $150 billion of Company's share repurchase plan, off which $96.5 million remains for future purchases.

In terms of dividend, our full Board meets soon to review recommendations from both our quarterly dividend and for the dividend from appetite proceeds for the past four quarters. Once any the dividends are declared, we will communicate that information to investors. In terms of second quarter guidance, we expect the following.

Total revenue will range from $31 million to $33 million. Second quarter 2014 GAAP operating expense from continuing operations is expected to range between $36 million and $38 million which includes, expected litigation expenses to be higher compared to the first quarter.

Stock-based compensation expense of approximately $2.4 million, amortization intangibles of approximately $4.6 million, approximately $0.2 million of impairment and restructuring charges and other related exit cost and approximately $1 million loss from discontinued operations. With that, I will now turn the call back to Tom. .

Thanks Robert. Before I turn the call over to Heather for Q&A, let me provide our reviews on patent legislation activities going on in Washington DC. As noted last quarter, a more deliberate selling process for consideration of patent litigation reform is underway.

We've been working with some peers and stakeholders from across the technology industry to character responsible build to address abusive litigation practices, while maintaining the strength and integrity of the U.S. patent system.

In an effort to achieve this balance, the summit judiciary committee members, the various build sponsors and stakeholders including Tessera have engaged in subsequent deliberations. To-date the house in summit builds reflected important principle the fact that we should focus on abusive litigation not on specific business models.

We continue to encourage Congress to maintain this principled approach additional certainly overly brought provision such as the proposed mandatory customer say remain unresolved and likely to have unintended consequences, in particular for small business individual and ventures.

We're actively engaged on the visions and working constructively with other stakeholders summit to achieve consensus and a proper balance. With that, let me turn it over to Heather for Q&A for Robert and I. .

(Operator Instructions) Your first question comes from the line of Krish Shankar of Bank of America. Your line is open..

Yeah. Hi. Thanks for taking the question. Good afternoon Tom and Robert. .

Hey, Krish..

Hi. Couple of questions. Number one, on the Q1 revenue, it looks like you are now going to split between IP and optics on the recurring side is the true.

So, can you give some color on how they trend is compared to the December quarter on a sequential basis?.

Yeah. Krish, this is Robert. For the total quarter actually we finished at 88.3 and the total of the episodic revenue which was the key driver for the corner was I think that's $60 million, $65 million roughly. I'll get you an exact number here in a second.

Why don't we go on with your second question?.

Right. So, I just wanted to figure out the $23 million in non-episodic revenue in Q1.

What is the split between IP and FotoNation?.

We are not at this point breaking up the FotoNation business as a separate segment..

Got it.

But how was it relative to December quarter sequential split?.

Okay. Understood. I don't know the exact percentage of the increase, but it was I would say probably 30% higher than the prior quarter..

Got it. All right.

And then second question is the guidance for the Q2 which is $31 million to $33 million, is that all recurring or does it have episodic and how much that including?.

And so, we are not going to provide guidance between recurring and episodic, but I think as we have mentioned in the past, it's very difficult to actually provide a forecast on the episodic.

So, unless I have something to which we have clear visibility, I am not going to include an episodic piece in the forecast, and I'm not providing a breakdown at point..

Okay, alright. And then just to follow-up, in your last earnings call, you mentioned that you might exit Q4 with about $120 million annualized run rate for recurring revenue and I think today you guys said, you could probably do like things that are prior to customers, your recurring revenue will increase by $30 million next year.

So is it fair to assume that, everything was being flat at least $115 million recurring revenue is possible for next year?.

You've got it. That's right. So, on February 5th, we talked about $120 million recurring revenue for 2014 and to that what we're suggesting assuming all that remains the same best occurs as we would expect to that we have had approximately $30 million in agreements that we talked about that would commence 2015.

So, will you $150 million that makes sense..

Got it. Alright. And then couple of other quick questions. So, A, number one, in this recurring revenue, I'm guessing it include some of the FotoNation component.

B, number two, in the non-FotoNation which is legacy IP microelectronics business, what is the split between DRAM and non-DRAM or the wireless guys you have?.

So, in terms of the FotoNation fees, yes, the recurring revenue includes FotoNation. And initially, it's about $15 million as we talked about in the past in 2014 and expect that to rose substantially, that's piece of it and then in terms of what the split is DRAM and non-DRAM, we don't break it out but it's overwhelmingly DRAM based.

I mean, that became evident and we have had historically read through the case and what not. You can see 10% customers have historically they have been multi RAM guys..

Got it.

And then just a final question from my end, I think Tom, in your prepared comments you said that FT micro trial scheduled for November, I was under the impression that it's scheduled for August?.

Good question. I will get back to you on that. November is the date I have in my notes.

So, I don't recall it was push down or not, do you know?.

Yeah, my recollection is pushed out..

Okay..

Got it. Okay, all right. I think that's what I have for now. Thank you, guys. Appreciate it..

Thanks a lot..

Thanks..

Alright. We will try to get continued record quarters if we can..

(Operator Instructions). There are no further questions at this time. I will turn the call back over to the presenters..

Heather, Thanks. Again, thanks again for your interest in Tessera, most of you listen are listening live over recorded playback. We really, really appreciate you are spending time to learn about company.

We come a long way over the recent past and we continue to build our referring and revenue stream the same time pursuing episodic revenue and other growth opportunities. We continue to right size the company's cost structure and these improvements together with our partnership style approach to customers are yielding tangible bottom line results.

We have improved our internal communication with our strong employee team; we try to be as transparent as possible with external audience. In summary, we are really optimistic about our future and look forward to provide an update in the next quarter. Thanks again..

This concludes today's conference call. You may now disconnect..