Rambus Inc (RMBS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q2 2011 Rambus Incorporated conference call. At this time, all participants are in a listen-only mode.

( Operator Instructions ).

And as a reminder, today's conference call is being recorded. Now, I would like to turn the program over to Chief Financial Officer, Satish Rishi.

Thank you, operator. And welcome to the Rambus second-quarter 2011 conference call. I'm Satish Rishi, Chief Financial Officer. On the call today are Harold Hughes, our President and CEO; Tom Lavelle, Senior VP and General Counsel; and Sharon Holt, Senior VP and General Manager of the Semiconductor Business Group. The press release for the results that will be discussed here today have been filed with the SEC on Form 8-K. A replay of this conference call will be available for the next week at 855-859-2056. You can hear the replay by dialing the toll-free number and entering the ID number 83829526 when you hear the prompt. In addition, we are also simultaneously webcasting this call, and along with the audio, will be webcasting slides. So even if you are joining us via a conference call, you may want to access the webcast for the slide presentation. A replay of this call can be accessed on our website beginning at 5 PM Pacific time.

In an effort to provide greater clarity in our financials as we began last quarter, we are using non-GAAP pro forma format in our press release. We will continue this same format for our reporting. I need to advise you that the discussion today will contain forward-looking statements regarding our financial prospects, pending and current litigation, and demand for technologies, among other things. These statements are subject to risk and uncertainties, which are more fully described in the documents we filed with the SEC, including our 8-K, 10-Q, and 10-Ks.

These forward-looking statements may differ materially from our actual results, and we are under no obligation to update these statements. Further, as mentioned, we will discuss non-GAAP financial results today, and have posted on our website, reconciliations of these non-GAAP financials to the most directly comparable GAAP measures. You can find a copy of our earnings release and the reconciliation on our website at www.Rambus.com on the Investor Relations page, under financial releases. Now I will turn the call over to Harold.

Thanks, Satish, and good afternoon, everyone. Q2 was a great quarter. We made a lot of progress executing on our strategic objectives. We delivered strong revenue results at the high end of our guidance. Q3 should be even better, as Satish will talk about later in the call. A major highlight in Q2, was signing a patent license with Freescale Semiconductor. The Freescale agreement demonstrates our continued licensing momentum. We have now signed a total of 9 new or renewed patent license agreements in 2010, and the first half of 2011. The Freescale agreement provides another validation of the value of our innovation efforts. It's also another strong statement of the importance of our innovations to the market.

Further demonstration is the continued growth of our portfolio of patented innovations. We ended Q2 with 1,283 issued patents, and another 964 pending applications. Great credit goes to the hard work of our engineers and scientists, and our patent development team. In Q2, we announced and completed our acquisition of Cryptography Research, or CRI. This acquisition is another bold step in realizing our vision of becoming the leader in electrical property licensing, for the electronics market.

Complementary to technologies developed in our semiconductor and lighting and display businesses, the addition of CRI contributes to the strength of the Rambus growth story. We made good progress bringing the benefits of Rambus' infrastructure to our new CRI business. Our goal is to give Paul Kocher and his team, more bandwidth to focus on innovation, more time to develop compelling solutions; securing electronic systems. This is an area of critical importance in an increasingly connected world, where every PC, mobile phone, game console or TV is a portal for financial transactions, and content that needs protecting. At the same time, benefiting from the Rambus' infrastructure, our CRI business will have the scale to address more customers, and accelerate the adoption of this important technology.

Meanwhile, in our Semiconductor business in Q2, we showcased the development of a breakthrough new clocking technology, that offers the potential for tremendous power reduction in high-speed interfaces. One of our inventors, Jared Zerbe, presented these findings at the prestigious VLSI symposium in Japan last month. Jared discussed how our innovations make possible ultra-fast power-on capabilities that can significantly reduce memory system power, in both mobile and compute applications. Increasingly, the power consumed by electronics, while the system or certain subsystems are in a standby mode, can rival the power consumed in an active operation. The need for standby operation is to deal with the latency of powering up, and this latency leads to an unacceptable performance.

The technology that Jared unveiled, where circuits can be powered up in about 5 nanoseconds, means that you can eliminate the need for standby modes, and dramatically increased power consumed. This has big implications for battery-powered devices like mobile phones, as well as power-hungry computing applications, like server farms. This new ultra-fast power-on technology comes out of our Rambus Labs organization, which focuses on innovations for the market, of 5-plus years down the road.

We also had an exciting quarter in our lighting display technology businesses. At LightFair in May, we formally unveiled our Pentelic lighting solutions, with over 30 lighting demos on display. These showed the flexibility and broad capabilities of our lighting technology. Our Pentelic lighting solutions allow designers to truly harness all of the advantages of LEDs. With our solutions, our licensees can create the highest efficiency edge-lit LED light fixtures that provide precise control of the light distribution, and unparalleled freedom of design.

Because our Pentelic lighting solutions address optical design, thermal management and power delivery, customers can achieve rapid time-to-market, and unprecedented price performance characteristics for their lighting products. Pentelic solutions achieve all this with a 92% to 95% optical efficiency, a level unmatched in the industry. Since our announcement at LightFair, our lighting and display team has been very busy with business development activities with a number of prospective licensees. Also at LightFair, General Electric, our first licensee showed off a number of light fixtures, hanging pendants, ceiling troffers, and linear arrays. They are targeted for market introduction later this year, in early 2012.

Our ambition is to redefine lighting, to make it highly efficient, yes, but also compelling and beautiful in ways that were never before possible. If you go to our Pentelic website at Rambus.com/lighting, you will see some of the possibilities. These first products from GE, are a taste of what's to come.

So it was an event-filled quarter for our business, and that's also true for legal developments. The decision of the Appellate court, in the Micron and Hynix cases regarding spoliation, is one we respectfully disagree with, and certainly one we didn't want. But on the positive side, the CSC affirmed a number of positions in our favor. This is particularly true, in respect to the validation of our patents, and overturning the dismissal sanction imposed by the Delaware court. However, we were disappointed with the overall decision, and will continue to fight to be fairly compensated for the use of our patented innovations. And with that, I will turn it over to Tom, who will walk you through the latest legal developments.

Thanks, Harold, and good afternoon, everyone. Let me begin with the price-fixing trial that's now ongoing in California State Superior Court in San Francisco. This is our case against memory manufacturers, Micron and Hynix. This matter deals with our anti-trust claims against these two companies. At issue are our allegation that the defendants engaged in a concerted and unlawful conspiracy to kill our product, RDRAM, and thus to eliminate competition, and stifle innovation in the market for memory technology and memory chips.

This case was originally filed in 2004, and we are pleased to finally be given the opportunity to present our case to a jury. The jury was seated in the middle of June, with opening arguments beginning on June 20. The Honorable Judge McBride is presiding in this trial. We expect this trial to last several more months. While the trial is progressing, we will not be able to provide detailed commentary, nor to speculate on how things are going, or when certain witnesses will be called to testify. We appreciate your understanding in this regard. It has taken us a very long time to get this case to trial, and we do not want to do anything to jeopardize the process of the trial.

I'd also like to further echo Harold's comments about the result we received from the Federal Circuit, in the patent cases with Hynix and Micron. As a reminder, the Fed Circuit affirmed the spoliation ruling in the Micron case, but vacated much of the rest of the ruling, and remanded the case back to Delaware for a reconsideration to deal with a number of issues, including the sanctions imposed by Judge Robinson.

In the Hynix matter, the Federal Circuit vacated the spoliation ruling, along with a final judgment, but affirmed the findings regarding JEDEC, patent validity, and infringement. The Hynix case was also remanded back to the District Court for a reconsideration, in light of the Federal Circuit ruling. In our special conference call on May 13, we characterized these decisions as very disappointing, and that remains our position on the overall result.

We have filed a petition with the -- we have filed with the court a petition for rehearing in that case as well. We have not heard from the court at this point. Neither of the District Court cases will move forward, until the Federal Circuit has issued its mandate, which will not happen until after the petitions, or rehearing are resolved.

Following the decisions from the Federal Circuit, Judge White in the Northern District of California held a case management conference in the DDR2 case. Judge White has indicated that he will hold off on scheduling anything in this matter, until the issues raised by the Federal Circuit are resolved. We can understand the position the judge is in, and fully respect his continued thoughtfulness.

With regards to our action at the ITC, the license agreement with Freescale, settles all outstanding litigation between the two parties, namely us and Freescale. So they are no longer party to that complaint. Licensing is our goal, first and foremost, so we're very pleased to have signed the agreement with Freescale. As we've said before, litigation is our last resort.

The ITC action against Broadcom, LSI, MediaTek and STMicro, alleging infringement of certain Rambus patents in both the memory controller space, and for [SeriaLink] functions, and against NVIDIA regarding SeriaLink functions, continues to move forward. The discovery phase for this action is now completed. The oral hearing before Judge Essex, the presiding administrative law judge, is scheduled for October 12 through October 20, 2011. With that, I'll turn the call back over to Satish.

Thanks, Tom. As a reminder, we use non-GAAP or pro forma numbers, which we believe are indicative of Company performance, as they include the impact of certain cash events, and exclude certain non-cash and discrete events, not indicative of a long-term performance.

Let me start with a brief explanation of CLI, or customer licensing income. Occasionally, we receive royalties from customers, pursuant to a patent license agreement, which we are unable to recognize as revenue under GAAP. An example of this, is the royalties received from Samsung for the past 18 months, which we bifurcated between revenue and gained from settlement.

In Q2, we have cash receipts from a new licensee, but we cannot recognize that as revenue, because the actual release for the patent infringement was not fully effective until July. Starting in Q3, we will have royalties being paid to CRI from their existing customers, but because of purchase accounting rules, we are required to book these contracts to a balance sheet as an intangible asset, and reduce this asset by the amount of cash collected in the period, with no additional revenue. In this case, we would include that royalty receipt in customer licensing income, because it is a royalty being paid for an existing patent licensing agreement.

So to summarize, CLI is a non-GAAP measure that includes royalty-related payments that we receive under a signed agreement. It is how we measure the top-line performance of our business, and it may be different than revenue within a particular, when the amounts of cash received from patent licenses are different than the revenue recognized.

For this quarter, as compared to our guidance, we had a very good quarter with higher customer licensing income, and lower manageable expenses. CLI was $73 million, as compared to our guidance of $62 million to $66 million. Pro forma expenses came in at about $50.6 million, below our guidance of $54 million to $58 million. And as a consequence, pre-tax income was $12.4 million, as compared to our guidance of between $1 million and $5 million.

CLI for the quarter, at $73 million, was an increase of 6% from the previous quarter, and 48% from the quarter a year ago. This quarter included royalty payments received from a new licensee that is included in CLI, but will be recognized in revenue next quarter, when the revenue recognition criteria as per cap are met. In Q2, there was no revenue or CLI recognized from our acquisition of Cryptography Research, or CRI.

Pro forma operating expenses were $50.6 million, relatively flat with the previous quarter. Litigation expenses during the quarter were $11.5 million, up 25% quarter-over-quarter, driven by the expenses related to commencement of the price-fixing trial in San Francisco, as well as some of the other cases that Tom discussed. Compared with the quarter a year ago, pro forma engineering expenses were higher by 4%, due to our continued investment in lighting division. MG&A was higher by 19%, due to higher litigation expenses. Pro forma interest and expenses were $2.9 million, up 4% from the previous quarter, and up 61% from a quarter year ago.

For pro forma tax expenses, we are using a flat rate of 36% on a pro forma pre-tax income. Pro forma net income this quarter was $12.4 million, an increase of 21% quarter-over-quarter. Overall cash, defined as cash, cash equivalents and marketable securities, was at $359 million, a decrease of $149 million from the previous quarter, and a decrease of $238 million year-over-year. The decrease from the previous quarter was associated with acquisition of CRI. The decrease from a year ago includes about $100 million in stock buybacks.

We generated approximately $20 million in cash from operations during this quarter, and expect to be cash positive from operations in the next quarter, or Q3 also. As we filed in our 8-K, on July 20, we received notice from Samsung exercising their rights to put back 4.8 million shares to us for aggregate amount of $100 million. One of the questions I was asked earlier was, how this will be accounted for.

There is no P&L impact from this transaction. On the balance sheet, we will reduce our cash by $100 million, increase our (inaudible) by $13.5 million, and eliminate the category of CRCS, or Conditionally Redeemable Common Stock of $113.5 million in temporary equity, and we will reduce outstanding shares by 4.79 million. After this transaction, we expect to end Q3 with a comfortable cash position of approximately $280 million.

Now let me give you some thoughts regarding the third quarter. This guidance reflects our reasonable estimate, and actual results could differ materially from what I am about to review. For the third quarter, we expect customer licensing income or CLI to be between $85 million and $90 million, and revenue to be between $91 million and $96 million. We expect pro forma operating expenses, which exclude stock-based comp, cost of restatement, the CRI retention costs, and amortization to be between $61million and $65 million. These amounts include an estimate for litigation expenses of $15 million to $18 million, and a full quarter of CRI operating expenses. Pro forma net income is expected to be between $11 million and $16 million.

Before we open the call for questions, we would like to address a few additional inquiries that we received from stockholders, via e-mail onto our website. The first question relates to why Bruce Dunlevie resigned from the Rambus Board. As we stated in our June 10 press release, Bruce had informed us that his responsibility at Benchmark Capital are increasing, and the demands on his time means he could no longer fulfill his responsibilities on the Rambus Board.

Bruce served for 21 years on the Rambus board, and we are extremely grateful for his long commitment to the Company. We are very pleased to have Tom Bentley step up to the Chairman role formerly held by Bruce. The next question that was asked was, how does CRI and the lighting solutions fit into the Rambus strategy of being an interface Company?

We're -- we don't look at ourselves exclusively as an interface Company. All three of the individual parts that we have, looked at discretely, address very large markets. Each has strong technology, which we found to be an easier way to complete licenses. But behind that, they have equally strong patents, if patent licensing is the way we go. So, individually, these are all good markets.

But also important, and probably growing in importance, is the fact that these individual technologies tend to appear in the key devices that all of us buy and are very familiar with; cell phones, tablets, laptops, printers, all have memory interfaces. Obviously, they have screens, and many of them want to become, if they are not already, secure devices. Now we can't say with 100% certainty, how the licensing approach will go, but we're pretty optimistic that having technology at this level, will increase our ability to license, and license more quickly.

Thanks, Harold. With that, we'll open the call up to questions. Operator?

Thank you.

(Operator Instructions).

Our first question comes from Jeff Schreiner of Capstone. And your line is open.

Yes. Congratulation, guys, on the quarter, and congratulations, on the guidance as well. If we could just start the guidance, Satish, what's driving -- if we just looked at even just the CLI level, on a sequential basis, you're up pretty substantially. Is the majority of that contribution from CRI, or is it a mix with the Freescale settlement that was recently announced as well?

It's a mix, coming in from some contribution from CRI, and a couple of one-time events that will happen in Q3, that will recognize the CLI, and also -- maybe some as revenue also.

Okay. And those one-time events, I mean, are those something we should know about? Or what are these one-time events, that you have just brought up?

Well, again, these are not the (inaudible) they may not be material. So that's why we included them in our guidance. But to the extent something needs to be disclosed, and needs a press release or a communication, we'll definitely communicate at that point in time.

Okay.

But as you mentioned, we are very happy with the guidance, and it was a great quarter. And we're looking forward to having better results in Q3. So we feel pretty happy with the quarter.

Great. What happened with legal kind of being lower than forecasted, I guess? Tom, were you beating your external team down there, or it seemed that some cost maybe perhaps got shifted from Q2 to Q3? Any color there?

No specific color, Jeff. As you have seen, the ability to predict when a litigation or legally-based events are going to actually occur, and therefore incur the expense, is not necessarily a science as much as an art. And our art on that issue this quarter, was not as good as we'd like it to be.

Okay. Fair enough. Harold, when we look at CRI, in some of the markets that they are trying to target, can you help us understand if there's any crossover between what Intel and McAfee are trying to do? Are they going after similar markets as CRI, or are we looking at kind of two different markets, that each may be attempting to target?

They touch on the edges. They -- the Cryptography market is very, very broad. There are -- and growing everyday, new ways to attack various hardware and software. CRI's initial product was in focusing on how people could literally, through probing hardware extract keys.

They found some very clever ways to avoid that. They have created -- they have created additional hardware that makes the device much more secure, They call that Crypto Firewall. And obviously, they are developing other platforms. The -- I am not completely at liberty to address exactly what Intel sees completely in McAfee, but some of those areas will come in. They want -- the Intel platform wants to be secure for obvious reasons. They want to be the place where you go to view content, and to have your financial transactions secure. So they are moving down the same path. Intel would be a customer, and we will work hard to make them a customer of CRI.

Okay. I'll stay with you real just quickly, Harold. I'll try to only get maybe one or two more in, and let some other people get on. But, geez, we had this big boom, let's call it, boom bust cycle in Silicon Valley. And one finally falls in Rambus' lap somewhat, in terms of patent valuations. Is Rambus now, based on the valuations given to Nortel, and the talk that is going around with InterDigital and the like, considering any patent sales?

No. We believe that the patents that we create and buy, are best maintained and licensed by us. On occasion, there might be some smaller transaction, we would look at. But we are very, very comfortable in our ability to use the patents we have, Jeff.

Okay. And Harold, can you help us -- maybe I guess, the only real question I have about is the anti-trust trial. I understand it's going on. There's not much talk about until it gets complete, hopefully, but can you help us maybe quantify where the management team is right now, with expectations? Because I think one thing that's happened in the past, is Rambus investors at any level, retail, institutional, what have you, may have different expectations of what management may have been willing to do, going into that effort. Thus if, we see the full award is X, in the anti-trust trial, whatever that may be, should we feel comfortable knowing that management isn't really willing to come to a table, unless there's a high percentage of that award built into the settlement? Can you help us maybe set expectations a little bit for this trial, so where you guys are -- the best as you can right now?

That's a good question. I -- we're certainly are not at liberty to put numbers to that. Let me, let me make the question a bit broader, and it really brings into the picture the CISC -- the CAFC ruling. As we said, we are very disappointed with that ruling. And it removed some of the immediacy which was possible, with regard to how we would price a license after the joint boycott case. That's about what happened with that particular action. That notwithstanding, we've said very clearly, that we had every intention of having this trial, seeing what comes out of it with the hope of ultimately coming to good resolution, at values that will appreciate the stock, hopefully significantly.

Okay. Final question for me. The Samsung put, should we -- should investors I should say, throw out hopes of any type of future partnership with Samsung? Is that how investors need to look at this today? And then given that, I guess given the put being put back to Rambus, and there's obvious -- Samsung has their own internal reasons, how should investors maybe view that settlement, as it stands today?

So Jeff, I'll talk about the relationship with Samsung, if there are any real, more technical questions about the put, I'll defer to Satish. But clearly, they had every right under the agreement that we had, to exercise, and we were certainly prepared for that. I don't think you should read anything into it, as to Samsung's broader intent in the relationship. It's a business transaction, like many others. We continue to have the very same kind of dialogue we have been having with them, since the settlement occurred. And I believe that both parties are very serious about finding long-term ways to collaborate and benefit from the relationship with one another.

Although, keep in mind, we are talking about a future technology development effort, in a very dynamic market environment. And we are talking about two companies, that had a period of five or more years, where we weren't really working together. It takes time, to really find the right sweet spots of engagement. And we are investing a ton of effort into that. And I would say that Samsung is as well. And they certainly wouldn't do that, if they weren't serious about having a relationship going forward.

And just to add to that. Even subsequent to the put, they still owe -- they still own another 4.8 million shares. So they still own about 4.3% of the Company. So they're still a long-term investor.

Okay. Well, thank you all for the answers, and a great quarter. It's great to see the guidance move higher, and operational events really moving the stock tonight.

Thanks, Jeff.

Thank you. Our next question in queue is from Michael Cohen of MDC Financial. Your line is open.

Thank you for taking my questions. And congratulations, after seven years, of finally getting the anti-trust trial to a -- on board. It's been a pleasure, sitting there everyday, getting to watch it after seven years. My first question is regards to the Samsung put. So they do still have, I guess half the shares, within the original Samsung agreement. Is there any indication that they are going to sell those, or does it look like they are going to be a happy holder of the shares, that they did not have a put right for it?

There was no indication they were intending to sell.

Okay. My next question is sort of in the spirit of Jeff's comment, with regard to the increased valuation through wireless portfolios. I think a lot of investors overlooked the applicability of your patent portfolio in the wireless sector. And a lot of people overlooked that DRAMs are now being in smart phones. I was wondering if you could touch on a little bit of -- the strengths of your patent portfolio, and the areas that you think they apply strongest to the smartphone market, specifically platforms like Android and Apple?

Michael, this is Sharon. I am not going to talk specifically about the patents, but I'll talk about the technology. Yes, we absolutely believe that a lot of the technology we have been working on over the last several years is very relevant to the entire mobile market. But maybe even most interestingly, to the high growth sector of smartphones and tablets.

Obviously, you heard us talking about mobile XDR. That continues to be an area of focus. But we're also looking much more broadly at memory solutions for that portion of the market, Mobile XDR and other approaches. I would also add, that as these devices are becoming more complicated, there are a lot of other interesting semiconductor-related areas, that we're going to be looking to address, as we look to continue to expand our footprint in semiconductor technology going forward.

I'd also add, per Harold's earlier comment about our two new businesses, if you think about applications for display technology and hand-held platforms, or frankly for securing all those very high value content hand-held devices that are out there, we believe they are also exciting opportunities for the Cryptography and the backlighting portfolios that are part of our LDT, NCRI businesses. So yes, the mobile market as you heard us at the May Analyst meeting, the mobile market is going to continue to be a very strong focus for us. And we believe there's a lot of opportunities for all of our businesses.

Would you characterize the mobile market as being your number one focus?

Well, I think each one of the businesses, would speak a little differently. If you were to -- but from a Company standpoint, I think -- as we've have talked about two major trends that I think are relevant to all of our businesses, one is the mobile platforms. The other is sort of the infrastructure that goes along with that. We believe those two poles, are actually relevant to all of our businesses. And then, of course, there are things like lighting, the general lighting market, which of course, is just unique to one of them. But I think, if you think about rallying technology markets that are relevant to all of our businesses, I would say, those two.

Okay. Thank you. That's very helpful. My next question is, switching over to Satish. I was wondering if you could give us a little bit of color, in terms of the timing of the impact of Freescale agreement. Was some of that in this quarter, and -- just wondering if you could give us any color on, which quarters it's coming in, and how it's impacting your financial?

Sure. Michael, the color I can give is very limited, because the terms -- many of the terms of the agreement are confidential. But I can tell you, that there was no revenue that we recognized in Q2, but we did recognize as part of CLI. And then in Q3, we will be recognizing revenue that will be part of what we get paid, plus some of the past years, and also for the current period. So it will be bifurcated -- it's bifurcated a little bit between Q2 and Q3, as far as the CLI is concerned. But as far as revenue is concerned, all of it shows up in Q3.

Okay. That's helpful. And my last question is for Tom. And I'm not sure he's going to be able to help me with this, but you can't blame me for trying. With regard to your petition for rehearing at the CAFC, do you have any color, or what's your best guess as to when we might hear something, in regard to either granting or denying or requesting of a poll being taken?

That's a good question, Michael. Yes, as you've noted, we did file petitions for rehearing. We filed a petition for a rehearing, and so did Hynix, in their case. As I said earlier, regarding the expenses, our ability to guess when an event is going to happen in the legal world, is not as good as it might otherwise be. My suspicion, is it won't be all that long. I don't know, but there were five judges on our panel. There are now 11 judges on the court. My guess, is there -- a lot of the judges have given this a lot of thought already, and we may get an answer relatively soon. But -- I don't really know.

Great. That is more color than I actually expected. (Laughter). Okay. Well, thank you very much. And congratulations on the good quarter, and best wishes for how things are going to progress in your anti-trust case. I have really been enjoying watching that every day.

Thanks, Michael.

Thank you.

(Operator Instructions).

Our next question comes from Hamed Khorsand of BWS Financial. Your line is open.

Hi. This is actually [Wahid] calling in for Hamed. Could you, really fast, repeat the OpEx guidance number again?

Sure. So for the pro forma OpEx, we said between $61 million and $65 million, which includes litigation of between $15 million and $18 million.

Okay.

We do have these slides on our web -- as our part of our webcast. And they're also -- they're posted on our IR website. So anytime you want to go look at the details of the financials, and how we go from GAAP to pro forma, all that detail is now posted on the website.

Okay. And could you tell us if there is going to be any catch-up revenue from Freescale?

Yes, there is catch-up revenue in Q3 from Freescale.

Could you go a little bit more in depth than that?

No. Like I said, we -- because a lot of the details are confidential, and we agreed to give them confidential, I can't give you any more color, or any more details. I would love to, but I can't.

Okay. Now pricing in lighting is coming down steadily. Does this play a role in how much royalty revenue you can receive in the future?

Somewhat removed, but I think the more dominant factor of the cost of LEDs going down, is that the attractiveness of LED lighting goes up proportionately. And as it continues to eat existing types of lighting, it increases our chances overall, of selling more LED-based lighting.

Okay. Thank you.

Thanks.

Thank you.

(Operator Instructions).

The next question comes from Jeff Schreiner of Capstone. Your line is open.

Hi, guys. I just had a quick follow-up. Regarding the Freescale, and the Q3 guidance, I mean how sustainable -- are third quarter revenue levels at this time? Or are we going to see a step up in third quarter, and then kind of a step back down, because we're getting that kind of one-time catch-up benefit it sounds, whatever that may be from Freescale? Is there any help, you can give us there?

Jeff, Q3, definitely is step up And I'm not ready to say that is a normal run rate at this point in time. So in Q4, we will see a slight step down, from what we have currently forecasted in -- in Q3. But I can't give you any more guidance for Q4 at this point in time.

I would add there are other things in play, obviously.

Yes, I mean --

It's fair to say that in -- there is a catch up in the revenue portion, and to a certain extent in CLI in the third quarter. But it's a bit early to be giving guidance on Q4.

Understood. Understood. Thank you, gentlemen.

Thanks, Jeff.

Thank you. I show a follow-up from the line of Hamed Khorsand from BWS Financial.

Yes. This is Hamed. Sorry about my voice. I just had jaw surgery. Does the CRI, and the new revenue scheme, remove some of the seasonality that we have seen in the past?

It is a licensing business, and into that regard, it's wave if you will, will be pretty comparable to how we book everything else. It's -- the biggest seasonality effect that we have right now is the PlayStation 3. I don't believe that CRI will have that impact. But it's again, it's a second derivative. I don't think it will have a big impact.

But I am talking about the whole Company in general. Now that you have Freescale, they have been busy there. The company is sharing quite a bit. So the seasonality will get removed now?

Hamed, this is Sharon. I think we will continue to see some level of seasonality. I mean, Harold mentioned the PlayStation 3, We obviously, have many other licensees who are involved in the consumer electronics market. And I would say generally, it's consumer electronics that drive the seasonality that we've had historically. So to the extent, that we are successful with our new businesses, also in addressing some consumer applications, I think we will continue to see a bit of seasonality in some parts of our revenue stream. But there are others which are in completely different markets, and really not subject to the same.

Okay. Great. Thank you, and I apologize for my voice.

No problem. Good luck with the recovery.

Thank you. And at this point, I would like to turn the call back to Harold Hughes.

As always, thank you very much for your support. And we look forward to talking to you next quarter.

Ladies and gentlemen, thank you for joining today's conference. This does conclude the program. And you may now disconnect.