Rambus Inc (RMBS) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Rambus, Inc. Q3 2011 conference call. (Operator Instructions).

As a reminder, today's conference call is being recorded. Now, it is my pleasure to turn the conference over to Satish Rishi, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you, Operator. And welcome to the Rambus third quarter 2011 conference call. I'm Satish Rishi, CFO. And on the call today are Harold Hughes, our President and CEO; Tom Lavelle, Senior VP and General Council; and Sharon Holt, Senior VP and GM of the semiconductor business crew. The press release for the results discussed here today have been filed with the SEC on form 8-K. A replay of the 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 then entering ID 18184950 when you hear the prompt.

In addition, we are simultaneously webcasting this call and along with the audio, we will be webcasting slides. Even if you are joining us via conference call you may want to access the webcast for the slide presentation. A replay of this call can be accessed on your website beginning today at 5 PM Pacific Time. In an effort to help provide greater clarity to our financials as we have been doing, we are using a non-GAAP pro forma format in our press release. We will continue to use the 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 risks and uncertainties which are more fully described in the documents we filed with the SEC including our 8-Ks, 10-Qs 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 financials today and we have posted on our website reconciliation of the non-GAAP financials to the most directly comparable GAAP measures. You can find a copy of the earnings release and recon at www.rambus.com on the investor relations page under financial releases. Now, I will turn the call over to Harold. Harold?

Thanks, Satish. And good afternoon, everyone. As we stated last quarter we expected a great Q3 in terms of revenues, and we delivered. Q3's revenues of $100 million was above the top end of our guidance thanks to strong contributions from our businesses across Rambus. Satish will go through the quarter's financials in greater detail later in the call.

A real highlight in Q3 was the signing of a license agreement with a major cell phone company for our cryptography research, differential power analysis counter measures technology. By the terms of the agreement, we won't disclose the company's name, but there are some details we can discuss. This was CRI's first smart phone licensee. The deal includes a license for CRI's patents for use in phones and tablets and includes recurring royalties. Security is becoming increasingly important for smart phones and tablets as they are used to conduct commerce, consume digital media and high-value content, and store private user information.

There is increasing recognition about the importance of GPA countermeasures in electronic devices. At a recent security conference in Japan more than 50% of the users -- 50% of the talks were focused on side channel attacks. Side channel attacks represent a threat to a broad range of products and applications and DPA has been shown to be a powerful and effective side channel attack. We see the need and the interest in CRI's patented DPA counter measures continuing to rise. We believe the deal we announced this quarter will be the first of many DPA counter measure agreements we signed with smart phones and tablet manufacturers, securing consumer electronics from DPA attacks is foundational for their usefulness and ties directly to our mission of enriching the end-user experience using electronic devices. Continuing to focus on CRI, during the quarter we saw continued momentum in our cryptography firewall security solution in the pay TV market.

At the International Broadcasters Conference in September, we announced chip partnerships with NSTAR Semiconductor and Triton Microsystems. These companies join Broadcom, ST Microelectronics and Physics as partners implementing crypto-firewall security core technology in their set top box SOCs. We deployed crypto-firewall solutions at the chip level and then monetize downstream customers when they use the crypto firewall functionality. The crypto firewall core provides a robust hardware security foundation for broadcasters and conditional access companies to build secure services apod. We also announced that conditional service provider Aeromatrix has licensed the crypto firewall core for use in reinforcing its offerings. With this license, Aeromatrix will be able to utilize the cryptography firewall core present in the SOCs from the semiconductor companies I mentioned a moment ago. Downstream customer licenses such as the one with Aeromatrix are solutions license agreements that will generate recurring royalties. The engineers and scientists at CRI as with other innovators across Rambus actively educate the industry throughout leadership events. In the third quarter, Paul Kocher delivered the Rambus gold sponsor presentation at the most recent intel developer forum.

Paul talked about how the increasing complexity of systems dramatically increases the security challenges we face in electronics industry. And he talked about how hardware based security solutions are means with which we can meet these challenges. Also at IDF, our semiconductor business showcased developments in our terra byte bandwidth initiative, EDR3 innovations, as well as our mobile XTR memory platform. The key enabler in our ongoing technology development efforts is to ensure we have access to the most advanced semiconductor process technology. This is with our demos at IDF, we validate the performance and benefit of the innovations and solutions through silicon demonstration test chips. As part of our strategy to ensure we have access to leading edge technology, we have been collaborating with GLOBALFOUNDRIES on their advanced 28-nanometer super-low power process.

This collaboration allows to us employ the capabilities of one of the most power efficient and highest performance analog and mixed signal offerings for advanced SOC development. In recognition of our contribution in this field, GLOBALFOUNDRIES presented us with a leading-in-innovation award at the GLOBALFOUNDRIES conference 2011 at the end of August. We are very appreciative and proud of the award since innovation is a core value for Rambus and one that we live by every day. As a company of inventors, we are continually seeking opportunities to hire experts that can lead to development of innovations and solutions in new areas of focus. Areas where we can lead the industry with new technology breakthroughs. One such area is advanced computational sensing and imaging.

We believe there are tremendous opportunities in adding intelligence to imaging in the coming years and we are targeting our work accordingly. To that end, we recently hired imaging and optics expert Dr. David Stork. Dr. Stork is a renowned industry expert in optics and the development of algorithms that enable novel sensing, imaging, and image analysis techniques. His honors include being named a fellow from the International Association of Pattern Recognition. We are pleased to have David join our world class team of engineers and scientists here at Rambus. I will touch on developments in the lighting and display technology business. Since unveiling our pandelic lighting solutions at Light Fair International earlier this year, we are seeing great interest from a variety of companies that are now engaged in discussions with our technology team in Brecksville. We expect to have some exciting news to share in the coming months.

Lighting products from GE using our pandelic solutions make their market debut late this year or early next. First up are tropher-style lights used in ceiling installations in commercial and retail settings. Proof of our commitment to innovations continues to pace. We ended the third quarter with 1,333 issued patents and another 1,039 pending applications. As always, great credit to the hard work of our engineers and scientists and our patent development team. Changing gears. As you all know, we had the long awaited price fixing trial this past quarter and still awaiting the verdict.

This is an important case to say the least, and while we hoped to have a verdict by now the jury is still deliberating. We look forward to the result. Given the time this matter has taken and the tremendous amount of thought and effort by our litigation team, our litigation expenses last quarter were higher than originally expected. As we have talked about in the past, litigation expenses are driven by events the timing of which we cannot always control or even influence. They nonetheless represent a strategic investment in achieving fair compensation for the use of our great inventions created by Rambus inventors.

Satish will have more details on expenses as part of the financial discussion upcoming. With that, I will turn the call over to Tom to walk through the legal developments.

Thanks, Harold and good afternoon. Let me begin with the price fixing trial that's now in the hands of the jury in the California superior court in San Francisco. This is our case against memory manufacturers Micron and Hynix. At issue of our allegations that the defendants along with others engaged in a concerted and unlawful effort to eliminate our RDRAM product from the market, stifling both competition and innovation in the market for memory technology and memory-related chips.

This case was originally filed in 2004 and we were pleased to finally be given the opportunity to present our case to the jury. The jury was seated in the middle of June, opening arguments beginning on June 20. The honorable judge James McBride has been presiding in this trial. As Harold mentioned, we are all anxiously awaiting a verdict, and we will communicate the result as quickly as we can. Moving now to the ITC action for memory controllers and serial link innovation. As you'll recall, we are seeking an exclusion order baring the importation or sale after importation of products from the respondents that infringe certain Rambus patents. An evidentiary hearing before administrative law judge Essex was held over the course of the past two weeks and concluded today in Washington, D.C.

We expect judge Essex to render his initial decision in this matter in early January of 2012. In the other ITC case we have with NVIDIA, oral arguments were held at the court of appeals for the federal circuit on October 6. In that matter, NVIDIA is appealing to the ITC decision that their products infringe patents in the Barth family of patents. In addition, we are appealing the fed circuit's decision of non-infringement with respect to the Ware family of patents. We expect the fed circuit to make their determination early next year. Now, a quick update on the remanded cases in the Hynix matter as well as Micron matter. The judges recently held hearings and judge White in the northern district of California has scheduled another hearing for tomorrow. We are briefing the issues before each judge following the CAFC decision in May. With that, I will turn the call back to Satish.

Thanks, Tom. As a reminder we use non-GAAP or pro forma numbers which we believe are indicative of our company performance as they include the impact of certain cash events and exclude certain non-cash and discrete events not indicative of long-term performance. Customer licensing income is a non-GAAP measure that includes royalty related payments that we receive under a signed patent license agreement. It is how we measure the topline performance of our business, and it may be different than revenue within a particular period when the amount of cash received from patent licenses is 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 management expenses. PLI was $91.6 million, as compared to our guidance of $85 million to $90 million. Pro forma expenses came in at $66.8 million, above our guidance of $61 million to $65 million, driven primarily by higher litigation expenses.

Pro forma net income $14 million as compared to our guidance of $11 million to $16 million. Customer licensing income for the quarter at $91.6 million was an increase of 26% from the previous quarter and 118% from the quarter a year ago. This quarter included royalty payments received from Freescale who we signed and received partial payments from in Q2 as well as royalty payments from the mobile handset manufacturer that Harold alluded to. This quarter's CLI included a total of $23 million in nonrecurring royalties and catch-up payments from the new licensees. Pro forma operating expenses were $66.8 million, up 32% from the previous quarter. These pro forma expenses include litigation expense of $23.5 million, up 105% quarter over quarter driven primarily by the expenses related to the ITC cases and the San Francisco price fixing case. Compared with the prior quarter and the quarter a year ago, pro forma engineering expenses were higher by 9% and 15% respectively due to a full quarter of CRI related expenses and continued investment in the lighting division. M&A expenses for the same periods were higher by 50% and 88% respectively.

Again due to higher litigation expenses. Pro forma interest and other expenses were $2.9 million, flat with the previous quarter and up 59% from the quarter a year ago. For pro forma tax expenses, we are using a flat rate of 36% on pro forma pre-tax income. Pro forma net income this quarter was $14 million, up 13% quarter over quarter. A year ago we had a loss of $2.1 million. Overall cash defined as cash, cash equivalents and marketable securities was at $293 million, a decrease of $67 million from the previous quarter and a decrease of $192 million year-over-year. The decrease from the previous quarter was the result of the repurchase from Samsung of approximately 4.8 million shares of our stock or an aggregate amount of $100 million pursuant to the put option offset in part by cash from operations. The decrease from a year ago also includes our acquisition of Cryptography Research Inc, or CRI.

During the quarter, we generated approximately $35 million in cash from operations. Now, I will give you some thoughts regarding the fourth quarter. This guidance reflects our reasonable estimate and our actual results could differ materially from what I'm about to review. For the fourth quarter, we expect customer licensing income to be between $68 million and $73 million and revenue to be between $66 million and $71 million. We expect pro forma operating expenses, which exclude cost of restatement, TRI retention cost, amortization, to be between $58 million and $62 million. These amounts include an estimate of litigation expenses of between $12 million to $15 million. Pro forma net income is expected to be between $2 million and $8 million. Before we open the call for questions, we would like to address a few inquiries we have received from stockholders via e-mail or through our website. The first relates to our position in flash memory. Specifically, what are your thoughts on flash replacing DRAM in the coming years?

I will take that one, Satish. There will be some interesting developments for both DRAM and flash in the five- to ten-year time horizon. Both memory types face fundamental scaling limits that will give rise to the development of new bit cell technologies. There has been a lot of investment and activity in the industry in these new technologies and this is an opportunity for new Rambus innovation. Because the replacement technology candidates don't have the same performance characteristics as either DRAM or flash, there may also arise the need for new memory architectures that best utilize these new memory cell technologies.

That is another area ripe for Rambus innovation and contribution. So I don't think flash will replace DRAM. I think in the next few years, we are headed for a period where a number of different memory technologies compete to replace both flash and DRAM, and we intend to make a strong contribution with innovations and solutions to help the industry make that technology transition.

Thanks, Sharon. And the next question pertains to our lighting business, specifically when will LED revenue be meaningful or when will lighting and display revenue be meaningful to Rambus?

We divide our lighting business into two generic parts. One is the technology licensing for physical product, be it a light or a display. And secondly, the patent licensing of the patents which underline our technology licenses. I believe that we will have contributions to revenue from both of those in 2012 and meaningful contributions in 2013 from both.

Thanks, Harold. We plan to continue addressing questions from shareholders in a periodic basis at this forum. Operator, we are now ready to open the call for questions.

Thank you. (Operator Instructions).

Your first question comes from Paul Koster of JPMorgan. Your line is open.

Thank you for taking my questions. A quick question, can you break out semi business from the new business group in terms of the revenues this quarter?

Hi, Paul, this is Satish. No, we are not planning on breaking out our businesses at this point in time. I think when they get to be material and meaningful or they start becoming operating segments, we will start doing that.

Okay. And then maybe this is a procedural question, but when will you be issuing the cash flow statement and/or can you provide us with some handle on how cash flow evolved this quarter?

Cash from operations was $35 million this quarter.

Okay.

The cash used for investing activities was about $22 million. We started the cash at about $359 million and ended about $293 million. Any other questions?

Yeah, was there a purchase of property, equipment this quarter that you can share?

Yes, on the CapEx side we had about $15 million in CapEx. And then just cash flow, so that -- to give you some color on the non-cash portion, about $10 million was an amortization. Depreciation is about $3 million. Stock-based comp I think you already had that was about $7.2 million. I think that should give you a good feel for some of the cash flow.

Okay. That's great. And then my last question really for Harold, I guess. Is the DPA licensing deal you did with the smart phone company. Can you help us size this in some way and how many such deals do you think there are out in the market so we can get a handle on what your growth prospects are there?

I really, under the terms of the contract, can't give you any information on the size of the deal. I know that is frustrating. It's frustrating to us and it's obviously frustrating to shareholders. But many of these deals are complicated and our licensee believes that it is confidential information as they compete with other people so I can't say much. I apologize for that.

That's okay. Can I ask a question in a different way then? And that is looking across the whole handset industry, do you believe this can be material to it your -- in terms of licensing contribution? Can it be 10% to 20% of your royalty revenue in the SBG group in, say, two years from now, three years from now?

It certainly can be material, but we believe that the DPA attacks are very dangerous. It's becoming the standard, and we are optimistic as to our ability to sign most if not all cell phone companies.

Okay. Thank you very much.

Thanks, Paul.

Thank you. Our next question in queue is from Hamed Khorsand of DWS Financial. Your line is open.

Thanks for taking the call. My question is more as to, you know, it seems like you are gaining traction on the CRI side and is this going be more of a continuing basis because it sounded like when you bought CRI, they already had lots of licensees. So is this -- are these announcements going to be small in factor or just get bigger and bigger as CRI expands their portfolio patents?

I think a way to look at it is to think of the uses of the devices that we now buy and how as those uses become broader and broader, you bring into play more, should we say, risky transactions. For example, it would be nice to be able to use your cell phone to pay for purchases. That then requires that be very secure both at the handset level and at the transmission of that information back to your bank account. If you are a content owner and you would like to deliver high value content you want to be certain that whoever receives that content receives it to a secure device which would be the means by which you are paid.

We believe that the CRI acquisition can lead to substantial revenues both in terms of securing the delivery of content, the security of the financial payments, and in the ability to upgrade phones as features are included in phones, but not realized until that particular feature is turned on. And we are moving forward across a broad front to maximize the revenue there. Whether or not we will have as many announcements next quarter as we did this quarter I don't think we can commit, but we are optimistic that over time we can sign many people to pir CRI technology licenses.

Isn't the movement to NFC going to spark more and cryptography requirements for smart phones?

I think there's a one-to-one relationship between the NFC requirement and the DPA requirement.

Okay. And my last question is regarding guidance, the current guidance you are providing for Q4, you know, what's changed or what is expected to change in Q4 compared to Q2 because you now have two new licensees compared to the second quarter revenue you reported, and now it seems like there is going to be very minimal topline growth between those two quarters.

Hi, Hamed, this is Satish. I think what we had in Q3, we had a couple of catch-up licensees that I talked about and we about $23 million from non-recurring royalty payments that came in to us, the CLI numbers. But I think in Q4, what we are seeing is out of a standard run rate, and there are variable royalties that we have in our Q2 numbers and our Q4 numbers and there is some seasonality that's built into the numbers and that is part of what you are seeing in the guidance.

Okay. Because I was just leaving Q3 alone. I was looking at Q2.

Right.

And so looking at Q2 and Q4. Now, what is declining? Where is the seasonal factors coming in?

Well, the declines are coming in, like I said, we have seasonality with some of the licensees. Some of them are variable and most of them are in some form or fashion fixed or they are in a hybrid -- with the hybrid payments that we have. Not all quarters will be equal. There is some seasonality as some customers who may have a variable license don't do well and others do well and the ones doing well may be fixed. That is why we have some variation in our topline.

Hamed, the Q4 CLI forecast that we are giving you is a run-rate forecast, unless we are highly certain, forecasts what a catch-up license would be were we to sign someone that we are currently negotiating with, and obviously there is no estimate as to what we might receive when we hear the good news from the court in San Francisco.

Okay. Thank you.

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

Thank you for taking my call, and thank you, Tom, for the legal update. Especially with regard to the ITC in Washington, D.C. I'm actually currently here at the court head in San Francisco where we he have been holding vigil waiting for the verdict for about a month now and eagerly awaiting that. I was wondering if you could share with us how potential double damages would be calculated. You have an antitrust claim and you have a tort claim. If the jury found in your favor on both, I was wondering how that would play out and if you could tell us the likely scenario. I know it is open to uncertainty.

Thanks, Michael. Before I stay anything. I want to correct a statement I made in my prepared remarks. I indicated that the Ware patents were found not infringed. In fact, that's not correct. They were found to be invalid but infringed. Because hey are invalid, obviously, they are not enforcible at this point until we get that turned around if we do in the fifth circuit. So I apologize, Michael, for jumping in, but I realized as I was saying it and I was watching what was happening in San Francisco as I was saying it. That's why I misstated. My apologies.

I can confirm the jury did just leave for the day.

Yes, that is what I was confirming when I was saying that. In any case, it is going to be very difficult to sort through what would happen if we were able to get damages both on the Cartwright Act and on the tort claims. I don't think I want to speculate on that. I would love to have that problem and make it a real issue to sort through, and I'm sure we will do that very effectively if we are given that opportunity. But I would rather not try to do that on the line right now.

My understanding is that if you win on the tort claim, it does open up the possibility of punitive damages which could be about 10% of their net worth, which was shown to be, I believe, roughly $1.7 billion. I was wondering, if you did win on both claims, could you have the punitive in additional to a troubled antitrust amount?

Again, I think that's a good question. I don't have a specific answer. I have talked to a number of people and we would like to be confronted that with problem. And I believe we could probably find a way to collect both and as you well know, Michael, we did put on evidence about the torts. We put on evidence involving behaviors that could and, in my opinion, should lead to a punitive damage findings. We put on evidence as to their net worth was or their market capitalization actually, that's what one of the two put on. And so we look forward to having that problem, but you are sitting in the courtroom in San Francisco. I'm sitting in a conference room in Sunnyvale and we will look forward to having that problem should that come up, and we will sort through it all when we get it. If we get it.

Okay, great. I was wondering the next question, I guess I will go over to Sharon. I was wondering about if there is any past licensing deals that are set to it expire in the next six months that we should be aware of?

Nothing that I'm aware of from the semiconductor business in the next six months, Michael.

Okay, great. That's fantastic. Thank you for taking my calls.

Thanks, Michael.

Thank you. Our next caller in queue is Mike Crawford from B. Riley & Co. Your line is open.

Thank you. Going back to the leading-in-innovation award you got from GLOBALFOUNDRIES for the super-low power process, that is something that I believe GLOBALFOUNDRIES is collaborating on with Samsung. Is this something that you expect Samsung to be implementing soon, and if so, what would that mean for Rambus?

This is Sharon. I will take that question. Samsung and GLOBALFOUNDRIES and IBM and a few other people are part of an alliance where they actually share new process development and they actually run identical or close-to-identical processes in their cabs. Obviously, it's part of an effort in the industry to provide options for fabless or fab light companies to have other places to go to have their chips made. In the particular award that you mentioned, a project that we worked on with GLOBALFOUNDRIES, we do a lot of internal R&D here at Rambus, and we don't just do it on paper or through simulation. We actually take many of our designs all the way to silicon to prove that they work as we expect they will, and that is actually an important part of demonstrating new technologies to customers. The reason that we received the award is that we were doing some very unique mixed-signal, high-performance, low-power designs, unique among GLOBALFOUNDRIES customers, and it actually was a good exercise for both us and GLOBALFOUNDRIES because they were able to prove out some of the capabilities at their process and improve their silicon access methodologies for other potential customers who might be doing high-performance, low-power designs targeted at the mobile market.

Thank you, Sharon. Maybe an adjunct question would be -- any updated commentary on how your Samsung MOU is or is not progressing?

So, you know, we continue to be very pleased with that progress on the relationship with Samsung. Clearly, if we had a new agreement to announce we would do so. But as I have reviewed with our team internally here, there has been a lot of benefit coming to Rambus through the relationship over the last however many months it has been, 16 months or so. As we continue to share with them our plans and get real valuable feedback from them as to the relevance and importance of some of the new technologies we're looking to introduce. So that work is ongoing, and certainly, as we have any major new announcements to make, we will do so.

Thanks. Then last question back to lighting.

Thank you, Harold, for talking about some revenues in 2012, meaningful in 2013. GE obviously a great partner to have there. Is this something where you think it stops at GE or would you expect to be able to sign another of the major players in the next timeframe, be it 12 to 18 months?

Would I expect to? Absolutely. And again, just for emphasis, our businesses at this particular level of discussion are best divided into two parts. One where we work with people who produce a physical lighting product such as GE and another a licensing arm where people who are currently using our technology primarily in display, we look to find a patent licensing with them, and to a certain extent or the extent that we can, we will work with them on a technology basis to improve the performance of their display. In both areas, we expect to have a broad licensing program and indeed, they are underway right now. GE is a big customer. I guess I would have to say candidly in signing a big customer they tend to take a lot of your attention. So obviously, we had many of our resources focused on GE. But as though issues are resolved, we are beginning to talk to other people and are optimistic about the likelihood of success.

Okay. Thank you.

Thank you. At this time, I would like to turn the call back to Harold Hughes for any concluding remarks.

As always, thank you for your continued support and interest, and we look forward to speaking to you very soon. Thank you.

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