Rambus Inc (RMBS) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to your Rambus Incorporated Q1 2012 conference call. At this time all participants will be in a listen-only mode. But later we will conduct a question-and-answer session, which instructions will be given at that time. (Operator Instructions) As a reminder, today's conference is being recorded. And now, I would like to introduce our host for today, Satish Rishi.

Thank you operator and welcome to Rambus' first-quarter 2012 conference call. I am Satish Rishi, CFO. On the call today we have Tom Lavelle, our General Counsel; Sharon Holt, GM of the Semiconductor Business Group; and Martin Cox, SVP and General Manager of the New Business Group. Unfortunately, Harold is home ill with the flu and is unavailable to join us today.

For today's call I will cover Harold's prepared remarks. But, before I do so, I need to inform you that 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 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 number 69256005 when you hear the prompt.

In addition, we are simultaneously webcasting this call. Along with the audio we will be webcasting slides, so, even if you're 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 our website beginning today at 5.00 PM Pacific Time.

In an effort to provide greater clarity on our financials we are using both GAAP and non-GAAP pro forma format in our press release. I also 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 that are discussed during this call which may be more fully described in the documents we filed with the SEC including our 8-K's,10-Q's and 10-K's.

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. Now I will go ahead with Harold's prepared remarks.

Overall we had a strong first quarter with $62.9 million in revenue which was toward the high end of our guidance. I will provide more detail on this in a few minutes. During the course of the quarter we signed two semiconductor patent license agreements nVidia and MediaTek. These license agreements are particularly important as it settled the outstanding ITC claims as well as the individual district court cases with these parties.

We have signed forward-looking license agreements with both companies, which is obviously important for the future. While we had a setback in the ITC case, we are pleased to have resolved the differences with nVidia and MediaTek. Two other parties remain in the ongoing ITC case, in which we have filed a petition for review by the commission.

A quick comment to the price fixing case in San Francisco. We have filed our notice of appeal. While we cannot predict how or when the appellate court will decide our appeal, we believe mistakes made during the trial require reversal of the judgment. Tom will address questions later in the call. For now we would like to share a few thoughts on where we are as a Company.

We are well-positioned to build and develop a series of solutions and innovations that will enrich the experience of end users around the world. We are in an ever-changing environment. Digitally connected devices, consumer demand and technology breakthroughs have all changed the world in which we do business.

Historically, advances in semiconductor technology with the drivers for increases in functionality of consumer electronic devices. Today, consumer demand has become a force that is pushing us all to innovate faster and to drive greater functionality requirements. This plays well into our strengths as inventors and as a Company.

We saw this trend emerge years ago and adopted a strategy to diversify the businesses both within and beyond our traditional markets to meet the growing needs of consumers worldwide. And we continue to execute on this strategy. Our focus on innovation lies at the heart of who we are. We will continue developing into a Company that can take advantage of technology disruptions in large markets. We believe in this strategy and it will continue to govern our actions.

All of the businesses are driving rapid innovation and change, whether it is high-performance, low-power memory systems, highly efficient cost effective lighting and (inaudible) solutions or across the board -- across the broad spectrum of electronics that need to be secure. Innovation remains at the core of our Company.

Regarding our CEO search, Harold is working with the board to identify a new CEO to lead our business forward to reach its full potential. The search for a new CEO is well underway with the board looking at both internal and external candidates.

Now, a quick update on the business. On the semiconductor front we are delighted to welcome the Unity Semiconductor team to Rambus and we are very excited to have them on board. Over the past several years, we have been studying the limits of current memory technologies and have been investigating a variety of potential successors. Both within the dealer markets and as well as within flash.

Memory will continue to be a large and growing market, and will continue to be an area of focus for new technology development for Rambus. The resistive RAM Technology Unity team has been creating called complex metal oxide or FeMOx, is a promising successor for the current generation RAM technology.

Its potential for scalability in low power has been key to attracting the development partners. While the technology is still in the development stage, we believe the Unity team, the technology, and the underlying patent portfolio puts us in a good position in this space.

Outside of the newly acquired technologies, our semiconductor business has continued to innovate across a number of key areas. As far as innovation, we ended the quarter with 1,277 issued and 948 pending semiconductor-based patents.

In addition, our engineers celebrated receiving the prestigious Best Paper Award for this year's DesignCon. Our winning paper was one of the 10 papers we presented at the conference. Earlier this week, Rambus Fellow, Craig Hampel discussed the evolving landscape of computing and the demand this places on memory architecture at the GSA Memory Conference in Tokyo.

Moving now to the new business group, we reached a milestone in the lighting and aesthetic lighting division with GE lighting shipping Rambus-based lighting products into the market. We have seen licensing success for our lighting technology beyond GE with the agreement recently signed with Fern Howard in Europe. In fact, just this week Fern Howard demonstrated several products based on innovation and designs at the Light plus Build trade show in Frankfurt.

Our photography research division continues its educational camp and security concerns of side channel attacks. Over the past quarter, the CRI team spoke at a variety of industry events including DesignCon and the RSA Conference and there's a growing awareness among device manufacturers and even the public, about the importance of effective security. From a revenue perspective, the CRI team is on track with a plan and we look forward to sharing more details on the progress at the appropriate time.

As is the case with the semiconductor business, the inventors in our new business group are continuing to advance their respective technologies forward. The NBG team finished Q1 with 320 issued and 263 pending patents.

Before reviewing the financials there are a few additional items we wanted to address. The first is new term licenses. Despite the recent legal setbacks, we have been able to sign new license agreements with [SFE] companies. To do so, we have had to make a few compromises.

The second item is an expectation for renewal starting in 2015. Over the past couple of years, we have invested through innovation as well as through acquisitions. The results of these investments is an evolving portfolio of technologies that can add value to our licensees. We believe we are building tremendous value as a result of our diversification strategy play out and we believe we will be in a stronger position moving forward.

The third item we want to discuss is on the proposals in this years proxy. At our annual meeting with the stockholders next week, we are seeking shared approval of a one-time employee stock option exchange. As it is no doubt clear, our stock price has dropped significantly over the course of past year. While our recurring revenue in pace of signing license agreements has improved over the past year, the adverse court outcomes have had an impact on our stock price. As a result, roughly 97% of our employee stock options are under water.

We are asking stockholders to allow us to exchange some of these underwater options to a strike price of $14.50, which would vest over the course of three years. I do want to reiterate that this program is for our non-executive employees. We have historically granted stock options to employees to encourage them to act as owners of the Company, which helps align their interests with those of our stockholders. This is an important program to help us retain our valuable employees.

Now, I will move on to the financials. 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 our 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 top line performance of our business and it may be different than revenue within a particular period, when the amounts of cash received from patent licensees is different than the revenue recognized.

For the quarter as compared to our guidance, we had a good quarter. With high CLI and lower manageable expenses. Customer licensing income was $65.3 million, towards the high end of our guidance range of $61 million to $66 million.

Pro forma expenses came in at $56.7 million, below our guidance $57 million to $61 million, driven primarily by lower litigation expenses. Pro forma pretax income was $5.6 million and pro forma net income was $3.6 million, as compared to guidance of a loss of $2 million and an income of $4 million.

Customer licensing income for the quarter at $65.3 million was a decrease of 23% from the previous quarter, and a decrease of 5% from the quarter a year ago. As you recall, we received a large payment from Broadcom in the fourth quarter of last year. This quarter included royalty payments received from MediaTek, a new licensee who we signed in Q1. Recurring CLI for the quarter was $63 million and one-time or non-recurring revenue was $2 million. Pro forma operating expenses were $56.7 million, down 15% from the previous quarter. These pro forma expenses included litigation expenses of $4.1 million, down 76% quarter-over-quarter. Compared with the prior quarter and prior year ago, pro forma engineering expenses were higher by 7% and 33% respectively, due to our continued investment in CRI, our lighting division and the recent acquisition of Unity Semiconductor.

MG&A expenses for the same period were lower by 30% and relatively flat respectively, primarily driven by litigation expenses. Excluding litigation, MG&A was higher by $4.7 million, as compared to the prior year and $1.1 million as compared to the prior quarter. Driven primarily by additional headcount both organically as well as through acquisition of CRI and Unity.

Pro forma interest and other expenses were $3 million, flat from the previous quarter, and from the quarter year ago. For Pro Forma tax expenses, we are using a flat rate of 36% on pro forma pretax income. Based on that, pro forma net income this quarter was $3.6 million, down 63% quarter-over-quarter and down 65% from a year ago.

Overall cash, defined as cash, cash equivalents and marketable securities, was at $233 million, a decrease of $57 million from the previous quarter, and a decrease of $276 million year-over-year. During the quarter, we spent $43 million for acquisitions, which included about $31 million for Unity Semiconductors and $11 million for a couple of other acquisitions.

Cash flow from operations was a negative $12 million for the quarter. The decrease from a year ago includes our acquisition of Cryptography Research Inc, Samsung's exercise of the $100 million PUT option, offset in part by cash generated from operations.

Now I will give you some thoughts regarding the second quarter. This guidance reflects our reasonable estimates and actual results could differ materially from what I'm about to review. For the second quarter, we expect customer licensing income to be between $54 million and $60 million, and revenue to be between $53 million and $59 million.

Let me provide some rationale behind these estimates. During the first quarter we entered a settlement and a five-year patent agreement with nVidia and under these new agreements, quarterly payments are lower than the quarterly payments made under the prior EC license. Also, our royalties from Samsung will impede on our variables and they are a function of a customer's revenue looking back two quarters. The DRAM market was soft in the second half of 2011, impacting our Q1 revenue and also is currently impacting our forecast for Q2 revenue.

Elpida declared bankruptcy in February, and is currently going through a reorganization. While their will remain uncertainty about our ability to receive payment during the pendency of the reorganization proceedings, based on discussions with contacts at Elpida, we are optimistic that it will be paid in Q2. As such, we have been included the estimated payment under a patent license agreement in our guidance for Q2. That being said, we continue to be in negotiations with other licensees.

The timing of these agreements is difficult to predict. We expect, on the expenses side, we expect pro forma operating expenses which exclude stock-based comp, cost of restatement, retention costs, amortization and acquisition expenses, to be between $57 million and $62 million. These amounts include an estimate for litigation expenses of $4 million to $7 million. Pro forma net income is expected to be between a loss of $6 million and break even. We are now ready to open the lines for Q&A. Operator, can you please open the lines?

(Operator Instructions) Paul Coster from JPMorgan.

Hi, it's actually Mark Strauss in for Paul. If we can, can we just go back to these cases. The ITC case, you filed a petition for review with the commission and then you have also appealed the antitrust case. What should investors be thinking as far as timing there of when a decision could ultimately be made? Are we talking months, quarters, past this year even?

They are two different answers to that. With respect to the ITC case that we have, we are having the commission review or asking the commission to review, that we expect to be relatively quick like this summer is when we would expect the commission to make a determination as to whether the administrative law judge's ruling was correct and whether they will support that ruling or overturn a portion of it. With respect to the San Francisco price fixing case, very different question. I expect that will be a year anyway before we get any real answer. We have filed a notice of appeal, will be filing the actual briefings very shortly, and that will take some time for both sides to brief. Then to determine oral argument and then the oral argument and ultimately a ruling by the Court of Appeals in the State of California. Whatever happens there, whoever wins or loses that may very well go to the California Supreme Court. The San Francisco case could take a couple years anyway to get to any real resolution from what the jury did after the instructions from the judges.

Okay. The ruling from the PTO regarding the Barth One patent. I understand that doesn't impact any of your existing agreements, but can you just talk about qualitatively what you are hearing or what to expect as far as negotiations going forward. Maybe discuss the MediaTek settlement, maybe not in exact numbers but on a percentage basis how much lower that was than prior settlements because of this ruling, if any?

Mark, this is Sharon, I'm not going to address the ruling, I will refer back to Tom for that. But just talking about the potential impact -- the actual or potential impact on current agreements or ongoing negotiations. As Satish mentioned during the prepared remarks, we have a very large portfolio. When we are negotiating with anybody for a license agreement, it is really about all of the relevant patents and claims for the products that we are licensing, not anyone in particular. In terms of negotiations going forward, we still have a very large portfolio which we are using in negotiations that are ongoing now. With respect to licenses that have already taken by MediaTek or any others, I think I mentioned last quarter that we certainly -- those negotiations are a big commitment, not only for us but the folks on the other side of the table who agree to take the license and they don't do so lightly. We are certainly expecting people who have licenses with us to continue to pay under those licenses despite this particular decision from the PTO.

Okay, thanks. Satish, sorry, I might've missed this, but the portion of recurring CLI during the quarter. About $63 million, how much of that was from new business group? And my follow up to that is do you still expect that to be approaching mid teens by the end of the year or even for the full year?

Yes we do, so the NBG group was about 13% of the total CLI this quarter. We believe we are on track to get to about a 15% by the end of the year.

Okay, thank you very much.

Daniel Bretthauer from MDC Financial Research.

I have a couple questions for Tom. Focusing on the antitrust appeal first, it seems to me that the exclusion of the plea agreement for Samsung and Elpida and then during the trial might be an appealable issue, are you aware that Judge Kramer recently clarified his prior ruling on this issue but in the TESRA anti-trust case?

I'm sorry, in the TESRA case? Yes, as you can imagine we are following the TESRA case, it is a similar set of -- somewhat similar set of facts as our case so yes we are following along with it. I am not going to specify which grounds that we are going to file our appeal on, but that you can imagine would be one we are very closely looking at as well as the rule of reason and a few other issues that we are looking at. But we haven't filed the actual brief yet and I prefer not to make a comment until we have done that.

Okay, thank you. And then in the ITC investigation, the 753, can you comment on how ALJS final initial determination might affect the outstanding (inaudible) from Judge White and Judge Robinson?

I think that's an interesting question. I don't know that Judge Essex's rulings will have any impact on either Judge Robinson or Judge White. Could it? One can only speculate on that answer but each of the judges, White and Robinson had an opportunity to undertake a full trial in front of each of them, and my best estimate is they will make their rulings based on the evidence and the record that's in front of them and their individual cases. Which is almost the same but there are some very slight differences.

Are you expecting anything else to be filed in those cases that might eventually hold up rulings from either judges?

I presume you're talking about the Micron Delaware case and the San Jose Hynix cases? And if you're asking if we're filing anything out there. No, everything has been submitted in those two cases and we are waiting for rulings from Judges Robinson and White.

Thank you.

Hamed Khorsand from BWS Financial.

With the settlement, does that mean you guys revoked the first settlement that you guys reached with them or the first license that you reached with them?

The new license overrode or basically replaced the original EC so the answer is yes it all was wrapped up into one settlement and license agreement that we are proceeding forward on now.

Okay, if Elpida is bought out by a competitor that does not have a license with you, what happens there?

There are a number of different scenarios that could happen there, Hamed. We certainly don't want to speculate. I think I mentioned during the last call while not speaking specifically about the terms of our agreement with Elpida, that most of our license agreements do allow us the opportunity to terminate if there is a change of control. Obviously we are monitoring Elpida's situation closely because any number of outcomes are possible. And there certainly could be some scenarios where if they were acquired we would want to actively negotiate with the acquiring party to come to mutually agreeable terms. But there are many different scenarios that could play out so I don't want to speculate on any one.

Just given the scope of the license agreements and the new patents versus the older patents, it almost sounds like you are putting very low value on the new patent portfolio based on these settlements. Going forward, what is the return on investment on these patents you are being issued?

I think maybe one thing that is important to address is to talk a little bit about how we do our licensing. Because if we are talking just about a patent license, not a technology license where we are delivering designs or other services to the company, we take a look at our patent portfolio and the relevant products that we are licensing and what the customer is actually paying us for in those type of licenses are just the relevant patent and claims for a particular set of products. For any given customer, depending on what products they are shipping that are covered by the license, the value is very unique to that customer based on the kinds of products that they have and what is being asked to be covered by the license. So, while in Satish's prepared remarks he talked about us making compromises and certainly we have had to make compromises as we have not fared as well as we would've liked in some of the recent litigation. That has an effect on our negotiating position but it is not the only thing that has an effect. We also have to look at what is actually happening with the customer's products, their product offering today as well as over the future period for the license and price it accordingly.

I understand that, but you're talking about value to the customer but how about value to the shareholders and the Company though? Every quarter you're saying more and more patents are issued, but then again you are issuing revenue guidance that is lower and not profitable. I'm just stuck here trying to figure out where's the cash flow, where's the return on investment?

Yes Hamed, let me address that. The increasing patent portfolio we have, not all of it is monetizeable today because many of these patents and the technologies have not even gotten to the point where those patents are useful today. So, we are building a patent portfolio for the future. And as Sharon mentioned, we have had to make a few compromises because of the litigation issues we had, but that is for the existing products that are being shipped. We continue to look forward and I disagree with you that we are not putting value or we are putting low value on the future patents. All of these agreements have a term and there's a renewal that comes about. And at that point in time, depending on the patents we have today, our expectation is that to in reflection with technology, in the futures, and that is where we would be able to monetize those patents at that point in time.

Okay, thank you.

Philip Zera from Algorithm Capital.

My first question is on the guidance for the second quarter, specifically the litigation expense, could you repeat that again please, the estimate?

The litigation expense was $4 million to $7 million.

That is your guidance for the second quarter?

That is correct.

What was it again in the first quarter?

About $4 million.

I'm sorry how much?

$4 million.

So it's going from $4 million to $47 million?

No, $4 million to $7 million. A range of $4 million to $7 million.

Okay, and it peaked -- is it safe to say it peaked in the fourth quarter?

Yes it did. At about $16 million.

And can you just add a little color on that $7 million estimate where that will be coming from?

We spent about $4 million in the current quarter. The litigation expenses are really based on how any of these cases progress. So if we -- as we file a brief, if there's some action to be taken as we engage the lawyers. So, it is difficult to predict exactly what it is going to be, so we typically give a range of $3 million to $4 million on our litigation expenses.

Okay. And my other question, regarding the proxy vote, the proposed price or revised price or reduced price of the options is $14.50? Correct?

That is correct.

Do you have an average, where the current options are at or is it just varied considerable?

They vary considerably but at the current price or even at $7 or $8, about 97% of them would be underwater.

Okay, thank you.

Thank you ladies and gentlemen for your questions. I would now like to turn the conference back to your host, Satish Rishi.

Thank you all for your continued interest and support. We look forward to seeing many of you at our annual meeting of stockholders next week. Thank you.

Okay ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.