Rambus Inc (RMBS) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen in Q2 2012 conference call. At this time all participants are in listen only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Satish Rishi. Please go ahead.

Thank you, Patrick. Welcome to the Rambus Second Quarter 2012 conference call. I am Satish Rishi, CFO and on the call today are Ron Black, President and CEO; Tom Lavelle, our General Counsel; Sharon Holt, General Manager of the Semiconductor Business Group and Martin Scott, General Manager of the New Business Group. Before we begin, I need to inform you that the press release with the results that will be discussed here today been filed with the SEC on Form 8K. 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 10812253 when you hear the prompt. In addition, we are simultaneously web casting this call. And along with the audio we'll be web casting slides, too.

So, 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 the website beginning today at 5 PM Pacific time. In an effort to help provide greater clarity in the financials were using both GAAP and non-GAAP pro forma format in our press release and in the earnings call.

I also need to advise you that the discussion today will contain forward-looking statements regarding our financial prospects, pending in current litigation, and demand for our technologies among other things. These statements are subject to risks and uncertainties that are discussed during this call and which may be more fully described in the documents we file with the SEC including our 8Ks, 10Qs and 10Ks. 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 currently 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 turn the call over to Ron to review the business. Ron?

Thanks, Satish and good afternoon to everyone. Over the last months since becoming CEO, I have had the opportunity to meet with a number of people both internally and externally and I can tell you that I even more excited and impressed with the technical prowess that exist here Rambus. This is a company that is steeped in innovation with enormous technical strength in a multitude of fields. Nevertheless, as I mentioned on the call the day I joined the Company, I am very aware that our current stock price does not reflect the overall value the Company can provide. To that end, I've been reviewing all of our businesses in-depth and while I am not prepared to make any changes immediately, I will say that we will be making decisions that optimize our business.

One of the biggest issues we face as a company is that our engagement model for patent licensing has affected our image in the market and created trust problems with some customers and partners we serve. Interestingly, this is not a universal position and there are many customers and partners that have excellent relationships with Rambus. It is such positive engagements that we must and will model to continuously grow the business. Now, just to be clear, it may be necessary for us to, from time to time, take actions to protect our intellectual property. That happens in every industry. However, our primary strategy is to provide outstanding products and services to customers and partners that we serve and by doing so make their products better.

Turning to the industry at large, in some of the key business drivers for Rambus, we are carefully monitoring and evaluating Micron's offer purchase Elpida. In general, we are in favor of the combination, as consolidation tends to stabilize every industry, which in turn is ultimately good for all participants, Rambus included in this case. Simply put, if our customers are making money it is easier for us to do so as well. With respect to Rambus' collaboration with Micron and Elpida, we remain confident that the combined entity that would result from this merger will want to take a license to our portfolio, which is obviously our goal. However, as Satish will outline in our guidance for the next quarter, we are taking the Elpida payments out until the situation is resolved. We think this is the prudent thing to do given the bankruptcy proceedings and the time it takes for such deals to be finalized.

Moving now to our New Business Group, I've spent time with both our Lighting and Display team as well as our Cryptography Research team. And I see enormous opportunities for both of these businesses. On the lighting front, the deal we signed with Cooper Lighting is important as it allows us to interact with a leading lighting company and help them bring advanced LED lighting solutions to market. And there is a lot of activity taking place with Cooper. At Lightfair, Rambus provided over 40 lighting fixtures based on our novel micro lens LED technology that puts light precisely where it is wanted. I know this sounds obvious, but technically it's not very easy to do with LED's.

While I wasn't personally at Lightfair, the videos I saw and the discussions I had with external and internal folks in the industry, clearly indicated how impressive the Cooper Booth was. And I can tell you our team is not only proud that the booth was essentially dedicated to Rambus based products but also excited by the feedback from the enormous number of people that lined up to see it. Our collaborative relationship with Cooper is exactly the type of customer engagement model that will exist across the board in Rambus.

With our Cryptography Business, we similarly continue to gain traction and build up the importance of having secure devices. The customers we already have are those who understand the risks associated with systems and devices that remain unsecured. We recently announced that Discretix, which is a leading global provider of field proven content protection solutions, has joined our growing list of partners who are incorporating our DPA countermeasures into their devices. This notion of providing superior technologies that actually help the customer deliver value to the end-user is again exactly the type of model that will exist across the board at Rambus. I look forward to reporting on more partners and customers that adopt this CRI technology over the coming months. With that, I'll turn the call back to Satish to review the financials. Satish?

Thanks, Ron. As a reminder, we use non-GAAP for pro forma numbers which believe are indicative of Company performance as they include certain cash events and exclude certain non-cash events and discrete events not indicative of a long-term performance. Customer licensing income is a non-GAAP measure that includes cash payments that we receive under assigned patent licensing agreement. It is how we measure the top line of our business and it may be different in the revenue within a particular period. When the amounts of cash received from our customers is different than the revenue that we recognize.

Customer licensing income for the quarter was $57.4 million within our guidance of $54 million to $60 million. Pro forma expenses came in at about $56 million, slightly below our guidance of $57 million to $61 million. Pro forma per-tax income was a loss of $1.7 million, and pro forma net income was a loss of $1.1 million, as compared to our guidance of a loss of between $6 million and break even. Customer licensing income for the quarter, at $57.4 million, was a decrease of 12% from the previous quarter and a decrease of 21% from the quarter a year ago. The sequential decline is primarily due to one-time payments from MediaTek and Renesas in the 1st quarter and a lower royalty payment from NVIDIA.

The year-over-year decline was due to lower variable payments received from our Devium customers, mainly sampling Elpida, who have seen their revenue decline, as well as lower royalty payments from NVIDIA. These declines were offset by royalties from our new customers, MediaTek, Broadcom, and others who signed with us in the past year. The current quarter included royalty payments received from Broadcom, a new licensee who we signed Q4 last year. Recurring CLI in the quarter with $57 million. Pro forma operating expenses were $56 million, essentially flat over the previous quarter. These pro forma expenses include litigation expenses of $4.5 million, up 9% quarter over quarter.

Compared with the prior quarter and prior year, pro forma and engineering expenses were higher by 2% and 35% respectively, due to our continued investments in CRI, our Lighting Division, and the recent acquisition of Unity Semiconductor. MG&A expenses for the same periods were lower by 4% in 8% respectively. Excluding litigation expenses, MGA was higher by $4.7 million, as compared to the prior year due to continued investment acquisitions just mentioned, higher operating expenses for recruiting services, the recently completed exchange offer and organic head-count growth. Excluding litigation expenses MG&A was lower by $1.2 million as compared to the prior quarter, driven primarily by lower marketing activities.

Pro forma interest and other expense was $3 million, flat with the previous quarter and flat 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. Based on that, pro forma net income this quarter was a loss of $1.1 million, as compared to a gain of $3.6 million a quarter ago and $12.4 million, a year ago.

Overall cash, defined as cash, cash equivalents and marketable securities, was at $203 million, a decrease of $30 million from the previous quarter, and a decrease of $156 million, year-over-year. During the year we paid out the first $17 million for a pension bonus associated with the CRI acquisition from last year. It also included approximately $10 million at CapEx and a differed payment for the Unity Semiconductor acquisition from the previous quarter. Cash flow from operations, which includes a retention bonus payout, was a negative $20 million. The decrease from a year ago includes our acquisition of Unity Semiconductor, additional CapEx, additional acquisitions as well as a payment we made to Samsung for their exercise of the $100 million put option, offset in part by the cash we generated from operations over the year.

Now, I want to give you some thoughts regarding the third quarter. This guidance reflects our reasonable estimate and our actual results could differ materially from what I am about to review. For the third quarter, we expect customer licensing income to be between $55 million and $61 million, and revenue to be between $54 million and $60 million. As Ron mentioned, we are not including payments from Elpida in our guidance. Elpida is in bankruptcy proceedings in Japan and they are expected to submit a plan of reorganization in late August. At this time, we are not sure whether Elpida will continue to pay us under the license agreement or stop paying when they submit the reorganization plan. Given that uncertainty, we have excluded the receipt of a royalty payment from Elpida from our guidance.

We expect pro forma operating expenses, which excludes stock-based comp, cost and restatement, retention costs, amortization and acquisition expenses to be between $58 million and $63 million. These amounts include an estimate for litigation expenses of between $4 million and $7 million. Pro forma net income is expected to between a loss of $7 million and a loss of $1 million.

Before we open the call up for questions, I want to remind you that in the Rambus action against LSI Logic, ST Microelectronics and other respondents with the ITC, the target date for completion of its investigation was extended to July 25, 2012. We are now ready to open the lines for Q&A. Operator, please open the lines.

(Operator Instructions)

Please hold for our first question. Paul Coster, J.P. Morgan.

Thank you, a little bit late so I might have missed this. Can you talk about the proportion of revenues coming from the New Business Group and or the growth rate that you're experiencing in that group? And where specifically you're seeing most of the growth, is it in CRI or in the lighting applications?

Hi, Paul. As we had said in the last call we are trending towards a 15% mix, a 15% NBG as a total percent of revenues, so we are on track for that. I think there might be some variations quarter over quarter, but that's what our end goal is. A lot of the growth within the NBG group has come -- most of the revenue in the NBG group is coming from CRI, and as we've said before, that we expect 2013 is when LVT will start becoming material.

Got it. You've omitted Elpida from third-quarter guidance, without that, what would the year-on-year growth or decline -- or growth actually wouldn't it? Or sequential kind of growth rate would have been?

The best way to look at it would be that quarter-over-quarter, we ar guiding towards a flat top line, yet we are excluding Elpida. Organically, we are expecting additional growth coming in from other licensees and other business, which we have included. So we don't break out what the Elpida portion is, but we've publicly said that Samsung is at about $25 million approximately, with some variability in the revenue. So you can do the math to get to what proportion Elpida might be paying. Without Elpida, we are forecasting for some growth quarter-over-quarter.

My last question is it must be tempting to just slash the OpEx and drive this Company into profitability and you can do that. Why don't you consider that? Why don't you do it?

There is no reason not to do it. Something which, as we've looked at the business, with some of the outcomes we had earlier in the year, some of our license have been pushed out. Our expectation is that we will continue to monitor the situation and if there is a need to look at other options we will look at them. They are not off the table.

Thanks very much.

Paul, this is Ron Black. Just one more thing to add and I think it's probably because you came in a little bit late to the call.

In the beginning, I explained that I am in fact, with the team, going through a deep dive in all of the businesses. So you just need to give us a little bit more time to be more explicit about what we're going to do with respect to expenses.

Okay, thanks very much. Appreciate that.

Matthew Galinko, Sidoti and Company.

Thanks, guys. First question is do you have any different expectations now following the acquisition of Cooper?

Different expectations in what sense?

In terms of how that business ramps within Cooper, or any sense of the priority that LED lighting can play within the consolidated company?

Are you talking about acquisition from Eaton or are you talking about just generally?

Right, the acquisition from Eaton.

This is Martin. We haven't seen any indication other than continued robust support of all of our products with Cooper. In fact we have a long deep dive with them the next week on an increasing product portfolio that they are very anxious to get to market. So, were actually quite bullish about the partnership so far.

Great. Anything you can talk about in terms of additional partners in the LED lighting space?

Nothing to announce today but please stay tuned.

Great. I know you've talked about this in the past, but what are your expectations for contract revenue for the next few quarters?

Most of our contract revenue is from Es3 royalties, so there is some seasonality -- most of it, a fair part of that comes from Es2 revenues. There is some seasonality built in. The first half, typically, is lower and the second half ends up being higher. I think my expectation would be that, no different from the previous years, we would expect to see a slight pickup in Q3, and then Q1 next year would be much lower than what we see in Q3, on the contract revenue.

In the meantime, we are talking to other partners to engage in other customer relationships and customer contracts and as and when we sign something that is significant we will announce it. But we continue signing smaller contracts, which we typically don't announce because they are not significant and our customers don't want us to go on announcing it, that the project we're working for them and they're paying us for it. It is a part of a revenue that has been fairly stable over the last couple of quarters.

Okay. Can I ask a couple more or should I jump back in the queue?

No, please go ahead.

Okay, curious if there is anything that we can or should read into ITC delaying its decision?

Hi, Matthew this is Tom. No, I don't think the delay is anything special to Rambus or any of the respondents in that case. The ITC has pushed out a number of its cases. They're, pretty heavy on backload right now so I don't read anything special into that at all.

Okay. Also, just sort of a cleanup question here. Judging from the press release, there were no one-time payments from any licensees this quarter including Broadcom, is that right?

Yes, excluding Broadcom there were no other one-time. It's not one-time anymore, Broadcom is recurring, starting this quarter. The first time we received a payment was this quarter.

Okay so there's nothing unusual about their payment this quarter? In terms of the size?

No, there is not.

Okay.

That's why we said our recurring revenue, we said $57 million, which is very close to our total revenue.

Okay. Last question for Ron, just wanted to sort of put this one to you again now that you've had a few weeks. In terms of the New Business Group, is there any one in particular that you are most encouraged about after talking to both groups?

Kind of question which is your children is most attractive?

Sure, of course.

No, I look at the businesses independently. And, I find them both to have a lot of attractiveness in their different ways.

What I am very impressed with, both of them about, I tried to mold that into the script, is that they have very tight customer relations and they have a true collaborative approach, which you can see has enormous advantages in terms of really anticipating where the future is going and working to a common end. And obviously, when we get into patent litigation that's a little tougher road to go down with the customers.

What I keep telling all of the teams is revenue is very good, so to the extent that we said LDT, the Lighting Group, is revenue next year, right? I would say if there's anything that the Cryptography Group is ahead in the attractiveness category today, but we will hopefully catch up on LDT.

Okay, thanks.

Michael Cohen, MDC Financial Research.

This question's for Tom. Tom, it's been a while since we've heard an update on what's going on in Europe. I was wondering if you could just kind of remind us of the landscape of cases that are there and a quick summary of what the current status is any better over there?

Thanks, Michael. Basically, high-level summary is the main and probably the really only important case right now in Europe is the settlement that we reached with DG Comp a few years ago. That was appealed by Hynix to the Court of Appeal in Europe. That case has not been scheduled for hearing at this point and that's still somewhere off in the future.

Hynix is attempting to overturn the agreement that we made with the European Union to offer licenses to both memory control companies and DRAM manufacturers and they're trying to get that overturned. And there's no news, that agreement remains in place while that appeal goes forward.

Can you give a little bit of comment, in terms of white Hynix would still want that overturned? It almost seems like in many respects if that agreement was undone that might actually be good for you?

I think you probably ought to ask Hynix why they would've done that rather than me? We think it's a pretty good agreement.

Okay. In terms of the question for you, how would you feel if let's say that agreement was undone?

Well, if the agreement were undone it would call into question what the purpose of DG Comp is in Europe entering into settlement agreements with companies. We made a settlement agreement and I think that would undermine the role of DG Comp doing its job in Europe. What it would do to Rambus, as you indicated, Michael, it would allow us to enter into agreements as we chose to rather than as we agreed to do with the commission. I don't know that it would have a huge difference in overall impact, because our business is licensing people anyway. So, we agreed to do what we do for living as part of the settlement agreement.

Okay, thank you. I appreciate it.

Hamed Khorsand, BWS Financial.

Hi, guys. Just a question I have here is given the commentary that you said during the regular comments was that you're looking at different aspects of the business, but are you looking at ways to leverage the current patents at all? Or, are you really just looking at it from operationally breaking up the Company in that manner? I'm just trying to get a little bit more granular details to what you are looking at here?

This is Ron. There's really nothing off the table, obviously as a new leader of the Company you have to take input and look at all possibilities. I tried to again lead in to the script that I am very sensitive to value creation for shareholders, so that is our top priority. But, in terms of the patents, I see them as an incredibly valuable asset, it is something very important to this Company. And of course we will always look to try to monetize that value in the most expedient way that gives us a long-term value creation.

Okay. And your R&D expense, just overall, how would you describe that? Because it almost sounds like you evaluating what to do that but you're also continuing to spend in R&D. So is it going into an abyss? Are we going to see more products, patents from this? Can you explain that a little bit more?

Sure, Hamed, this is Satish. If you look at what a lot of our R&D generates, it generates technology, which publicly is shown as patents and patent planning, then you can see that our patent filings continue to increase over time. We've had patents start expiring starting 2010, but our rate of growth for the actual outstanding patents continues to increase. So a lot of the technology we have focused on in R&D, has been working at developing, is for the future and no it's not going into an abyss. There are a lot of technical innovations and if you look at a number of papers that our engineers have presented and been awarded best paper in the last couple of years, you will find that for a company our size, the amount of respect we get and the recognition we get is off the charts.

I understand you guys are being granted patents, but then I look at the revenue line, the revenue line hasn't grown over last five, six years. So I have to look at it from that standpoint, to though, right?

Sure. And, there is the technology development, there is the patent development, and there is the monetization and I think we had this discussion last time. As we talked about and I think your question that we had signed new licensees yet our overall revenue was going down. And we try to explain that part of that is seasonality, part of that was because the overall DRAM market was down. And sampling Elpida, they are on variable royalties at this point in time. And given that second half of last year the DRAM market was down, that affects those two quarters in arrears and that's part of the reason why Q1 and Q2 for us were lower in DRAM revenue.

We also explained that the NVIDIA license that we had, once we settled with them, we reduced our payments so that also calls for a lower run rate going forward. So, those are some of the reasons why our revenue is down. In the meantime, we are continuing to try to monetize with other controller companies and also with the DRAM companies.

Okay. Thank you.

Thank you, Hamed.

This ends our Q&A session, I will turn it back to Ron Black.

Thank you all for your continued interest and support. I look forward to speaking with you again soon, Good Day.

Ladies and gentlemen thanks for participating in today's program. This concludes the program you may all disconnect.