Rambus Inc (RMBS) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Rambus Incorporated Q3 2012 conference call. At this time all participants will be in a listen-only mode. Though 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. Now I would like to introduce your host for today, Satish Rishi. Please go ahead, sir.

Thank you, John, and welcome to the Rambus third quarter 2012 conference call. I'm Satish Rishi, CFO. On the call today with me are Ron Black, our President and CEO and Tom Lavelle, our General Counsel. The press release with 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 38404730 when you hear the prompt. In addition, we are simultaneously webcasting this call and along with the audio will be webcasting slides. So if you are joining 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 p.m. Pacific time.

In an effort to provide greater clarity in our financials, we are using both GAAP and non-GAAP pro forma format in our press release. I need to advise you that the discussion today will contain forward-looking segments 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 and may be 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 financial results today and have posted on our website reconciliations of these non-GAAP financials to the most direct comparable GAAP measures. You can find a copy of our earnings release and the recon on our website at www.rambus.com on the Investor Relations page in the financial releases. Now I will turn the call over to Ron.

Thanks, Satish, and good afternoon, everyone. I'll let Satish provide the details of our financials later in the call, but I wanted to say how pleased we are to have achieved customer licensing income of $62.4 million as well as pro forma profit of $0.08 per share, both of which are higher than the guidance we provided.

During the course of this quarter, we initiated a restructuring to help reduce some of our expenses. We expect this restructuring will result in an overall net savings of $30 million to $35 million annually as compared to our run rate in Q2 of this year. Additionally, we have altered the business strategy within our lighting and display technology division to focus less on display technology and more on general lighting. This increased focus on general lighting necessitated a revision of our future forecast, which cause us to revisit the goodwill and long-lived assets on our books. Satish will have more on that later. Ultimately, we believe these restructuring efforts allow us to operate in a more entrepreneurial fashion and properly position us for future successes. As our strategy within LDT evolves, we continue to be pleased with the progress within the division as well as the engagements we have with key customers such as Cooper and GE.

We've had a number of highlights during the quarter that not only showcase the technical acumen of our team, but also our ability to reach the beneficial agreements with customers. In September, we announced that we signed a new licensing agreement with Fujitsu, that covers the use of our patented innovations in a broad range of their IC products. Also during the quarter, we received payment from Elpida, which, as you may recall, we were unsure of when we reported last quarter, given their ongoing bankruptcy proceedings. We also entered into a patent purchase agreement with Elpida. These patents apply to memory technology and are not cross licensed to all of the players within the memory industry. We believe this patent acquisition will provide additional opportunities to our already strong portfolio.

As an IP company, the normal course of our business is to manage our patent portfolio, which includes buying and selling patents when it makes sense. Usually this happens through acquisitions of companies, people and intellectual property. Historically we have focused mostly on the buy side of this equation given that we license extensively. Based on a recent review of our total patent portfolio, however, we have found that there are some individual patents and small portfolios that may be more valuable to others and have consequently decided to institute a more formal sell-side activity. To be clear, this is in no way indicative of a change in strategy, it's just good fiscal practice. For instance, this quarter we sold two semiconductor test patents for approximately $1 million.

On the technology development front, we are continuing our efforts to create the most advanced memory solutions. At the recent Intel Developer Forum in San Francisco, we demonstrated some of these new innovations and what we're calling the Future of Main Memories. These demonstrations received excellent praise among the technical community. In fact, one of the industry's most respected news outlets stated that our demonstration of transmitting data at high speeds with very low power, and I'm quoting here, previously not possible and the fact that we can get it to work correctly and reliably is proverbial magic. It is not easy. With testaments such as this, we are encouraged and excited to share our vision of the next generation memory technology through these demonstrations.

Also this quarter we announced the successful tape out of novel mobile memory test chips with our foundry partner, GLOBALFOUNDRIES. These ultra-low-power devices provide substantial reductions in memory power and therefore an increase in battery life for smart phones and tablets, and possibly also for compute main memory applications. Using GLOBALFOUNDRIES 28 nanometer super-low power process, these test chips have surpassed all power and performance expectations. So we're very pleased, indeed, with these results.

In our cryptography research business, we are continuing to see great traction on several fronts. First, we are delighted to have the opportunity to work with the Secure Content Storage Association, or SCSA, to provide our security expertise to their efforts. The SCSA is a consortium of companies in the entertainment and storage space, founded by SanDisk, 20th Century Fox, Warner Brothers and WD, a Western Digital company. The goal of the SCSA is to provide consumers with new ways to build digital home libraries. The SCSA initiative will give consumers an easier and faster way to organize, store, and move their high-definition digital movies and TV shows across multiple devices. Our security expertise will be deployed across this platform, and we look forward to our engagements with this consortium.

In addition to the SCSA, we continue to make progress in our DPA countermeasures business. Our customer, Microsemi, is the first to introduce FPGA, including DPA countermeasures. The recently unveiled SmartFusion2 FPGA, is, we believe, the first of many FPGA devices that will need to include the added protection and security offered by DPA Countermeasures. We have already garnered traction in the smart card market and with FPGA customers we expect to see more revenue in the coming years as we expand our reach through other verticals, such as military and government opportunities.

We've also gained significant traction in our broader set-top box strategy with our CryptoFirewall core. One of the key markets for where this security core is been beneficial is pay TV. Our CryptoFirewall core helps to lock down and prevent privacy of high-value content something that is extremely important for pay TV. We worked collaboratively with semiconductor partners like Broadcom and ST to deploy the security core in set-top boxes. The core is integrated directly into the video decoding SoCs, so as new products roll out, we should see an increasing share of this market. With our downstream revenue model, we anticipate revenue ramping into 2013.

Also this quarter, we announced an agreement with Logiways, which specializes in video on demand, security and embedded software integration. Logiways joins our growing list of set-top box customers that rely on our CryptoFirewall core to build their advanced solutions and protect their video delivery revenue streams. We are also pleased with our collaboration with Sigma Designs. Our CryptoFirewall core helps this leading provider of SoC solutions for home entertainment to deliver a robust hardware security solution for digital entertainment.

Finally, I'd like to provide a quick update on the legal front. As we discussed in our special conference call on September 24, we received the decision from the Honorable Judge White in the Northern District of California in the SK Hynix matter. In this decision, Judge White affirmed the validity in infringement of our patents and determined that we are entitled to reasonable and nondiscriminatory royalty rates from Hynix. The amount of the royalty payments we are entitled to receive will be determined by the Court. The Court has granted additional time for the briefings to be filed and now both sides will be submitting their briefings on this matter sometime within this quarter. With that, I will turn the call back over to Satish to review the financials. Satish?

Thanks, Ron. As a reminder, we use non-GAAP or pro forma numbers, which we believe are indicative of Company performance, as they include certain cash events and exclude certain non-cash and discrete events such as impairment charges and restructuring charges which are not indicative of a long-term performance. Customer licensing income is a non-GAAP measure that includes cash payments that we receive under a signed patent license agreement. It is how we measure the top line of our business, and it may be different from revenue within a particular period when the amount of cash received from our customer is different than the revenue recognized.

Let me hit the high points first and then I'll go into some more detail. Customer licensing income for the quarter was $62.4 million, above our guidance of $55 million to $61 million. Revenue for the quarter was $57.5 million, within our guidance of $54 million to $60 million. Pro forma expenses came in at $45 million, well below our guidance of $58 million to $63 million. Pro forma net income was a gain of $9 million as compared to our guidance of losses between $7 million and $1 million.

Customer licensing income for the quarter with $62.4 million. As Ron mentioned during the quarter, we signed Fujitsu to a patent license agreement. In addition, we also signed a patent purchase agreement with Elpida, and we agreed to buy patents from them over the next four quarters. Because the patent license agreement and the patent purchase agreement are considered to be linked, we only recognize the net amount as revenue, which explains most of the difference in customer licensing income and revenue for this quarter. Customer licensing income was an increase of 9% from the previous quarter and a decrease of 32% from the quarter a year ago. The year-over-year decline was primarily due to one-time payments we received from a couple of license fees, both of whom were signed in Q2 and Q3 of last year.

During the quarter, consistent with the restructuring announcement we made in August, we booked a restructuring charge of $6.6 million. During the course of our business reviews with Ron, we also determined that the lighting industry division's go-to-market strategy, as well as our longer-term forecast, had changed. As a result of that change, we assessed our goodwill and long-lived assets for impairment and are taking a non-cash impairment charge of $35.5 million to write down $15.7 million of goodwill and $21.8 million for impairment of long-lived assets. In the past, we had expected to generate more revenue from just realizing royalties, but our focus has evolved over time where we are pursuing a variety of different lighting solutions and expect to be introducing a variety of these solutions into a marketplace with several key partners and industry leaders. As Ron mentioned, we are very pleased with the progress being made within LDT and are excited about the engagements we have with key customers such as Cooper and GE.

Pro forma operating expenses, which exclude the restructuring and impairment charges, stock -based compensation, amortization of intangible assets and retention bonuses were $45 million, 20% lower than the previous quarter. These pro forma expenses include litigation expenses of $2.6 million, which are down 43% quarter over quarter. Compared with the prior quarter, pro forma engineering expenses were lower by 15%, and MG&A expenses for the same periods were lower by 25%. Expenses were lower primarily due to lower expenses related to our recent restructuring, which reduced both headcount and program spending, along with the reversal of accruals relating to a variable compensation, which was a one-time event of approximately $3.5 million.

As compared to a year ago, pro forma engineering expenses were 5% higher, and MG&A expenses were lower by 54%. The decrease was driven primarily because of reduction in litigation expenses, which went down from $23.5 million to $2.6 million. Excluding litigation, MG&A expenses were lower by 11% as compared to a year ago. Quarter over quarter, we have reduced our operating expenses as reduced headcount and also reduced spending on MG&A programs. With the recent restructuring we expect to reduce net expenses by $30 million to $35 million net annually as compared to the analyzed run rate that we had in Q2 of 2012.

Pro forma interest and other expense were $3.3 million, up 14% from the quarter a year ago. For pro forma tax expenses, we're using a flat rate of 36% on pro forma pretax income. Pro forma net income this quarter was a gain of $9 million as compared to a loss of $1 million last quarter, and a gain of $14 million a year ago. Overall cash, defined as cash, cash equivalents, and marketable securities was at $207 million, an increase of $4 million from the previous quarter and a decrease of $86 million year over year. Cash from operations was an increase of $11 million as compared to a use of cash of $20 million in the prior quarter.

Now I'll give you some thoughts regarding the fourth quarter. This guidance reflects our reasonable estimates and our actual results could differ materially from what I am about to review. For the fourth quarter, we expect customer licensing income to be between $60 million and $66 million and revenue to be between $57 million and $63 million. We expect pro forma operating expenses, which exclude restructuring charges, stock-based comp, amortization of intangible assets and retention bonuses, to be between $52 million and $57 million. These amounts include an estimate for litigation expenses of $5 million. Pro forma net income is expected to be between $2 million and $9 million.

I would like to close by saying we had a solid quarter and are well positioned going forward. We exceeded our guidance for the period while moving aggressively to restructure the business to improve our profitability and our cash flow in going forward. We also remain focused on execution, investing in the areas which drive future revenue growth and profitability for the Company. We remain committed to delivering an operating leverage and to the $30 million to $35 million in reduction in spending we communicated at the time we announced our restructuring activities. It's an exciting time for the Company, as we are well positioned to deliver value across all of our investment areas. We are now ready to open the lines for Q&A. Operator, please open the lines.

(Operator Instructions)

Hamed Khorsand, BWS Financial.

Just a couple of questions here. First one is, can you elaborate on the restructuring process as to the timing when you would see the savings?

Sure, Hamed. We announced the restructuring in August and because of the warn notice period, we had our employees until the middle of October -- at the end of October. So we'll starting to feel the full impact of that in Q1 of next year. But we are already seeing some of the impact in Q3 and Q4.

Okay.

As far as the programs are concerned, we have stopped many of the programs that we felt we could reduce our spending on and some of those, we have some lead time before we can cancel some of the programs. Others we have already canceled. So, I believe we'll get to the full run rate sometime in Q1 of next year.

All right. And given that -- I would imagine a lot of the savings is coming from the R&D side of the business, what's going to be the focus going forward as to what kind of patents and innovations you're going to be developing?

Hamed, that's an incorrect assumption. Most of the savings are not coming from the R&D side. When we did our announcement, we talked in a little more detail about it when we had the call on restructuring. Most of the savings are coming from programs that we have cut in SG&A. And then also in some headcount reductions, primarily in SG&A.

There is a small impact to R&D. I think we mentioned we took out -- reduced our design team by one because we felt we had capacity, -- we had enough -- we were over capacity by one design team. So, that is the only impact we have to R&D. So, we are still an engineering company and our focus will continue to be in engineering.

Okay. Great. Thank you.

Paul Coster, JPMorgan.

This is actually Paul Chung stepping in for Paul Coster. Going back to the restructuring, in terms of R&D,-- just a second -- you're saying the cuts are coming mostly out of SG&A. Should we expect that the R&D cuts to be similar?

You faded off at the very end. Can you repeat the question, please?

We saw R&D come down about 20% this quarter. Do you expect it to be in that range moving forward in the next quarters?

It will be slightly higher than that. As I mentioned, part of the impact to the expenses we have is because of reversal of a variable com, that we had than accruing, based on certain expectations for the end of the year. So, we had a reversal of that. Some of that savings are one-time savings coming both from our both from R&D and SG&A.

Okay. And for the quarterly Elpida payment, the net amount of revenue, do you expect that to be similar in what you saw this quarter?

We expect to be slightly higher. We have paid, in arrears, two quarters in arrears based on what Elpida's revenue was, say, in Q2 of this year. So, their revenue went up from Q1 to Q2. So, we expect slightly higher payment from Elpida in the next quarter. I'm sorry, in Q4.

And finally, can you provide any guidance on timing and payments for SK Hynix if you know that, and in what magnitude?

Could you repeat the question? Timing of payments, you said?

Yes. If you could give us a general idea of the timing of payments and in what magnitude from the SK Hynix?

There are no payments that are due to -- well, I see what you're saying. So, we had mentioned a couple of quarters ago that we had accrued about $8 million for payments to Hynix. That is still not being finalized by the judge. So, we have built into our forecast for Q4. But if it doesn't get paid in Q4, we'll push it out to Q1. So, that is something which we are not in control of. Our expectation or our desire is to make that payment a lot lower than what SK Hynix has asked for. And this relates to their past cost of the bond that they had placed back in 2010 time frame.

Thank you.

(Operator Instructions)

Mike Crawford, B. Riley and Company.

Thank you. Just to continue that train of thought, so that bond that Hynix placed, that was after jury award that was knocked down to close to $400 million based, I thought, on RAND royalties at the time. So, now you and Hynix both need to argue what RAND royalty should be in this case. And can you remind us when those briefs are due and then comment on when we might expect a decision for Judge White, and given that there might be some hearings scheduled, as well in that court? Could you just comment more on the Hynix situation?

Sure, Mike. Hi, it's Tom Lavelle. The briefings for that case on how much Hynix will owe us under the RAND situation or RAND rate, will now be filed in, it looks like, November. It's been pushed out by Judge White based on a request from Hynix. There will be an oral arguments scheduled after the briefings are submitted, but they haven't been submitted yet. And then subsequent to the oral argument, of course, would be when we expect to get a ruling from Judge White. And I really would rather not try to speculate on when Judge White will make a ruling. We've not been not particularly good at making those estimates in the past and I'd rather not start trying to do it now.

Okay. Tom, since you're on, can you comment on any progress or upcoming milestones in any of the other litigation, be it in Delaware or on its way to the CAFC?

Well with respect to Delaware, that's Judge Robinson, who as you remember was sent back for remand by Judge Robinson. We had oral arguments early this year, 2012, and she has not yet ruled on the remand and the arguments that have been made. Again, I won't speculate as to when Judge Robinson will rule. But you may recall that it was about 14 months after the trial that she ruled on the bench trial involving the claims despoliation. I don't say that's a prediction when she will rule this time. I just don't know.

With respect to -- you asked about the Fed circuit. I presume you're talking about the re-exam cases. And no, we don't have it. We're discussing how to move forward in the Fed circuit on the re-exam cases. Now, San Francisco appeal in the price-fixing case, we filed our brief in late September, I think it was September 20, oral arguments have not yet been set in the California Court of Appeals on that case, and we'll let you know when there will be an oral argument on that, when that's set.

Okay. Thank you. And a different line of questions relates to the businesses. I was hoping that Ron could provide some sort of assessment with what Rambus has regarding the two main branches of technology that really that the heralds use to -- brought in, one, the Cryptography business and the other the Lighting business.

So on one hand, your pulling away from display lighting now and focusing on general lighting. There's been a bunch of investment in both areas. I'm just wondering what the comments are on the value created or not there and then when these businesses are expected to start generating cash flow?

That's a very broad question. So, if there are refinements as I speak, feel free to ask them. This businesses are rather small, but I think they are both poised for very significant growth. CRI has done a lot with extending the DPA countermeasures. They're opening up new segments of it. We spoke about one with the FPGA.

A field programmable gate arrays are a very interesting business with a high average selling prices. And for a lot of industrial and military applications, they are the preferred technology and certainly you want those technologies to be very secure for industrial and military applications. There's a lot of other segments that they're working on and we're seeing a lot of traction in them as well. We have plans, and we think there will be significant growth year on year for that business, as well as the Lighting business.

The Lighting business is poised for a couple of announcements that are going to be rolling out early next year. Or possibly earlier, depending on the market and some of our work with customers. We've been focused maniacally as we have licensed our technology and we're providing some manufacturing support to these major customers as they ramp their businesses. So everything is kind of in the pipe and we expect significant growth in 2013.

I can tell you I'm happy and excited with both of them. I wish I could give you more specific information, but it's just not consistent with the policies of the Company to get that far of forward-looking guidance. Is there anything else in particular that you are interested in?

I could probably go on for days, but maybe just one final question would just be on the chip interface business. The focus now appears to be, in addition to getting compensated for prior innovations, to really focus on the mobility market. And so this new chip that you taped out, is that where you're placing your highest excitations now, or is there still some hope that some kind of XDR memory could gain greater some traction in the market? Thank you.

That's a very broad comment or statement or question. And the answer is yes to all of them. I think in all honesty that we could have put more investment previously in some of the technology and technology licensing aspects of the Business. And here I mean, certainly granting patent licenses, but also providing core technology to customers, almost in the form of a product.

In fact, that's what CRI, our Cryptography business does. They provide the security cores to customers who integrate them into devices. We have become, ramping up that initiative, and we're gaining tremendous traction in the marketplace. And it's really in the area of memories.

Really two-fold, very high-performance and low-power and combinations thereof, and also in high-speed interfaces. We have some of the most advanced serties, this is serialization deserialization technology, that I have seen. The team is working on all of these aspects and we're engaging customers very aggressively. Something that we haven't done for years.

So we're going to patent and continue to patent, and we're going to continue to license our patents, you know, very aggressively with partners. But as we found this time, we can close these deals and we're going to continue to do them. But I think there's a lot more technology that this Company can bring to bear as we engage in the marketplace. And I think that memory and interfaces is going to maintain a very large portion of this business for a long period of time because I see a lot of growth there as well.

Okay. Thank you very much.

I am showing no further questions in the queue, so I'd like to turn the program back to your host for any concluding remarks.

This is Ron. Thank you all for your continued interest and support. We look forward to speaking with you again soon. Good day.

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