Rambus Inc (RMBS) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Rambus first quarter 2013 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I will now turn the conference over to your host, Mr. Satish Rishi. You may begin.

Thank you, operator, and welcome to the Rambus first quarter 2013 conference call. I am Satish Rishi, CFO. On the call with me today is Ron Black, our President and CEO. Also joining us today for Q&A is our newly appointed General Counsel, Jae Kim. 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 3223-7211 when you hear the prompt. In addition, we are simultaneous webcasting this call and along with the audio, we'll be webcasting slides. So even if you are not joining us via conference call, you may want to access the website 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 help provide greater clarity in the financials, we also use both GAAP and non-GAAP pro forma format in the press release and also on this call. The discussion today will contain forward-looking statements regarding our financial prospects, pending and 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 may be more fully described in the documents we file 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 directly comparable GAAP measures. You can find a copy of our earnings release and the recon on our website at Rambus.com on the Investor Relations page under financial releases. Now I'll turn the call over to Ron.

Thank you, Satish, and good afternoon, everyone. Q1 was a very good quarter for Rambus. As Satish will review in more detail later, we ended the first quarter with revenue of $66.9 million, well within our upwardly revised guidance and pro forma net income of $13.4 million, which exceeded our guidance. For Q2, which is typically down primarily because of lower running royalty payments that are based on prior quarterly sales, along with certain customers who pay us annually in Q1, we are expecting revenues in the range of $53 million to $58 million. This range does not include several deals that we are currently negotiating, so it is possible we could have significant upside in this quarter as well, but we prefer to be conservative when setting guidance.

In previous earnings calls, I explained that Rambus had adopted a strategy of increasing collaboration with the industry to better deploy our outstanding technologies in the marketplace and ultimately deliver value to our shareholders. This strategy is summarized by the evolution of our tag line, which used to read -- a Company of Inventors, and now reads -- Bringing Invention To Market. It is based on this philosophy that we decided to transfer certain display patent assets to a subsidiary of Acacia Research, allowing us to ultimately deliver value to our shareholders while focusing our resources in other areas. As part of this transaction, we received an initial upfront payment in Q1 and expect to receive subsequent payments as Acacia rolls out its licensing program. The transferred patents relate on certain display technologies used in backlights for smartphones, tablets, computers, and high-definition TVs, all very high-volume markets. So these payments may be significant. However, we are not including them in our guidance until there is an established run rate. We do believe, however, that we could have further upside to our financial results later in the year.

Another testament to our commitment of engaging with the industry is the signing of a patent license agreement with LSI last quarter. This agreement allows LSI to include our patented innovations and all of its products and, as part of the agreement, we have settled all pending disputes. This patent license agreement will terminate in 2018.

Also during the quarter we announced our collaboration with GlobalFoundries. To support this expanded relationship, we are developing a portfolio of complex semiconductor IP optimized specifically for GlobalFoundries' leading edge process technology. Our collaboration with GlobalFoundries will enable mutual customers to more seamlessly integrate our enhanced, standard interface solutions into the next generation electronics for faster time to market. These silicon proven IP blocks will address the growing needs and applications ranging from high-performance computing to smart mobile devices. GlobalFoundries will compensate us for our designs with upfront payments and then royalties as the technologies are integrated into customers' products. We expect revenue to be recognized in the second half of this year and to continue into 2014.

Turning now to our focus markets. Our memory and interface division was very busy this past quarter. At the end of January, we introduced our R+ family of enhanced standard solutions, including our first LPDDR3 memory architecture. Fully compatible with the industry standards, R+ solutions provide our customers with improved power efficiency and performance, helping them differentiate their products in a cost-effective manner while improving time to market. At DesignCon 2013, where we announced and demonstrated our R+ technology, Rambus engineers presented six papers and subsequently won a Best Paper Award for our 3D Silicon Interposer Design and Electrical Performance Study. Also at the 2013 International Solid-State Circuit Conference, our engineers presented a paper and were invited to demonstrate our innovations for future main memory systems for this premiere event.

Our Cryptography Research Division also had an outstanding quarter, as they continue to gain traction in licensing its DPA Countermeasure technology as well as its CryptoFirewall Security Core. Just this month, we announced the signing of a DPA license agreement with StarChip where they will incorporate our DPA Countermeasures into their line of smartcard integrated circuits. We also announced a new license agreement with EchoStar Technologies. This leading provider of video delivery services will integrate our CryptoFirewall Security Core into their products to protect against TV signal theft. Marvell has similarly chosen the CryptoFirewall Security Core for inclusion in its consumable security chip which can be used in anti-counterfeiting applications and a variety of products.

The CRI team spoke at two conferences this quarter. At the RSA Conference, the CRI team exhibited, demonstrated, and led two sessions that addressed side-channel attacks as well as participated in a seminar where our team taught important, essential security and technology concepts. At the Europe Design, Automation & Test Conference, our CRI team presented certain design methods to help prevent counterfeiting.

Furthering our strategy of bringing invention to market is our Imerz Multimedia Platform announced early in Q1 and demonstrated at the Consumer Electronics Show, Mobile World Congress, and South by Southwest, where it helped us land a spot in the Forbes' List of 10 Companies at South by Southwest to look for in 2013. This platform exemplifies our expanded model of developing innovative solutions that address the growing trends of access and interactivity in a very compelling way. We are seeing great interest in this platform and look forward to sharing more on the development in the future.

On the lighting front, we are seeing great progress on our revolutionary LED light bulb. We are actively engaged with our commercial partner, The Elite Group, and have received the first orders for this new bulb. Next week at Lightfair International in Philadelphia, our customer, Cooper Lighting, will be showcasing pictures based on our edge-lit technology, showing further manifestation of how we are not only inventing and developing innovative products, but getting these inventions to market through our partners. Given the commercial progress with our bulb and Cooper's launch of products based on Rambus' technologies, our LVT business is on track to show growth in the second half of this year, as previously stated.

Rambus Labs, our research team, announced our Binary Pixel Technology at Mobile World Congress, which generated substantial interest from such industry publications as DPReview and Engadget, not to mention many of our customers. Our Binary Pixel image sensor and image processing architecture can dramatically improve the quality of photos and videos taken from [app] mobile devices in any lighting condition. Specifically, the technology achieves single-shot high dynamic range and improved low-light sensitivity. Using the same form factor, cost and system power of current and future mobile and consumer imagers, our technology can be easily adopted and is very cost-effective. We are exploring a variety of monetization schemes based on the positive feedback from this technology, although these will likely be a 2014 event.

Finally, last quarter we announced a change to our Board of Directors, reducing its size from 10 to 6. I believe this streamlined structure will enhance our ability to be more entrepreneurial and agile as well as work with our customers in the industry. Equally important, it will support our renewed focus on shareholder value. Okay, that's a quick update on the business side of the quarter and 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 an indicator of complete performance, as it includes certain cash events and excludes certain non-cash and discrete events, such as impairment charges and restructuring charges, which are not indicative of long-term performance. Customer licensing income is a non-GAAP measure that includes cash payments that are received under a signed agreement. It is how we measure the top line of our business and it may be different than revenue within a particular period when the amount of cash received from a customer is different than the revenue recognized.

Let me start by reviewing some highlights for the first quarter before going into additional details. Customer license income for the first quarter was $72.1 million and revenue for the quarter was $66.9 million within our revised guidance of $65 million to $69 million. Pro forma expenses came in at $48 million for the quarter, also within our guidance of $51 million to $46 million, And we are continuing to manage expenses tightly and drive towards higher operating leverage. Pro forma net income was, again, up $13.4 million as compared to our guidance of $4 million to $10 million.

Now I'd like to provide a little more detail related to the first quarter. As stated, customer licensing income for the quarter was $72.1 million. During the quarter, we signed an agreement with LSI and recognized a one-time settlement payment. In addition, as Ron mentioned, we sold a portion of a display patent portfolio and expect to receive future royalty payments from this engagement with Acacia. We also received clearance from the courts to consummate the Elpida patent purchase. From an accounting perspective, the patent license agreement and the patent purchase agreement with Elpida are considered to be linked and we only recognize the net amount as revenue.

For the first quarter, the new businesses represented approximately 15% of total CLI, higher than the run rate we had at the end of last year. Depending on the mix, this ratio will fluctuate quarter-over-quarter. But for the full year, we expect the new businesses to be between 15% to 20% of total CLI. Pro forma operating expenses, which exclude structuring and impairment charges, retention bonuses, stock-based comp and amortization of intangible assets were $48 million, 6% higher than the previous quarter. These pro forma expenses include litigation expenses of $2 million, which were flat to the previous quarter.

The operating expenses are higher primarily due to bonus accruals at the higher rates as well as higher payroll taxes, which is typical for the first quarter of the year. Pro forma interest and other expenses were $3.2 million, relatively flat to the previous quarter. 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 $13.4 million as compared to $8.3 million last quarter. Overall cash, defined as cash, cash equivalents and marketable securities, was $215 million, an increase of $12 million from the previous quarter. Cash flow from operations was an increase of $15 million as compared to an increase of $2 million in the prior quarter. We have had positive cash flow from operations for the past three quarters now and have managed to slow down our cash burn.

Now let me shift to guidance. We continue to manage expenses through reduction in annual spending by $30 million to $35 million that we had communicated last year when we announced our restructuring activities. As Ron mentioned, we typically see seasonality in the second quarter and in addition, Q1 included certain one-time payments. While the second quarter could have similar payment-related events, our practice is to exclude such events from our guidance and announce them when they occur. As a part of the agreement with Acacia, we expect to share in the future royalties that they receive on the display assets that we transferred earlier this year. Given that this is a new relationship, we are not including any potential royalties from that relationship in our guidance. That being said, for the second quarter, we expect customer licensing income to be between $56 million and $61 million and revenue to be between $53 million and $58 million. We expect pro forma operating expenses, which exclude restructuring charges, retention bonuses, stock-based comp, and amortization of intangibles, to be between $48 million and $53 million. These amounts include an estimated litigation expense of $2 million to $3 million. Pro forma net income is expected to be between breakeven and $6 million.

I would like to close by saying that we had a solid quarter and are well-positioned for growth and improved profitability in 2013. We came in higher than initial guidance range for Q1 while continuing to deliver operating leverage. We remain focused on execution while investing in areas which will drive future revenue growth and profitability. We are now ready to open the line for Q&A. Operator?

Thank you. (Operator Instructions)

We'll wait a few seconds. Matthew Galinko of Sidoti.

I was just hoping you could share a little bit more detail on that initial order you mentioned on the LED bulb?

Unfortunately, we can't name the particular buyer. It's through the collaboration we announced earlier in the quarter with The Elite Group. They have a large lighting business and they are connected with pretty much all of the do-it-yourself type stores. So you can imagine where we would likely be targeting first. It is -- to set expectations, it's just an initial order, but we really feel like we're gaining traction. The bulb is a very unique design. Because of the way that we architect it, it runs much cooler than others. So we see it as being very interested not in just the retail space where these orders came from, but also the commercial space.

Okay. And thanks. Do you expect to go to market with it through -- or are you exclusive to The Elite Group or do you have other plans of how to bring that to market?

We have a unique relationship with The Elite Group for some selected segments. And we have a small internal sales force and we're building a rep network that is focused more on the commercial side here and Europe and Asia.

Thank you. Hamed Khorsand, BWS Financial.

Where are you seeing any weakness from your revenue streams as royalties? Is there any particular product category?

We see some seasonality quarter over quarter, typically because we get paid in arrears from our customers sometimes. Some but one quarter, we have some two quarters in arrears. So in Q1 and also in Q2, as a lot of shipments from the holiday season tapers off, our royalties are slightly weaker. On the DRAM side, with the PC shipments, there was a recent report that came out that Q1 PC shipments are fairly low.

As we look at the dealer market, many of the analysts are still predicting about a $34 billion DRAM market, which is up from $28 billion last year. Many of them haven't quite revised their forecast yet so I think there might be some revision. But what's happening in the market is that the -- even though the PC units shipments may be going down, many of the manufacturers are moving to low [power] memory and there is actually now a shortage of commodity products. It's an oxymoron, but it's -- the prices for DDR3s that go into the PCs are probably stable to even going up at this point in time.

Secondly, another reason why I think the analysts are not reducing the number for the full year for DRAM is because of Intel expects Ultrabooks to kick in, in Q3, Q4. So from a total revenue perspective, I think the DRAM market will increase year over year. Whether they will go to $34 billion or not, time will tell. In our case, we saw a weak year in DRAM, $28 billion last year. And we -- in our second half, when we look at a second half from DRAM revenue, we expect it to be higher than what we have in the first half of the year.

Okay. And then just a quick question on the image sensor, the Binary Pixel technology. What's the next milestone that we could expect from you on that front?

Well, we continue to tune the architecture and we're fully engaged with a set of partners to take the evolution of what we've done and the test chip that we've produced and actually implement this in a high-volume product in silicon. So it will take a little bit of time. That's why I was managing expectations so that you'll see it coming in 2014, but the demand and interest in the marketplace has been incredible.

At Mobile World Congress, I attended some of the meetings and we've subsequently had many more. The fidelity, the image improvement and quality under low light conditions and the dynamic range, so you don't have the classical problem I have of fading out my family when I take the pictures of the sunset at beach, is incredible. So we really think we've gotten something. And I'm cautiously optimistic that we're going to have somebody come in as a partner and want to take this to market. We're also working very closely with the end consumers, not just the technology providers, because I think it's completing that loop.

Thank you.

(Operator Instructions)

Mike Crawford, B. Riley and Company.

Thank you. Could you just briefly walk through the -- some of the litigation front, including any thoughts on when we might see something from Judge Whyte and NDCA?

So the case in front of Judge Whyte is that it has been fully briefed and we have our oral argument. So we're still waiting for a decision. Obviously, we won't be able to speculate as to when we might receive that or what the outcome would be. So we're still just waiting for an opinion on that.

With respect to Micron and the Delaware case, we did file our notice of appeal to the Fed Circuit and our opening appeal brief will be due in May. With respect to the price-fixing case in San Francisco, the initial briefing has been done. The next milestone in terms of briefing will be in May for our reply. And then I would say sometime in mid- to late 2014 before there is any decision on that.

The ST matter and the sole defendant remaining in the [SOC] litigation, the ITC had ruled and we are appealing that decision. And then with respect to the parallel case in the Northern District, there have been trial dates set with respect to unclean hands for August, and then the patent trial to begin in April.

Okay. Thank you, Jae. And then just turning back to the business side, the Cryptography business, it's been, I think, a year -- a year-and-a-half or 2 years since you bought this business for, I think, $342 million. What are your thoughts on the value of that business? Looking back, does that seem like a steal or maybe a stretch? How would you comment on what you think you have with that business today versus what you paid for it?

Obviously, I will answer this not having been part of the team, looking back at it. Clearly, $342 million is a lot of money. $1 million is a lot of money. $100,000 is a lot of money. As you saw, we've been pretty parsimonious as we've gone through and continued to look at cost reductions. One of the things that Satish and I have done since I came on board is we work very closely with the business unit heads and we derive valuation models for them.

We believe that all of the businesses and the investments we make are going to pay off handsomely for shareholders. You haven't seen all of the flow-through, obviously. And we believe that the Cryptography business with the plans that we have in place and the customers -- of course, you don't have the benefit of seeing the customer engagements that we have going forward, that it will be significantly higher than that value.

Thank you.

(Operator Instructions)

I'm showing no further questions in the queue at this time. I'll hand the call back to Ron Black for closing remarks.

Thank you for all for your continued interest and support. As a reminder, we will be holding our annual meeting of shareholders next week, but this time it's a virtual meeting. We look forward to addressing some of the questions that have already come in through the shareholder forum and expect to continue sharing updates in coming weeks. Have a nice day.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.