Rambus Inc (RMBS) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Rambus, Inc., third 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 call is being recorded. I would now like to introduce your host for today's conference, Satish Rishi, Chief Financial Officer. You may begin.

Thank you, Operator, and welcome to the Rambus third quarter 2013 conference call. I'm Satish Rishi, CFO. On the call today with me are Dr. Ron Black, our President and CEO. Also joining us today for Q&A is General Counsel, Jae Kim.

The press release for the results that will be discussed here today has 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, then entering ID number 75199907 when you hear the prompt. In addition, we are simultaneous web casting this call and along with the audio will be web casting slides. So, even if you are 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 the website beginning today at 5 p.m. Pacific time.

In an effort to provide greater clarity to financials, we are using both GAAP and non-GAAP pro forma, forma in the press release and also on this call. I need to advise you that the discussion today will contain forward-looking statements regarding our financial prospects, pending and current litigation and demand for technologies, among other things. These statements are subject to risks and uncertainties that are discussed during the call and may be more fully described in the documents we filed with the SEC including 8-K's, 10-Q's, and 10-K's. These forward-looking statements will 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 are 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 reconciliation on our website at Rambus.com on the investor relations page in the financial releases.

Now, I'll turn the call over to Ron.

Thank you, Satish. Good afternoon, everyone.

Let me start by saying that Q3 was another very good quarter for Rambus. As Satish will review in more detail later, we ended Q3 with customer licensing income of $74.3 million, ahead of our guidance. Pro forma operating income was $43 million, also ahead of our guidance. And while we don't typically discuss GAAP financials, I'm pleased to report that we were GAAP pretax profitable for the first time in seven quarters.

As a part of the normal course of business we continue to look for ways to increase efficiencies and control expenses, including taking action when initiatives do not meet our targets for shareholder value creation. As part of our normal planning process, in Q3 we completed a set of internal assessments and concluded that our initiative and immersive multimedia software would not generate sufficient shareholder value and consequently concluded to curtail spending, redirecting some of the team in the core technology to other strategic programs. As a result, we have taken a charge of $8 million in the evening Q3 associated with goodwill impairment, which Satish will describe in more detail later.

While we are disappointed in this action as the product is way cool and the technology outstanding, it was simply not sufficiently core to our Company to justify further investment compared to our other strategic programs. We believe such relocation of assets is important to ensure we deliver optimum value creation for shareholders. We also remain open to broadly license the technology and continue to have discussions with selected interested third parties.

For the quarter, we came in significantly under anticipated operating expenses due to a set of circumstances that Satish will explain. Notably, however, was the lack of major litigation spend. While we endeavor to maintain a low litigation spend going forward and do not anticipate significant increases next quarter, we will enforce our rights as necessary as we have mentioned several times in the past.

This brings us naturally to our primary outstanding legal matter with Micron. While we cannot set any expectation as to when or if a potential deal will be completed, I can assure you that we remain committed to an open dialogue and have the goal to resolve the matter completely.

Moving now to a quick recap of our business. In Q3, our memory and interfaces division saw great progress collaborating with the industry. Of particular note, we received our first payment from SK Hynix following our settlement last quarter. The settlement has paved the way from our opening collaborative dialogue with Hynix and we look forward to working with them to collectively grow our business.

Also in Q3 we signed an expanded agreement with Freescale Semiconductor. This agreement provides our companies with the ability to collaborate on Rambus' resistive memory technology for embedded applications or eRRAM. Our eRRAM technology, while rather nascient, has unique capabilities that brings SRAM-like speeds to non-volatile memory and is attractive for a variety of applications ranging from consumer to automotive.

On the security front, we signed agreements during the quarter with both ALi for content production and set-top box solutions, and MicroSemi for secure semiconductor IP for certain government applications. We also achieved a design win with another printer company to include our crypto firewall anti-counterfeiting technology for verification of printer cartridges.

In lighting, we remain focused on supporting our fixture engagement with Cooper Lighting and continue to support their ramp by shipping light guides with our proprietary MicroLens technology, which are integrated into their LED products. Our A19 bulb is now available on Amazon under the EnviroBulb brand and has obtained very positive reviews. We also have bulbs on shelves at select Costco Canada stores under the Sunbeam brand with the a Hydro-Quebec utility-backed rebate program.

On the management side, I have to announce that Jeff Parker, who has led the lighting team, has taken a position at another company. We wish Jeff all the best in his new of endeavor, which will hopefully be positive for both companies, as Jeff and I have already had discussions regarding collaboration. As our lighting team is operating well and focused on growth, we do not anticipate any adverse impact to the business.

In closing, we continue our focus on execution, cost management, and prioritization. We believe Rambus has never been more relevant to the industry we serve. Having achieved a more stable business environment, we are not fully focused on profitable growth. That's a quick recap on the business side of the quarter.

I will now turn the call back over to Satish to review the financials in some detail.

Thanks, Ron.

As a reminder, we use non-GAAP, or pro forma, numbers, which we believe are indicative of complete performance, as they include certain cash events and exclude certain non-cash and discrete events, such as impairment charges and restructuring charges, which we believe are not indicative of long-term performance. Customer licensing income is a non-GAAP measure that includes cash proceeds that are received under assigned patent licensing agreement, as well as cash proceeds from the sale of intellectual property of products.

It is how we made the top line of our business, and it may be different than revenue within a particular period when the amount of cash received from our customers is different from the revenue recognized. As Ron mentioned, during the quarter we booked restructuring as well as Google impairment charges related primarily to our MTD division. The pro forma numbers that I will discuss will exclude these one-time charges.

Let me start by reviewing some highlights for the third quarter before getting into additional detail. Customer licensing for the third quarter was $74.3 million, slightly higher than the top end of our guidance of $69 million to $74 million. Revenue for the quarter was $73.3 million.

Due to reduction in both litigation expenses and payroll, pro forma expenses came in at $43 million, well below the guidance of $52 million to $48 million. Pro forma net income was a gain of $17.9 million as compared to our guidance of $9 million to $14 million. Our ending cash balance was $366 million and during the quarter we generated $26 million in cash from operations. Let me provide some additional detail related to the quarter.

Customer licensing and income for the quarter was $74.3 million with the sequential growth driven primarily by the royalties from Hynix, as well as high royalties from other DRAM customers. For the quarter, approximately 36% of our CLI was from DRAM-related royalties as compared to 46% last quarter.

New business accounted for 11% of CLI, as compared to 14% last quarter. In absolute term, CLI from new businesses was relatively flat, but lower as a percentage due to increasing DRAM-related royalties, mainly Hynix. For the full year, we expect the new businesses to be closer to the 12% to 14% range over CLI. For the third quarter, our fixed royalties contributed to 48% of our CLI, and also 92% of our CLI was from patent licensing, with the remaining being solution and contract revenue.

On the expense side -- on the pro forma expense -- on the pro forma operating expenses which exclude restructuring and impairment charges, retention bonuses, stock-based compensation, amortization of intangibles, they came in at $43 million for the quarter, about 10% lower than the previous quarter. The decline was driven primarily by how we calculate our variable bonuses where there is a higher accrual in the first half as compared to the second half, as well as certain one-time events such as credit score property taxes paid, lower consulting, lower facility expenses. Each one is significant individually but providing a reportable benefit when aggregated.

In addition, litigation expenses came in at $728,000 this quarter as compared to $2.3 million last quarter. Pro forma interest and other expenses were $3.4 million, relatively flat to the previous quarter. We issued $138 million of five-year convertible bonds during the quarter at a 1.125% coupon, and we have an additional month and a half of interest expense for the new bonds.

For pro forma tax expenses, we are using a flat rate of 36% on pro forma pretax income. Pro forma net income this quarter was $17.9 million as compared to $6.6 last quarter. Overall cash defined as cash, cash equivalents and marketable securities was $366 million, an increase of $160 million from the previous quarter. Excluding the net proceeds of $134 million from the new offering, cash flow from operations was a positive $26 million reflecting the leverage of our business model. Not withstanding the positive news and expenses this quarter, we expect to be operating at a quarterly OpEx expense of between $45 million to $48 million going forward.

Now, I will give you some thoughts regarding the fourth quarter 2013. This guidance reflects our reasonable estimate, and our actual results could differ materially from what I'm about to review. For the fourth quarter, we expect revenue -- we expect customer licensing income and revenue to be between $70 million and $75 million. We expect growth from operating expenses, which excludes restructuring, retention bonuses, stock-based comp, amortization of intangibles, and gain from settlements to be between $45 million and $48 million. These amounts include an estimate for litigation of between $1 million to $2 million. Pro forma net income is expected be between $12 million and $17 million.

I would like to close by saying that we had a good quarter -- another good quarter and have been demonstrating growth and profitability as the year has progressed.

Let's open the call up for Q&A. Operator.

(Operator Instructions)

Suji De Silva of Topeka Capital.

Can we talk about the restructuring of the Emerz business and, Ron, was this a review which you consider done at this juncture, or should we expect the potential for additional restructuring activities over the next several quarters and ongoing review efforts?

With respect to Emerz, it's done. We did the review. We are in discussion with a few third parties who are interested in the assets. So, there could be some transactions in the future. But, as I mentioned in the prepared remarks, we really needed to refocus on the other areas where we are seeing a lot more traction and is more fundamentally core. We are completing our annual operating plan and while there's nothing to report at this point in time, I haven't seen all of the financials and projections of the team, and neither has Satish. So there's always opportunities for adjustments if they're not hitting our internal milestones.

And then if I did my math correctly on the non-GAAP, you took in operating margins of 40 plus. Satish, do you have, or Ron, do you have a target operating model you'd like to run the business at, or is that something that would fluctuate with various factors?

Suji, we haven't been given percentages in terms of margins, we give the actual ranges. Not quite ready to provide an operating model, but definitely after we finish this year, and when we do our AOP, our internal plan for next year, ask me the question maybe in the Q1 call. I will provide you a better answer at that time.

And last question, can you just remind us with Micron buying Elpida, what the status of the Elpida relationship is when that expires, and how that potentially might be impacted as Micron may settle with you, in terms of folding the two together? Just any thought there would be helpful. Thanks.

So, we continue an open dialogue with Mark and team, so there is really nothing that I can comment on at this point in time.

Can you remind us what the Elpida agreement in place is, Ron? Just so we can understand that?

I'm sorry, could you repeat that question?

The Elpida agreement that is in place already with Rambus, can you just remind us of the terms of that?

We press released it, but actual terms and conditions of that agreement are confidential. So, unless there is something specific that we can share with you, what's out there publicly is as much as we can share at this point.

Understood. I'll look that up. Thank you.

Mike Crawford of B. Riley & Company.

You said that 8% of CLI was solutions and contract revenue. Is that something we should expect to go up next year now that you are working more in a collaborative fashion with some of your partners?

Yes. So, one of the reasons why it went up is because the (inaudible) million from Hynix, obviously, a percentage down from what we had in the previous couple of quarters. I think if you look at the first half of the year we are probably close to 85% to 87% was coming in from patent licensing with Hynix. The [denominator] changed, but the expectations of the company is that over time we want to increase that percentage as we get more NRE and more contract revenue, and also get more technology licensing revenue from our customers as we collaborate with them.

And what about the fate of some of these productizations of your IP like R+ and others? Is that something that is expected to be have a significant contribution to revenue next year?

Yes. So, Mike, we introduced R+ in Q1 of this year. So it takes a little while to get to the customers, show them what it does, get them engaged. And you even from the time we get them engaged we might see some revenue at the time we engage with them, but the tail of the revenue comes when they start shipping the product, which is still about 12 to 18 months out from the time we sign.

So that we have the dialogue that is ongoing with the DRAM companies, but nothing to announce right now. But that is one of the areas we would like to see growth coming from as we engage with the customers on these collaborative products you mentioned.

Thank you. Your LED products have received great reviews, and you have some nice initial distribution online and in some Canadian Costcos. But is this an area where this business would be better off in the hands of someone with more retail distribution than what historically has been IP development and licensing company?

Mike, this is Ron. It certainly could be. These are the type of things that we think about and look at all the time to try to optimize shareholder value. There is really two pieces to that business just to complete the thought. With respect to the light guides and the licensing that we do for the general lighting market, our focus is really unwrapping the existing customers and we feel that that is intrinsically a much higher margin business, very controlled, very thoughtful and we're trying to expand it from the US in our relationships with GE and Cooper to Europe and Asia, and we're intimately in negotiations with a variety of different companies.

On the bulb side, we're very, very cautious on this, because it is a very aggressive pricing market. There is rather low barriers to entry and there is a lot of big players. On the other hand, our technology is getting rave reviews, and our focus is not to try to ramp up a very large business, as I mentioned several times in different forums. We are not going to have 20,000 people in [Wushi] making light bulbs.

So, the model that we've engaged with and we're in, again, intimate discussions is more on a broader technology licensing agreement. Our color change that we've announced and we've shown where we can use some phosphor to actually get a different color temperature through a simple mechanical means of adjusting a dial and, therefore, you don't need to have all of the different LEDs. And it's better for the supply chain because you don't have to have different SKUs, that appears to be very attractive. And I could imagine the possibility that we would be licensing it to other third parties, and we would not necessarily be manufacturing the light bulbs ourselves, but using their scale and efficiency to do so.

Okay. Thank you very much.

(Operator Instructions) Hamed Khorsand of BWS Financial.

Thanks for taking the call. Ron, you were touching on where I was heading with my question. I was going to ask you about the competitive advantage on the bulb side given pricing is so aggressive, especially with Asian manufacturers entering the realm. Could you touch on that a little bit just from a pricing standpoint and how you guys would be able to maximize profits from that angle?

Yes. Sure. There are a few different things that we have with the proprietary technology both in terms of the connecting the LEDs themselves to the edges of the optical waveguide. It's very efficient, so we put more light in and, therefore, can extract more light out. That can give you theoretically less LEDs that you need than other suppliers.

The color change gives you the ability to, as I just described, have one SKU that can cover an entire gamut of color temperature of the LEDs. And because of the open nature of the design, we have both conductive and convection cooling which allows you to run at much lower temperatures. So, our bulb when we measured it compared with competitors, is 10 to 15 degrees Celsius, as I recall, cooler running and that cooler running often translates into lifetime. So, we really have all of those elements of it.

The design is inherently very low cost, so it is an extremely low-cost design, which is allowing us to compete on that level, but just being direct we have a low-cost design. But we cannot possibly have a low-cost implementation, because we don't have the scale efficiencies of the people that are shifting a much higher volume of it. So, the obvious way to engage the industry is to, just like we do in all of our other business, focus on our innovation, not our supply chain and manufacturing capabilities and that's exactly what we are doing and why we're engaged in the dialogue with licensing the technology to the larger players.

Okay. My other question was, are you guys able to break out or provide some sort of granularity as far as your DRAM revenue goes as far as penetration from the mobile market?

Yes, Hamed. Our DRAM royalties are based on the total revenue of our customers for the ones that are scalable or variable. So, we get royalty reports. It doesn't really break out what particular product or what particular sector they are in as long as overall revenue is flat to up we get paid royalties that are flat to higher.

So, really from our revenue perspective it doesn't matter what the composition is. Obviously, longer term it doesn't matter to us because we have good technologies in the mobile space and also in the server area, so we would like to see more of that penetration or concentration occurring in those areas but, overall, it doesn't really change the dynamic for us.

But in terms of licensing of the key suppliers, LP to Hynix and Samsung I think had the strongest position in mobile and those are the three licensed groups. So, from a mobile supply chain, the vast majority of it is licensed today.

Okay. Thank you.

Matthew Galinko of Sidoti & Company.

I was just curious if you had any preliminary review into how a case is doing with the patency transferred to them?

Hi, Matt. We don't talk about -- we are not privy to what revenue they are getting. The way the agreement works for them is that whatever they get a particular quarter, we will get the sharing that we have agreed with them in the subsequent quarter. So, when -- if it is material enough, we will announce it. Otherwise, we will just wrap it up in the guidance we give, but we are not tracking it on a patent by patent basis or a family by family basis.

And it is more of a passive back-end relationship. Acacia's activities with respect to their licensing and/or litigation if they engage in it is really something that they control solely and exclusively.

Okay. Thanks.

Thank you and at this time I am not showing any further questions. I'd like to turn the call back over to management for any closing comments.

This is Ron. Thank you all for your continued interest and support. Have a very good day. We look forward to talking to you again next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.