Rambus Inc (RMBS) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Rambus, Incorporated, fourth-quarter 2013 conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded.

I would now like to turn the call over to Satish Rishi, Senior Vice President and Chief Financial Officer.

Thank you, operator, and welcome to the Rambus fourth-quarter and full-year 2013 results conference call. I'm Satish Rishi, CFO, and on the call with me today is Ron Black, our President and CEO.

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, and then entering ID number 37074711 when you hear the prompt.

In addition, we are also simultaneously webcasting this call, and, along with the audio, we are webcasting slides. So, even if you're joining us via conference call, you may want to access the webcast for the slide presentation. A replay of this call can be accessed on the website beginning today at 5:00 PM Pacific Time.

In an effort to provide greater clarity on our financials, we are using both GAAP and non-GAAP pro forma format in our press release and on this call.

I need to advise you that the discussion today will contain forward-looking statements regarding our financial prospects, litigation and demand for our 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 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 also 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, in the financial releases.

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

Thank you, Satish, and good afternoon, everyone. Q4 was another good quarter for us, as we closed the significant Micron deal, and delivered CLI, revenue, and pro forma operating income at the high end of our guidance.

As we reflect back on the entire year, I have to say that I'm incredibly proud of what the team has accomplished. 2013 was certainly a year of transition, as we implemented our strategy of providing broad licensing options based on customer needs, approached the market in a more open and collaborative manner, and focused investment to achieve optimal shareholder value creation.

Clearly, the most important accomplishment of 2013 was settling the longstanding legal matters with both SK Hynix and Micron, as well as setting up the re-signing of Samsung to a very long-term license. Of course, our shareholders value not only the stability of the cash flow, but also the magnitude of the deals, which totaled approximately $1.2 billion.

Our more open and collaborative style was not just to close these deals, however, but to set up engagements with customers on new projects, which was impossible to do when we were in litigation, and to be honest, shunned by the industry. As I mentioned during the Samsung announcement call, we are now engaged with all our customers in openly discussing collaboration on new designs, and even delivering higher-value products such as chips and software.

Looking more broadly at the semiconductor industry, this was a good time for us to have resolved our past issues, as the memory market is no longer a segment of the industry known for bad economics. Indeed, the consolidated structure has enabled the significant improvement in profitability, and, based on the significant increase in the market capitalization, investors concluding that memory companies are back in vogue after a very long hiatus.

For Rambus it is not only improved financial position of our customers that is attractive, as it is always easier for a customer to pay when they are profitable, but the fact that the memory industry is also poised for technological changes that we believe will provide us more opportunity. For instance, we increasingly believe that the historic server architectures are not optimized for cost, power or performance of big-data applications, so there is an opportunity for us to provide new technologies, such as our R+ designs, that can address some of the issues.

The same is true for mobile, where, for example, faster non-volatile memory will require DRAM-like interfaces that we provide, and offer handset manufacturers substantially longer battery life at equivalent performance. The internet of things is similarly a hot topic, and definitely requires rethinking of the complete memory hierarchy, as well as connectivity and security, when designing things like wearable electronics.

As we look forward, we see an increasing amount of our engagement with customers not revolving around a naked patent license, but a solution that provides access to our cores and software, tools, consulting services, as well as, of course, a patent license. So, really a hybrid license.

In terms of business opportunity and shareholder value creation, we believe that despite signing nearly the entire DRAM market, investors should not assume that this segment is capped. It is true that the patent licenses from DRAM manufacturers are very stable, extremely high-profit annuities of sorts, but we expect to be able to deliver cores using our Rambus R+ technology, and even chips and software to the segment, to continue to grow the Business over time.

Moreover, since our technology works not only on the DRAM side, but the controller microprocessor side, it means that we have opportunity to grow with SOC companies as well. What will be different, however, is that the deals going forward will most likely continue to be that of a hybrid nature, where, say, the licensing will not only be for patents for our technology, but both, and often for both memory and security.

As a way to showcase our expertise in memory and high-speed links, this week at DesignCon we'll be presenting three papers where we will discuss the implementation of high-performance, low-power memory systems, as well as PCB interconnect technologies to achieve 50 gigabits per second and beyond. In addition, we'll be highlighting our lab station validation platform, a really cool development tool that includes built-in self-test and characterization features to help engineers optimize their designs. So, Rambus is not just about patents, but designs, cores, products and tools.

The approach we evolve to in our memory and interface business is actually what we do as well in our security business, which provides tools, consulting services, cryptographic processor cores for integrating into SOCs, as well as patent licenses. Indeed, in 2013, we licensed our CryptoFirewall cores to several companies including Broadcom, Marvell, and other conditional access and anti-counterfeiting chipset providers.

As Satish will outline later, we are pleased with our progress in the security business, as revenues have grown year on year, and while still relatively small, this business is poised for more substantial growth this year, especially in light of our expanding portfolio and the near-constant stream of news reports about security breaches. As we have said many times, our security technologies are broadly adopted in the payment industry, and used in approximately 7 billion smartcard chips per year. The growth going forward will be from conditional access platforms, such as set-top boxes, anti-counterfeiting applications, and ultimately mobile devices, which certainly is a huge market and a huge opportunity for us.

Turning towards our lighting business, 2013 was more a challenging year. We succeeded in supporting Cooper and GE in launching general lighting products, and also launching and selling incredibly cool and novel bulbs. Unfortunately, the bulb market turned out to be a sort of race to the bottom in price, so while our products are great and appreciated by customers, we chose not to chase extremely low-margin opportunities. Consequently, we have discontinued investment in the bulb roadmap, and will only invest in more with customer commitment on reasonable-margin business.

As Satish will explain in more detail later, this change in forecast has led to an impairment of the lighting business, and a restructuring to achieve a lower expense level. Going forward, we will focus on the general lighting portion, with Cooper being our driving customer, and manage the business for profitable growth.

Indeed, the Cooper WaveStream line of micro lens-based products appears to be gaining traction, which may bode well for our lighting revenues. Nevertheless, from a corporate standpoint, the lighting business is clearly very different from the rest of the Company, which is intimately associated with semiconductors, and consequently, we will manage lighting separately.

To help you understand our business model better, and to provide more transparency, we decided to break down the business by DRAM companies, which include Samsung, Hynix and Micron Elpida, and SOC and other companies as shown in the chart on the webcast. For the DRAM customers, the growth driver can't be patent licensing, but as I said previously, we believe there is additional growth opportunity from designs such as our R+, DDR3, LPDDR3 cores, and possibly chips and software.

For the SOC and other customers, we have significant opportunity in patent license, as we have only licensed approximately half the TAM for our memory and links portfolio, and certainly most are interested in security. The growth driver here will be the previously mentioned hybrid technology and patent license for both memory and security, as our new strategy makes both optimal for customers. Satish will use this chart more when discussing guidance, but I thought that mentioning how we are viewing the Business and the growth drivers will be important for analysts and investors to build their models, and for us to establish leading indicator proof points such as design wins for future revenue growth.

In summary, 2013 was a very good year for Rambus, as our augmented strategy is proving to work, and we have delivered substantial shareholder value. Our opportunities going forward are significant, and we have made the right capital budgeting decisions to invest in areas that will drive shareholder value, while curtailing investments that will likely not. For 2014, we just have to do it again, and we are all on board to do so. Patent licenses will always be of value, but increasingly it will be about broader hybrid licensings for both technology, including integrative cores and software, as well as patents, and for both memory and security.

With that, I'll hand the call back over to Satish to provide an outlook on our financials and guidance. Satish?

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, restructuring charges, as we believe these are not indicative of long-term performance.

Customer licensing income is a non-GAAP measure that includes cash proceeds that we receive for undefined patent license agreements, as well as cash proceeds from the sale of IP or products. [It is how we made the top 10 of our business], and may be different than revenue within a particular period, when the amount of cash received from our customers is different than the revenue recognized.

As Ron mentioned, during the quarter we booked restructuring, as well as asset impairment, charges related primarily to our LDT division. We evaluated the fair value of the long-term assets, and compared them to the carrying value of the assets on the balance sheet. Our fair value of the long-lived assets was lower than the carrying value of these assets, and we took an impairment charge of $9.7 million, primarily related to the lighting division.

We also right-sized the Business, reducing our headcount in Brecksville, and took other measures to reduce operating expenses. And as a result, incurred a restructuring charge of $2.2 million during the quarter. The pro forma numbers will exclude these one-time charges.

Now, let me review some of the financial highlights of the fourth quarter and the full year before going into additional detail. Customer licensing income for the fourth quarter was $73.9 million, at the high end of our guidance of $70 million to $75 million, and the revenue for the quarter was $73.4 million. For the full year, CLI was $281.6 million, which is an increase of 14% year over year.

Due to slower-than-expected headcount addition, as well as lower litigation expenses, pro forma operating expenses for the quarter came in at $44.2 million, slightly below our guidance of $48 million to $45 million. For the full year, pro forma operating expenses were $182.8 million, consistent with the run rate we had forecast in the beginning of the year, and a decrease of $20 million year over year.

Pro forma net income for the quarter was $16.5 million, as compared to our guidance of $12 million to $17 million. For the full year, pro forma net income was $54.4 million, as compared to $19.9 million for 2012.

For the full year, the customer licensing income sequential growth of 14% was driven by new customers such as LSI, SD Micro, SK Hynix, and Micron, and we expect to have long-term predictable licensing royalties from these and other core customers. For the full year, approximately 49% of our CLI was from DRAM customers.

With the signing of the 10-year Samsung license, additional CRI patents and technologies were covered in the license. As a result, we have an internal allocation of these royalties between our MID and CRI divisions. And, as Ron mentioned, as we sign more customers who take licenses across multiple divisions, a breakdown between the divisions might become less relevant. For the new allocation, new businesses in 2013 accounted for 16% of CLI. Since we signed up Samsung for a fixed royalty starting in Q4, our fixed royalty contracts accounted for 85% of the CLI for the fourth quarter, and 54% for the full year.

Pro forma operating expenses, which exclude restructuring and impairment charges, acquisition-related retention bonuses, stock-based compensation, amortization of intangible assets, and other one-time events, were $44.2 million for the fourth quarter and $182.8 million for the full year. As we've shared with you at investor presentations, pro forma EBITDA showed a significant expansion during the year. And for the full year, the pro forma EBITDA margin was 41%, as compared to 23% in 2012.

Pro forma interest and other expenses for the fourth year (sic - see slide 14, "fourth quarter") were $3.9 million, and $13.8 million for the full year. Using a flat rate of 36% for pro forma taxes, pro forma net income for the quarter was $16.5 million, and $54.4 million for the full year.

Overall cash, defined as cash, cash equivalents and marketable securities, was $387.7 million, an increase of $21.3 million from the previous quarter. Net cash at the end of the year was $77 million, as compared to $31 million a year ago. During the year, we generated $51 million in cash from operations, the majority of which were in the second half, positioning us extremely well for cash generation in 2014.

Now, I will provide guidance for the first-quarter 2014, as well as for the full year. This guidance reflects a reasonable estimate, and actual results could materially differ from what I'm about to review.

For the first quarter, we expect CLI and revenue to be between $70 million and $75 million. Going forward, we expect that the difference between revenue and CLI will be quite small, about $0.5 million a quarter.

We expect pro forma operating expenses, which exclude restructuring charges, acquisition-related retention bonuses, stock-based comp, and amortization of intangible assets, to be between $45 million and $48 million. Pro forma net income is expected to be between $12 million and $17 million.

For 2014, we expect CLI and revenue to be between $295 million and $305 million, and operating expenses of between $180 million and $185 million. The top line is not without risk, and includes expectations that we will sign new customers for patents, as well as solution licensing.

We expect pro forma operating margins to expand 4 to 5 points from 2013, as should pro forma EBITDA margin, which was 41% for 2013. As we continue to scale operations and leverage our Business, we expect our cash from operations to increase by almost 50% year over year, to about $75 million to $85 million next year, or in 2014.

Some additional details on the year. For the year, we expect to receive royalty payments of $148 million from our DRAM customers, namely Samsung, Hynix and Micron combined.

As we said, the new agreement with Samsung includes technologies from both our MID and CRI divisions, so we will be allocating some of the royalties to CRI. With this new allocation, MID will reflect about $134 million in royalty revenue from its current DRAM customers, as compared to $124 million in 2013.

On the non-DRAM side, 2013 includes some one-time payments from settlements, and our current estimates include signing new customers in 2014. As mentioned earlier, CRI was also around 12% of our CLI in 2014, and we expect it to be between 15% and 17% in 2014. Including LDT, the new businesses should be between 20% or 25% of our CLI in 2014.

I want to remind you that with the long-term contracts we have signed -- 5 years, 7 years, 10 years -- patent licensing revenue is a low-risk stream of long-term cash flows. Not many companies can claim to have such long-term visibility into a significant portion of their revenues. Having visibility to a steady stream of long-term royalties should reduce the perceived risk of the Company and should translate -- (technical difficulties)

Ladies and gentlemen, please remain on your lines. Your conference will resume momentarily.

You are reconnected.

Sorry about that. I think we got disconnected somewhere at some point, so maybe I'll just go on details for the year.

For the full year, we expect to receive royalty payments of $148 million from Samsung, Hynix and Micron combined. As we said, the new agreement with Samsung includes technologies from both our MID and CRI divisions, so we will be allocating some of the royalties to CRI. With this new allocation, MID will reflect $134 million in royalty revenue from its current DRAM customers, as compared to $124 million in 2013.

On the non-DRAM side, 2013 included some of the one-time payments from settlements, and our current estimates include signing new customers in 2014. As mentioned earlier, CRI was about 12% of our CLI in 2013, and we expect to be about 15% to 17% in 2014. Including LDT, the new businesses should be between 20% to 25% of our total CLI in 2014.

I want to remind you that the long-term contracts we have signed, some for 5, some for 7, and some for 10 years, patent licensing revenue is a low-risk stream of long-term cash flows. Not many companies can claim to have such long-term visibility into a significant portion of their revenues. Having visibility to a steady stream of long-term royalties should reduce the perceived risk of the Company, and should translate into a lower cost of capital and higher relative multiples.

We will continue to make investments in engineering, so we can secure additional technology licensing, as well as create technology and patents, which we will monetize in the future. For the year, we expect to keep our pro forma operating expenses relatively flat.

The expectations we are setting for 2014 are prudent, and based on our best estimates. 2013 was a starting point for a change in our financial performance, and we started to deliver on the commitments we made. I expect that we'll continue to do the same in 2014, and look forward to receiving your continued support.

We are now ready to open the line for Q&A. Operator?

(Operator Instructions)

The first question comes from Suji De Silva from Topeka.

Good job on the quarter. You talked about expecting some incremental revenue from the DRAM customers.

Am I right to understand that would mainly come from driving R+ adoption through the customer base, and if that's so, what kind of timing are we looking there? And can you remind me the business model for R+ as we look to that in 2014?

Sure, Suji. Good question. So in most of the designs where we're licensing cores, there's kind of three phases to it. There is up front NRE that customers provide, so that's very short-term revenue, tends to just cover the development cost, and then there's two future revenue streams.

The first is usually per tape out, so for every tape out that occurs, we get a fee, a licensing fee, and then for every chip bit sold, there's a further royalty base, so that's the typical model that we've been discussing with customers. Clearly, it takes time, because the customers have to design it into their chips.

Those chips have to go into production, so the royalty piece is long term, has a very long tail. Some of the stuff that we have and benefit from now was really done 8 or 10 years ago I think. But we can have upside immediately from the NRE portion of the revenue.

And R+ would drive the majority of the incremental DRAM revenue, looking forward? Are there other elements we should be thinking about?

Yes, there are other elements. We're in very proactive discussions with selected customers about doing chips, that they're suggestion, not ours, necessarily. They thought the [end] of commerce might be better in doing that.

But I'm not at liberty to divulge any of that. It's very confidential at this point, but we see that as a very interesting way, and that's why I refer to it often in the dialogue.

In the same way, we're spending a lot of time with the downstream customers who are really driving the big data applications, and we're very proactively working on different memory architectures that involve a lot of software development, so you're going to see some software elements of the product sets that we offer, I suspect, over the coming year. Again these things are not short-term, so I suspect that we see only very small amounts of revenue this year and 2015 is where we really are hoping to see more substantial revenue build.

Understood, and a quick question on the numbers. The gross margin, even the non-GAAP one, dropped from 1Q to 4Q in 2013, I think 93% to 86%. Is there a trend there we should be aware of or how to model gross margin going forward, Satish?

I think the change in gross margin is related to the LDT business, because for LDT, the line give you the gross margins given it's buy, sell and products, it is not even close to where we are on the IP business. So as that business grows, it does impact our gross margin slightly.

And into 2014, should we expect, now that the restructuring has happened, that would attenuate somewhat?

Somewhat, but I think, as I mentioned, it's collectively, it might be about 8% to 10% of our business, so there will be some pressure in the gross margin, but I think the guidance I gave, overall keeping operating expenses flat, and giving you close to the bottom line numbers, that should back into the gross margin where it would be.

That helps and last question, Ron, right after you signed with Samsung, I noticed Samsung did a deal with Google and Ericsson, and I know you can't speak directly to Samsung's motivations, but can you just talk to what might be a shifting climate in the thought process in patents and litigation, versus collaboration? Because it seemed very timely all that happened at the same time. Thanks.

Yes, and another good question and you're absolutely right. We can't comment on Samsung, and their motivation.

From our perspective, we're just looking at the memory industry as really being a very in-vogue, sexy industry that has a lot of things happening in it. So if I was to be more positive on this, I think people look at our technology, and say, well, if they have a different business model that's easier to get along with and more reasonable on the pricing, why don't we work with them, because there's a lot of way cool stuff that their engineers do.

We do spend a lot of money, and we're very cautious about it, and as you seen, when things aren't going well, we stop those investments, and we put more investment into other things, and we put a lot more investment into CRI and to MID. So in the memory, the core parts of the business, and we've reduced it elsewhere.

So while overall it looks flat, it is in fact, we're putting a lot of money into those things to develop products to serve those customers so I'm thinking that the industry as a whole likes the patent piece approach, and we certainly like it, because we think that the growth and upside, and to be frank, it's just more fun working with customers to build great products than it is to sit down and listen to the lawyers.

And might be more productive. Thanks.

The next question comes from Terence Whalen from Citi.

This question is also a question on SSD licensing, and specifically, obviously, you're making progress, Ron, now that you've been there over a year with your collaboration and customers. Can you just provide us some anecdotes in how the direct interface, and how your approach interfacing customers is changing, just so we can qualitatively understand the progress anecdotally? Thank you.

Terence, can you just explain that again a little bit? You're talking about -- you mentioned SSD. Are you talking about non-volatile or are you talking more generally?

I'm talking with SSD licensees, you mentioned half of the market is non-licensed. Can you just provide us some anecdotes to give us feedback on how the progress interaction is going with the companies.

For example, are you leading some of those high level discussions and at what level with these potential licensees? How is progress going in terms of you introducing your design services group with the customers?

Yes, there's a few different pieces to that. Again, an excellent question. So I would say a lot of the discussions with the broader semiconductor industry were held up, as people were trying to figure out what was happening on the DRAM side. So as we have systematically started to settle those matters, we've had more uptake with respect to the SOC side.

Every of the big customers that you can imagine, of course very small start-ups tend not to be our focus, we're engaged with, and we are having very open discussions at all sorts of levels, and I would say they're in general very positive. People see the results in the marketplace of what we're doing.

I don't think anybody has ever thought that our technology is not absolutely superb, so the engagements are going fine. I think it's really the proof points, and from Satish's forecast, as you see, we're planning on settling and licensing a broader set of the industry, so those things are really, I would say, about as on track as we possibly can make them.

One of the things that we did differently as well, you don't see a lot of expense growth. We've hired a lot of professional salespeople, we have a group called the Enterprise Solution Sales, that calls very directly on all of the large accounts, and it also takes an ecosystemic approach as well, so we spend a lot of time working with the customers, figuring out where their customers are going, and try to develop the optimum solution, so we have a much more robust process in place today than we did even a year ago.

And then perhaps as a follow-up to that, obviously you have some 2015 SOC renewals ahead of you. As I think about 2014, will some of the growth be driven by expanding existing interactions, as opposed to new licensees, or will it primarily be driven by new licensee growth? Thanks.

It's going to be both. We certainly have existing licensees that we intend to do more with, and we have new licensees that are targeted, and we're very proactively in those negotiations and discussions as we speak.

My last one, Ron, is, we saw the Samsung agreement one full year ahead of the expiry date of the pre-existing contract. Does this suggest that you're more open to renewing earlier rather than later in your future renewals, as well, or is this independent? Thanks.

That was more independent but I think people are looking at this space and seeing that we're a reasonable party to deal with. As I said when people, when you knock on their door and they pretend they are not home, that's rather difficult to have the meetings. Now we don't have that problem, they welcome us in, and so we may get things signed earlier.

It's not really a strategy of ours, by any means. In that particular case, Samsung was very willing to discuss things, and we collectively see more opportunity that the only way we could get to more opportunity was to settle, and make sure we had a stable relationship going forward, not settle, to renew, and make sure it was a stable relationship.

Okay, that's helpful, best of luck, thanks.

The next question comes from Sundeep Bajikar from Jefferies.

Thanks for providing the segment level detail to support your guidance for 2014, very helpful. I had just a couple questions related to the guidance. So given that the DRAM portion of royalties is relatively well known, could you help us understand roughly what portion of the SOC and EU business growth that you're guiding for is likely to be generated by the variable component of royalties from existing customers, versus royalties from new customers that Rambus expects to license in 2014?

That's going to be very difficult because some of our SOCs are variable, some of them are fixed. So I think the best way for us to describe this was to really talk about the DRAM, and then given that DRAM numbers are fairly well known, everything other than that is going to be a combination of SOC licensing.

It could be from CRI, it could be from MID, it could be a combination of some solution licensing, where we are talking to some customers and they might be in our RE and they engage us and recognized as revenue, and could also include some product sales from LDT, so it's a combination of non-DRAM that's driving the top line growth.

I can't break it any further into SOCs, because, in the past, what we have tried to do was a simpler model where we had MID and we had DRAM and SOCs. But we shouldn't forget that CRI, also, many of their customers are SOC customers, and now we have an overlap of customers like SD Micro is an overlap, Samsung is an overlap, so trying to discern how much is coming from SOC that's related to CRI, and how much is from MID will be very difficult as we move to the hybrid model.

Okay, I understand. Satish, just a quick follow-up on CRI.

Clearly it was a nice step up in CRI revenues in the fourth quarter. I understand some of it is the way you're doing allocations, but behind that, I guess, is there a way you can help us understand what drove the uptick, and more interestingly, what assumptions we might make about the quarterly profile of CRI revenues in 2014?

You're right. The allocation did help CRI to come in at about $34 million in CLI for the full year, about 12% of CLI for the full year. Going forward, the assumption that we have built into the model is that there will be additional longer-term customers that will be signed.

And as we mentioned in the past, CRI's model is more longer term, but we have built in signing additional design wins that they have for their technologies, both in the CryptoFirewall side, and also signing some DPA customers. So, a combination of selling some cores as well as from patent licensing, those assumptions are built into the growth for CRI. So if you look at the numbers, obviously CRI on a percent basis should be growing the fastest of all three business units.

Okay, that's very helpful, and last one for me, can you just talk in general about any differences that we should be aware of between license agreements with memory suppliers, and license agreements with SOC suppliers?

Generally the structure is very similar. The patent licenses are term licenses, typically in the past they've been five years. We've had a combination of fixed payments, we've also had variable payments based on the number of units shipped, so they mirror what we had with the memory division in the past.

I think the only slight difference, I would say, is that with some of them, even though we call them fixed, their payments are not the same every year over the five year period. Some of them, they have some sort of a scaling down over time. They might pay us X this year, divided by four every quarter, but next year they might be paying something us less than X, but it's spread over four years so that is something which we expect to fill that hole with growth from new SOC licenses.

Great, thank you very much and nice job in the quarter.

The next question comes from Terence Whalen from Citi.

Great, thank you. Pretty simple follow-up for Satish. We just wanted to get your understanding as how the debt will be handled, and how interest expense, specifically, will be divided up in the March and June quarter, just for us to precisely model that. Thanks.

Sure, so from a cash perspective, we'll be paying approximately, well not approximately but 5% of $172.5 million for six months in the first half, so that's around $4.5 million, and then we'll be paying 1 1/8% on $138 million so those are all of the cash portions of it. In our numbers, we also -- the way we have, the way our balance sheet records, the lease we have, we are assumed to own the property that we are in, even though we don't own it.

So there's a cash component of about $4.5 million for this, and that also shows up in the interest expense in the pro forma, as well as in the GAAP numbers. So for, if you want to know what to expect in terms of the non-cash portion for interest expense in the first half -- let me just pull that up for a second. The cash portion on the coupons in total for the notes should be -- the total interest expense should be about $6.2 million, $6.3 million in Q1 and Q2.

Okay, terrific. And then my last question has to do with, given the comments that you have made on the lighting business, does that affect your attitudes or approach to how you're thinking about M&A over the next year? Thank you.

Well I'm not sure the lighting business, per se, affects it. We look at it in the very strategic and opportunistic way. Clearly from an acquisition standpoint, the core of the business, which is the memory, high speed links and security part, the cryptography part, that's our focus for acquiring assets, because we really want to put more wood behind that era.

We're happy with the lighting business, we spent a lot of time, I've spent a lot of time with the customers over the last several months, and I think we have tuned it to have profitable growth. We're just very tempered in our view of the growth.

For the reasons that we described, we're working as hard as we possibly can with the customers, to get out from in front of some of these suppliers to them, and minimize the amount of manufacturing that we have to do. Still recognizing that it's an important element to be able to bring up their systems, so I think that business standalone is going to be even stronger than it was.

And clearly from a financial standpoint, it is much less of a drain, it's no drain, as long as we execute to what we wanted to. And who knows, there can be very substantial upside because, as these customers start to transition to ship more of our products, we do have a very healthy royalty rate that comes from them.

Great color, thanks.

Let me just correct myself. I think I gave you the 2013 numbers, so Q1 and Q2 for the total interest expense would be about $8.7 million and $7.6 million in the first half, first two quarters, and then going down to about $2 million a quarter.

Okay, got it. Thank you both. Thanks.

I am showing no further questions. I would now like to turn the call back over to Ron Black for closing remarks.

Thank you, all for your continued interest and support. We're very pleased with the results for 2013, and feel that we are especially well positioned for growth in 2014. Have a great rest of your day.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.