Rambus Inc (RMBS) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2014 Rambus, Inc conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Satish Rishi, CFO. Sir, you may begin.

Thank you, Vincent, and welcome to the Rambus second quarter 2014 results conference call. I'm Satish Rishi, CFO, and on the call with me today is Dr. 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 70409115 when you hear the prompt.

In addition we are simultaneously webcasting this call, and, along with the audio, we are webcasting slides. So even if you joining us via conference call, you may want to access the website of the slide presentation. A replay of this call can be accessed on the website beginning today at 5 pm Pacific time. In an effort to provide greater clarity in our financials we are using both GAAP and non-GAAP pro forma format in our press release and on also on this call.

I need to advise you the discussion today will contain forward looking statements regarding our financial prospects 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 directly comparable GAAP measures. You can find a copy of our earnings release and the reconciliation on our website at www.Rambus.com on the Investor Relations page under financial releases. Now I'll turn the call over to Ron.

Thank you, Satish, and good afternoon, everyone. We had a great second quarter with revenue of $76.5 million which came in at the high end of our upwardly revised guidance and was up 32% year-over-year. Our pro forma net income was $18.9 million also above our guidance, and we were again GAAP profitable sticking to our goal of maintaining that profitability quarter after quarter.

As a result, we are very happy with our first-half financial performance, especially in light of the fact that there was some significant downsides such as the revenue we expected from Sony PS3 that were offset by securing new customers. Satish will provide more detail on this in his section, but in summary, while we are ahead of our plan to date, we are not raising our full-year guidance.

As I have mentioned on previous calls, our approach to setting guidance is to have multiple ways to achieve the range and always avoid creating a situation where a customer will demand a price reduction in order for us to achieve the quarterly forecast. Sometimes this results in us exceeding our guidance range or lumpy revenue, but I can assure you that this is a result of what we believe to be an appropriately forecasting methodology. So while there are scenarios where we can exceed the annual guidance of $295 million to $305 million, at this point we simply cannot commit to them.

One of the big highlights of the quarter was the launch of CryptoManager, our secure feature management platform, with Qualcomm as lead customer. This platform provides chip in device companies with a hardware root of trust as well as an infrastructure that enables end to end security through the SSC design and manufacturing process. We are working closely with Qualcomm to integrate the solution into their application processors to provide advanced hardware based security provisioning throughout the manufacturing process. Feedback from market on CryptoManager has been excellent, and we are engaged with several new customers as we came out of stealth mode. We have a wealth of information about CryptoManager on our website and have created a video that shows the benefit of CryptoManager solution in a fun, easy to digest manner. Please check it out.

Touching on the strategic and tactical relevance of CryptoManager, I think that you will all agree that security is an important topic as the news is often highlighting enormous security breaches. We believe the CryptoManager platform can be a game changer in helping our customers and their customers improve security.

If you recall we have been speaking a lot about the importance of collaborating with the industry in finding ways to more broadly engage to deliver our solutions. This was the basis for our decision last quarter to join the JEDEC JC-40 committee, and it provides us a platform from which we can work with industry to help define and drive important requirements to improve power and performance in cloud and server-based memory environments.

One of the things that I am happy to consistently report on is the fact that the memory industry is once again healthy and consequently becoming more influential in driving system architecture. We believe that some of our architectural innovations can dramatically improve power and performance, and we hinted at some strategic programs at our Analyst Day in June, although we were necessarily vague because the program is still in stealth mode.

What we did indicate, however, is that the opportunity was on the order of $450 million today growing to over $600 million by 2018. I am happy to report today that we have signed a memorandum of understanding with a large strategic customer and have initiated development on the program which will run through 2015 and is expected to generate significant revenues for us in 2016. As Satish will outline in more detail later, we are increasing our expenses in the second half given the enormous growth potential for this program.

In looking back over the last two years we are proud of our accomplishments. We started with profitability through a modest restructuring, augmentation of the strategy to collaborate with the industry and profitably resolve litigation, refinement of our portfolio by curtailing investment in some areas to afford more in other areas and most recently with the launch of truly innovative solutions like CryptoManager.

With this positive momentum and completion of the turnaround, we are increasingly look for -- looking forward to determine how we best collaborate with the industry and influence future architectures in the cloud and mobile and in the Internet of Things. To this end we have created chief scientist positions and promoted Paul Kocher, who previously was the general manager of our cryptography division, and Craig Hampel, who was a Rambus fellow focused on memory and system architecture, to be Rambus chief scientists. You will be hearing more from both Paul and Craig in the near future.

Martin Scott, formerly our CTO, will be taking over from Paul running our cryptography division. Martin has extensive experience as a general manager having scaled several businesses in HP and PMC-Sierra. Laura Stark will expand her role and strategy and also run Martin's previous group which included Rambus labs, our lighting division and our new initiatives. Laura's group is called emerging solutions division.

In closing, I believe we are well situated to capitalize on the right opportunities and are properly structured to grow the business. We are building the right teams and investing in the right areas to build for the future growth, and I'm confident the revenue will follow suit. We believe we have several avenues in line that could more than double the size of the Company in the coming years. With that I'll turn the call back over to Satish to give a read on the quarterly results. Satish?

Thanks, Ron. I will begin with a review of some of the financial highlights for the second quarter before going into additional detail. Revenue for the second quarter was $76.5 million at the high end of our revised guidance of $75 million to $77 million. Even though we try to maintain steady revenue streams, sometimes our revenue is lumpy. And in this quarter we had additional quarterly payment from one of our customers which pushed our revenue higher than original guidance.

Year-over-year revenue was up 32% and sequentially revenue decreased by 2%. Due to slower-than-expected headcount additions as well as the pushing out of some prototyping expenses, growth from operating expenses for the quarter came in at $43.8 million, slightly below our guidance of $47 million to $44 million. Pro forma net income for the quarter was $18.9 million as compared to our initial guidance of $12 million to $17 million.

For the quarter, revenue for MID, CRI and LDT business units was $58.6 million, $12.8 million and $5.1 million, respectively. These numbers represent a 4% and a 1% decrease and a 20% sequential growth, respectively, for MID, CRI and LDT. Growth year-over-year as investments in new the businesses started to pay off, were 19%, 61% and 825% for MID, CRI and LDT, respectively. For the quarter revenue from [EUM] customers was $37.4 million as compared to $38.9 million last quarter and $25.4 million in the quarter a year ago.

Total costs and operating expenses which exclude retention bonuses, stock based compensation and amortization of intangible assets were $43.8 million for the second quarter, relatively flat with the previous quarter and a 6% decline from a year ago. Our overall costs and expenses continue to decline year-over-year due to lower litigation and consulting expenses. We continue to manage our resource allocation as we continue to streamline expenses and invest in areas where we believe will have the greatest impact to our customers.

Pro forma EBITDA margin was 47% for the quarter as compared to 48% last quarter and 26% the quarter a year ago. We paid down $172.5 million convertible notes this quarter, and pro forma interest and other expenses for the second quarter was slightly lower at $3.2 million due to the payoff of the convertible notes in June. Using a flat rate of 36% for pro forma pretaxes, pro forma net income for the quarter was $18.9 million, a decline of 4% quarter-over-quarter and an increase of 273% year-over-year. After paying out the $172.5 million notes, the last interest payment of $4.3 million and the final retention bonus with CRI, cash decreased by $157 million, and we ended the quarter with cash and cash equivalents of a healthy $246 million.

Cash from operations was approximately $10 million, slightly lower than what we had expected due to timing difference between signing deals and collections. Net cash, defined as cash, cash equivalents and marketable securities less outstanding debt was $108 million as compared to $93 million last quarter and $33 million a year ago.

Now I will provide some guidance for the third quarter of 2014 as well as for the full year. This guidance reflects our reasonable estimate, and our actual results could differ materially from what I am about to review. For the third quarter we expect revenue to the between $68 million and $73 million. We expect pro forma operating costs and expenses which excludes stock-based comp and amortization of intangible assets to be between $44 million and $47 million. Pro forma net income is expected to be between $12 million and $18 million.

When we estimate our revenue for the quarter or the year we try to include only those deals which we believe have a high probability of being signed during that period. For the quarter we provide a range of $4 million to $5 million when we make our estimates, so we are more flexible in the upside, and we are more likely to miss on the upside than on the downside.

When we give the full-year guidance at the beginning of year we built in high revenue estimates from the PS3 royalties, but, given the success of PS4, we have seen a faster decline in the royalties from PS3 which we have tried to replace from other signed deals. In addition, some deals move faster than expected, and we close them a quarter earlier than expected, so, even though we exceeded guidance in the first and second quarters of this year, with the offsets we have, we see no change to our full-year guidance.

As Ron mentioned, for the full year we still expect revenue to be between $295 million and $305 million. We expect total operating costs and expenses to be closer to $185 million. As Ron mentioned, we are making investments both for the CryptoManager platform as well as other new strategic initiatives in the memory and [interference] technologies and have been adding some headcount to support these initiatives.

We have been generating cash from operations for the past four consecutive quarters now, and we expect to continue doing so. For the full year we now expect our cash from operations to be between $65 million and $75 million.

Before we open the lines for Q&A, I'd like to take a moment to thank those who joined us in New York in June for Analyst Day. Our goal was to provide more transparency into our businesses, highlight some of the growth opportunities, provide a longer-term operating model and of course introduce our team of executives to you. Thank you for your attendance, and we appreciate the time you took from a busy schedule. With that, Operator, can you open the line for Q&A?

Yes, sir.

(Operator Instructions)

Our first question is from Suji DeSilva.

Hi, Ron, hi, Satish. First of all, the full year guidance being unchanged with the Q3 guidance, is that the -- implies a 4Q up sequential? Is that something your visibility with and comfortable with at this point just to clarify the full year range at this point?

We are giving a range of $68 million to $73 million, so right now there might be some push-out between Q3 and Q4, so for the full-year I'll keep to the guidance that we have. But I do want to parse it down to what Q4 would be right now. We have some expectations signing some licenses in Q3, and if some of those happen then we might be able to give better guidance for Q4.

Okay, so there's some possibility of push out Q3 to Q4, and that's what challenges that guidance, it sounds like. And then also how much of the Sony PS3 revenue run rate is left there that could fall off in terms of a headwind just to understand the magnitude of that?

Most of the revenue for PS3 for us comes in Q1 of the year, and we have some in Q4. So Q4 typically is the best quarter -- is a good quarter and then Q1 for PS3 is particularly the best quarter for us, and we didn't see that. So everything from the fall off of PS3 now has been built into the revised guidance we've given you.

Okay, and then maybe a question for you, Satish, and Ron also perhaps. It sounds like you are growing the R&D headcount whereas you have been perhaps in more of a redeploy mode the last few quarters. Should we take from that that the core R&D deployed right now is at a level you are comfortable with where everybody is being put to a use that you would like to and that you -- at this point you need to grow R&D to grow with the business?

Yes and we are comfortable where we are. But we just introduced CryptoManager, so we will be hiring some additional people to manage some of the infrastructure that we have to build and also for developing the CM program after that. Paying for the initiative that you are talking about on the memory side that Ron mentioned we will be adding some more headcount to that. So we might be expanding R&D quarter-over-quarter. Ron?

Yes. Suji, that's what we tried to reflect in it. The core business is performing exceedingly well. It is highly leveragable as we have described multiple times. Some of the newest initiatives, both the CryptoManager and the new one that Martin described briefly in the Analyst Day, are somewhat different.

Still very rich, high-margin businesses with enormous growth potential, but it is a little bit different than the historical business so we have had to add different skills. There'll be less portfolio management which we've done pretty ruthlessly over the last year. Of course we always tune them up as we go year-on-year, but we're pretty happy with everything we have.

Okay, that helps clarify, and then the last question for me perhaps. CryptoManager you said you had customers in the pipeline behind Qualcomm. I'm curious what the size of the customers are relative to Qualcomm, and more importantly how far along they are versus Qualcomm. Are they still in early stage or further along? Any color there would be helpful. Thank you.

I'm going to obfuscate the size, because it would start to indicate who they are, and that would be inappropriate at this point. They are strategic customers to us. They participate and understand the importance of this type of technology in the handset and mobile space, and they are new. They are not very advanced, but it is the type of thing that can go very quickly to a potential deal.

Great, thanks, guys.

Gary Mobley, Benchmark.

Things for taking the questions. I'm to start out with a question on clarification. Satish, could you mention again what the CRI revenue was for the quarter?

Sure, CRI was $12.8 million.

Okay, thanks. And (technical difficulties).

Sorry, Gary, you are cutting off. Can you repeat the question please?

Looking at the revenue delta that you are expecting between Q2 and Q3, it is about $6 million, could you walk through what that revenue delta is? How much of it has to do with the timing of the Qualcomm license relationship?

Every quarter is different, and we do have lumpy quarters. Q1 we had a couple of one-time annual payments, and we also had the exercise of one of the options that one of the customers had, so that was in Q1. In Q2 we had another customer pay us for an extra quarter, and we also had an annual payment that came in, so we -- not every quarter exactly the same.

This a certain portion of our revenue, whether you call it 85%, 90%, that is repetitive quarter-over-quarter, but there's other variabilities that are built in quarter-over-quarter, so I cannot give you a bridge between Q2 and Q3. But I can tell you that the estimate we are giving you is our best estimate, and we believe that we will come in between $68 million and $73 million for Q2 -- for Q3.

Okay. And could you talk about any major renewal -- contract renewals that might be coming up for the balance of 2014 and maybe even into 2015 without having to name specifically the customer?

We don't have any renewals in 2014. In 2015 we have a couple of SoC renewals coming up, and we will probably talk a little more in detail about them in our next call.

All right, that's it for me. Thanks, guys.

Thanks, Gary.

(Operator Instructions)

Atif Malik, Citigroup.

Hi, Ron, Satish, thanks for taking my question. You guys talked about recognizing some cash from the Qualcomm deal tail end of this year, and revenue is more in the second half -- in the first half of next year. In terms of, assuming your $300 million is a conservative outlook for the full year and then Q4 are growing 5% sequentially, is it fair to assume Qualcomm is a major driver in that revenue increase in Q4?

Qualcomm is a large customer and an important customer to us. I really can't talk more about the magnitude of Qualcomm's payments because of confidentiality.

Got it. And then you guys talked about a large strategic customer in your prepared remarks with revenues ramping in 2016. Can you provide a little bit more color without naming the customer? Is it an OEM, is it an IDM or a fabless customer, and is it a existing customer or new customer?

We really would prefer not to mention anything about this. We tried to outline the general direction if you go back to the Analyst Day and see where we articulated, so it gives you a few hints about the total available market, the richness of what we were doing. But neither the customer -- it's confidential -- would like us to do that, nor do we believe it is appropriate at this time.

It is just an explanation of why we are doing what we are doing, and quite candidly I think we've delivered consistently over the last few years. And we're pretty excited about this new growth opportunity, which we didn't have quite candidly last year. It is great. If anything I would say that this is another indication that our collaborative approach is working, and I would say that this opportunity would have never been presented itself if we had not changed our engagement model.

Got it. One last one for Satish. Is there a seasonality in terms of your revenue recognition for the CRI business? It looks like in Q1 always a little bit better and then in Q2 was flat. So is there any seasonality in revenue recognition for the CRI business for Q1?

Yes. The CRI has a couple of contracts where they are paid annually. So they get paid in Q1, and I think there is one also in Q2, but then they don't get paid for the rest of the year. It is not linear, it is not quarterized -- one payment every year from a couple of different customers.

One other comment as we deliver solutions like CryptoManager, some of those will in general -- it's a general-purpose solution that can be used any way. There's always a small amount of customization that customers will want to address their particular needs. As a consequence though often the revenue recognition piece is -- so we may actually get paid first time customers upfront and recognize the revenue in the future.

There will be more of that as we go forward, so we may actually have success with the customer payments with the customers but revenue recognized one or two quarters later.

All right, thanks, Ron.

Sundeep Bajikar.

Hi, guys, thanks for taking the question. So Rambus recently joined the JEDEC standards group. Does that mean that certain Rambus technologies would be on a faster path to adoption then they would have been otherwise? I guess where I'm going with that is if there's any connection between joining JEDEC and starting this new strategic element program with the new customer that you just announced?

JEDEC is more general engagement model. The customer that we are working with is a more specific one. We will always try to be standards compliant, although these two things are not necessarily connected, but what we are really trying to bring to bear in some of these is our own unique technologies to differentiate or help the customers differentiate. I wouldn't draw conclusions between these necessarily. But just look at them as steps for us to participate in the industry, and hopefully, yes, have our technology be more influential in doing so.

Okay, great. Then another question about the LabStation Validation Platform. Can you give us some color around the types of customers that might choose to use that platform? And perhaps a framework to think about the size of the market and potential timing of revenues there?

Sure. I would look at that in a very modest way. Just to make it clear, we are not a tools vendor. We have engaged a variety of the EDA tool companies just articulate some of the things that we have and a look at partnering with them as a potential channel.

Some of them do board level work. This is what this is. It can be used by chip companies. It can be used by system companies. And it is just kind of the classical what I would call IDE type environment where I came from in microprocessors that aids the customer in really understanding the margin that they have in their design. And being able to do it in a very controlled way, so you can program registers and really look at the responses.

This is very modest, although we are incredibly excited by it. And right now it tends to focus on working with our technology, but we are also expanding that. We are really improving the user interface. We have a group of experts in user interface, so we think when this is done is going to be one of the most usable tools out there. As a consequence there is always a business rationale for it. We are going to really nice sticky customer relationships, because the engineers will love the tool and as a consequence like to reference our technology.

Okay, great. Then last one for me on CryptoManager. Can you remind us of the sequence and timing of revenues from the CryptoManager platform? It is a new business model, so I think you had talked about at least three different types of revenues at different times. When should we expect steady revenues to start if they have not already?

We will have revenue coming from three different legs of the transaction. One would be for the core. When we ship the core for engineering services we will get data on the and as Ron mentioned, even though we may get the cash, the recognition of revenue might be spread out over a time where at least some of that work has been done.

The second part would be modest, but on the infrastructure side as we deliver to them what we call security appliances, or modules that we provide to them for them to be able to manage the infrastructure. The third one would be from the key management when this part taking their NextGen design into production, and when they are injecting the keys into that core so that would be the third leg of revenue.

And the timing of that would be anywhere from some starting now and some starting somewhere down the road depending on you can figure out how long it takes get from core to actual production.

Okay, great. Thank you.

At this time I am showing no further questions. I would like to turn the call back over to Dr Ron Black for any closing remarks.

Thank you very much and thank you all for your continued interest and support. We obviously are very pleased with Q2 results and our growth opportunities, and we believe we are well-positioned to capitalize on the exciting trends. Thank you, and we will speak to you again.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may disconnect. Have a great day.