Rambus Inc (RMBS) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2014 Rambus 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.

Thank you, Jamie, and welcome to the Rambus' third-quarter 2014 results conference call. I'm Satish Rishi, CFO. And on the call with me today is Dr. Ronald Black, our President and CEO, who is joining us from another location. The press release for the results that will be discussed 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 12537633 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're 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 5:00 PM Pacific time.

In an effort to help provide greater clarity in 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 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 filed with the SEC including our 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may also differ materially from our actual results and we are no under 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 likely 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 and the financial releases. Now I'll turn the call over to Ron to provide an overview of the quarter. Ron?

Thank you, Satish, and good afternoon, everyone. The third quarter was relatively quiet following a first half where we exceeded our plans on the financial front and also announced significant new products such as the CryptoManager platform with Qualcomm as the lead customer. For the third quarter, we ended with revenue coming in at $69.7 million which was near the midpoint of our guidance but was down slightly year-over-year.

As reported previously, technology licensing revenue from Sony PlayStation and other areas continue to run below our original expectation, although we've made up part of that loss revenue through signing new license contracts. We are of course negotiating new deals and will continue to do so and expect them to close in the coming quarters. We are pleased that we continue to maintain the goal we set earlier in the year which was to remain GAAP profitable every quarter, and we have been proactive in managing our expenses to that and.

Turning to the business announcements last quarter, we introduced the family of DPA resistant cryptographic cores with the first offering including 128-bit and 256-bit AES cores. These ready-to-use cores offer chip makers an easy to integrate security solution with built-in side channel resistance for cryptographic functions that can be used across a wide range of connected devices. Our current customers have been asking for these products to help them introduce DPA counter measures into their products more easily, and we believe these cores will also attract new customers.

On the memory side, we announced that we have a working with Northwest Logic to certify the interoperability of our DDR4/3 PHY with their memory controller core. Which we believe will give our collective customers assurance that they will add our solution to their design, and when they do, that it will be fully compatible. This continues to be important as the semiconductor IP market becomes more and more complex with SoC vendors needing to manage upwards of 200 IP blocks in a single SoC design.

We disclosed at our Analyst Day in June that we signed an MOU with a significant customer on a new memory architecture program. This program continues in full force and we have received positive feedback on the solution from a second major customer, so are even more excited about the project today and are on track for 2016 revenue. In closing, our team was extremely busy as we continue to create and invest in programs that we believe will breakthrough solutions as well as explore and negotiate potential new deals. We're optimistic we'll meet our targets and we look forward to sharing with you more in the coming weeks.

With that I'll turn the call over to Satish to give you a read out on the quarterly financial results. Satish?

Thanks, Ron. I'll 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 $69.7 million, close to the middle of our guidance of $68 million to $73 million. Year-over-year, revenue was down 5% and sequentially revenue decreased by 9% due to the additional quarterly payment we received in the previous quarter. Pro forma operating expenses less COGS for the quarter came in at $45.1 million, at the middle of our guidance of $47 million to $44 million. Pro forma net income for the quarter was $14.8 million within our guidance of $12 million to $18 million. For the quarter, revenue for MID, CRI and LDT business units was $52.5 million, $11.2 million and $6 million respectively. These numbers represent a sequential decrease of 11% and 12% for MID and CRI and an increase of 17% growth for LDT.

For the quarter, revenue from DRAM customers was $37.2 million, relatively flat to the last quarter and $41.7 million in the quarter year ago. I do want to iterate that for the next few years, we do not expect to see any fluctuations in our DRAM patent licensing revenues irrespective of how strong or weak the DRAM market is since the contracts with Samsung and Hynix have fixed royalty payments to us and Micron has a caps payment and is effectively a fixed payment too. Total patent licensing revenue for the quarter was $61.8 million, or 89% of the total revenue. Of this patent licensing revenue, revenue from DRAM customers was $37.2 million and from the SoC customers was $24.6 million.

Total costs and operating expenses, including COGS but excluding stock-based compensation and amortization of intangible assets, were $45.1 million for the second quarter, up 3% from the quarter ago and up 5% from a year ago. The increase was driven by increased headcount mainly in CRI as well as in our Emerging Solutions Division. We continue to manage our resource allocation as we continue to streamline our expenses and are investing in areas which we believe will have the greatest impact longer term. For the quarter, engineering and R&D expenses were up 7% and 13% quarter-over-quarter and year-over-year and MG&A expenses were down 5% and 8% respectively.

Pro forma EBITDA margin was 40% for the quarter as compared to 47% of last quarter and also for the quarter a year ago. Pro forma interest and other expenses for the third quarter was $1.5 million as compared to $3.2 million a quarter ago and $3.4 million a year ago. Using a flat rate of 36% for pro forma provision for income taxes, pro forma net income for the quarter was $14.8 million, a decrease of 22% quarter-over-quarter and a decrease 15% year-over-year.

For the quarter, cash increased by $25 million and we increased the quarter with cash and cash equivalents of $271 million. We continue to generate cash, and cash from operations was $24 million. Net cash defined as cash, cash equivalents and marketable securities less outstanding debt, was $133 million as compared to $108 million last quarter and $56 million a year ago. In summary, the quarter came in line with expectations with revenue around $70 million, pro forma net income of around $15 million and positive cash from operations of $24 million.

Now I will provide guidance for the fourth quarter of 2014 as well as for the full year. This guidance shows the reasonable estimate and actual results could differ materially from what I'm about to review. For the fourth quarter we expect revenue to between $70 million and $75 million. We expect total pro forma operating expenses, including COGS and excluding stock-based comp and amortization of intangible assets, to be between $46 million and $49 million. Pro forma net income is expected to be between $12 million and $17 million. For the full year, we expect revenue to be between $295 million and $300 million.

We are also managing our expenses in line with our top line and now expect pro forma operating expenses and cost to be between $179 million and $182 million, lower than what we had guided you in the last quarter and also lower than what we had guided to earlier in the year. For the full year, pro forma operating income is expected to between $113 million and $121 million, fairly close to what we had guided to you at the beginning of the year. With that, I'd like to open the line for Q&A. Operator?

(Operator Instructions)

Suji De Silva, Topeka.

Hello, Ron. Hello, Satish. Nice job on the quarter.

In terms of the CRI headcount and revenues, what kind of year-over-year growth are you expecting from security? And do you need to continue to add more heads to support that?

Hi, Suji. This is Satish.

Yes, we have been adding head count, but this is an area that has been the largest investment. And if you look at how they have grown year over year, just look at the revenue CRI has already between Q3 of last year and Q3 of this year. They've grown about 120% in top line. So we are adding to their expenses.

And especially with the traction we are seeing with CryptoManager and the work we have to do for Qualcomm and other future customers, we will be adding a few more heads. But I think we definitely are slowing down the ramp in the head count. And now I think we are getting to a fairly full staff level at CRI. But I think Q4, we may be adding a few more heads; and then I think we should be stable for the next three to six months.

Okay, great. And then I know that you clarified the memory part of the patent licensing will be relatively stable. Can you help us understand how much exposure you have remaining to things like the Sony PS3 and other variable components?

The Sony PS3 -- as we mentioned, we are not in PS4. And Sony decided to go with the standard memory solution. And this is something which has been declining, and we have been trying to make up that revenue that we had in the guidance at the beginning of the year.

But just anecdotally, in the best year that we had for PS3 in the 2010/2011 timeframe, we had close to $12 million- $13 million a year coming from the PS3 ecosystem, which we don't have currently. We are probably in the -- maybe I would say in the couple of million dollars in this year.

So that is something which we are trying to make up in other areas, especially on the solution licensing side that we have been getting traction in with new customers. So with PS3, that will taper off I think. In 2015, we probably won't see a whole lot of revenue from PS3.

Okay, great, that helps. And then lastly, just in terms of the seasonality, do you still expect the same first-half 2015 seasonality versus second half that you'd have in a normal year, where things pick up because of payments being front end loaded for the year? Thanks.

Sorry, Suji. I missed the middle part. Can you repeat that again, please?

I apologize. So in terms of the seasonality, do you expect the first half of 2015 to have the typical front-end-loaded payments for the year that you have in a typical year whereas the revenue would tick back up because of those things? Thanks.

We do have a couple of customers that make us annual payments in the first half. So they might be slightly -- again depending on what the mix ends up being -- we may see maybe a slight uptick. But why don't we hold that thought until we give guidance in the first quarter of next year? And we'll give you guidance for the full year.

Understood. Great, thanks, Satish.

Gary Mobley, Benchmark.

Ron, I think I heard you mention in a few venues that 2015 can be characterized as a transition year. And I'm assuming that you're referring to the few million dollars in missing PS3 royalties and the calm before the revenue ramp relating to Qualcomm and some of these server relationships. And so I'm wondering if you can share with us your thoughts regarding 2015, and what you mean by 2015 being a transition year. And do you think you can grow the top line in 2015?

That's a good question. And definitely, Gary, our objective is to grow. But I think, as Satish said, we're really going to wait to give guidance for specifically where that's at. We're pulling together the plan right now.

The transition that you're describing is the sequencing as you go through the turnaround. As you recall, we started about two years ago on a different path that we settled a lot of litigations that changed the whole dynamic where we are now partners with the industry. That led to a set of new products, some of them which are -- we're a little bit ahead, like CryptoManager, that was really started en masse two years ago. Some of them, like the new memory architecture, which took us a little bit longer to get going.

And when you just look at the sequencing of those things, they tend to produce revenue as we referred to in the prepared remarks for 2016. So if all of those things hit, which is certainly our objective, 2016 should be a very good year. 2015, by definition, has to be something in-between.

Okay, fair enough. And if I look at the different components of your revenue, it would appear to me that in 2015 the growth drivers might be CRI in the Lightning division as well. Am I fair to assume that maybe both those components can continue on this growth trajectory that's existed throughout this year?

Well, I think I'll turn it over to Satish to comment about CRI. I can't recall if we've given some guidance on that. With respect to the Lighting division, if you recall, we are focused -- we divested of the light bulb. We're really focused on the general lighting part of it. We are getting traction with some new customers, but that typically takes a longer time.

The team has done a fantastic job from nominally zero revenue per quarter last year to the $5 million, $6 million range. I think we're going to be tempering that and looking more to drive more on the royalty base. So it will depend on the success of our customers. Some of the products that we ship today from our machines and the work that we do -- the optical wave guides, the light guides -- we're not going to build a substantial PP&E.

So there's a limitation to where we'll be able to do that. However, our customer is doing particularly well. So we're cautiously optimistic that royalties are going to start to increase significantly next year.

Okay, as it relates to the CryptoManager Qualcomm license arrangement and the memory interface development efforts for potentially some server-related customers, will there be any milestone payments to be made to Rambus in the 2015 timeframe? Or is all that just back end loaded in the relationship and tied to royalties?

Maybe, Satish, you could describe the revenue recognition.

Yes, so for CM, we are getting milestone payments. So we have a combination of patent licensing as well as what we call percent of completion based on milestones. As far as the CM arrangements we will have in the future, we will have similar characteristics to that.

And on the other item, I'll probably defer. And we'll talk about it when we can talk a little more about who the customer is, what the technology is, and so on. But typically, our goal is to have a combination of both for the solution licensing where there is an upfront payment or an NRE that covers the cost of the engineering and sometimes a small margin, sometimes a breakeven; and then we get paid on royalties when a customer is successful.

Okay, last question from me. I know you're not willing to share with us what 2015 revenue growth might look like. But do you anticipate growing OpEx in 2015? And will that be irrespective of the revenue trends?

If you look at our trend for this year, our Q4 numbers are slightly higher than what our Q1 numbers were. So the OpEx we have from headcount will be there. I think year over year, you can say there will be a small increase in our OpEx because if we have employees in Q4, they will obviously stay all the way through all of 2015. So we'll have a slightly higher run rate than we had when we started the year.

But as we have shown with the guidance we've given for the full year, our top end of the guidance now is $300 million, but the top end of our OpEx is $182 million instead of the $185 million that we guided to you earlier. So we are managing our operating expenses in line with our revenue guidance and revenue expectations that we have set for ourselves internally.

Okay. Thank you.

(Operator Instructions)

Atif Malik, Citi.

Satish, can you talk about the renewals coming up for next year? We have AMD in 1Q and ASF in 4Q and MTI in 3Q. Can you talk about the renewal for next year?

Hello, Atif. I think the only one we publicly talked about is AMD. We had announced in 2005 in 2010 when we had renewals. But the other customers, we had not publicly announced when their renewals would be. I think many of them, the term and the amounts have been -- we've been bound by confidentiality not to discuss those.

Got it. And then on the Qualcomm, I understand it's a complicated structure -- it's been made in security -- and then the CryptoManager. It looks like in June quarter, you had about $15 million in revenue for Qualcomm. So I just want to understand the one-time. And is it possible to size an annual opportunity going forward for Qualcomm?

Much as I'd like to, I can't. Again, like I mentioned, we have confidentiality agreements with our customers and contracts that are material that we file with the SEC. We are able to disclose some information there. But others that are in the normal course of business, we can't give much detail on that.

Okay, and then last question for Ron.

Ron, if you look at the midpoint of the guide and your full-year revenues are coming out a little bit below the midpoint of the $295 million-$305 million guidance you gave at the start of the year. And you talked about a 12% to 18% long-term revenue growth for the Company. Has anything changed to that thinking -- the long-term growth outside the PlayStation 3 gaining weakness?

No, not at all. As we described from the very beginning, there were some estimates that we had made for some of the older technology licensing and that paired off. We actually have done better with some of the deals, but it wasn't enough to make up for that.

We have a lot of contracts that we're discussing currently with customers. As we've said a few times, we really don't like to put guidance in a position that we need all of these to be successful. So there is quite a wide range, but I think we're really on track.

It's certainly, as I mentioned in the prepared remarks, it was slower than we had liked. But the team is completely focused. Everything's executing as we want. And we just need to have these few contracts that we're negotiating close.

Okay, thanks.

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

Thank you all for your continued interest and support. And we look forward to speaking with you again soon. Thank you.

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