Rambus Inc (RMBS) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Rambus Inc. Q4 2014 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. Sir, you may begin.

Thank you, operator and welcome to the Rambus fourth-quarter and full-year 2014 results conference call. I'm Satish Rishi, CFO. And on the call with me today is Dr. Ronald Black, our President and CEO.

The press release for the results that will be discussed here today have been filed with the SEC on Form 8-K. A replay of this call will be available for the next week at 855-859-2056. You can hear the replay by dialing the toll-free number and then entering ID number 64238473 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 our 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 numbers 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 discussed in the documents we filed with the SEC, including our 8-Ks, 10-Qs and 10-K's. 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 Rambus.com on the Investor Relations page under financial releases.

Now I'll turn the call over to Ron to provide an overview of the quarter and for the full year. Ron?

Thank you, Satish and good afternoon, everyone.

We were pleased with the fourth quarter achieving revenues of $72 million in line with our guidance. And pro forma operating income of $27 million at the higher end of our guidance.

For the full-year revenues were $297 million in line with the guidance we set out in January of 2014. And pro forma operating income was $119 million, a significant increase over 2013. And of course we were GAAP profitable again in this quarter and therefore the full-year, generating significant cash in the process.

As important as our very good financial performance was, the success we've had in continuing to transform the business through collaboration with customers is equally notable. Our launch of CryptoManager with Qualcomm was probably the highlight of the year in this respect, showing that Rambus can attract marquee customers with our semiconductor IP solutions.

If you attended in person or listened online to any of the investor conferences as we presented at in 2014, you will probably recall our theme of making our semiconductor IP more consumable. CryptoManager does just that as it includes a cryptographic processor core that is easily integrated into any chip combined with secure servers, or infrastructure as we often call it, to inject cryptographic keys into the processor, as well as enterprise class software to manage the infrastructure remotely. CryptoManager is truly an end-to-end solution that delivers our semiconductor IP in the most consumable manner possible, and it shows that Rambus is a thought leader in security.

On the memory side, we alluded to an architectural project and an MOU with a significant customer, as well as interest in this project by a second major customer. We should make it clear to all of the project is not custom, but broadly applicable to the industry.

While we are still in stealth mode on the project, I can tell you that we are again trying to make our semiconductor IP as consumable as possible and that we are trying to help the industry solve the enormous problems in the data center around latency and capacity for memory. This program is proceeding exceedingly well and we look forward to launching it later this year and delivering significant revenue in 2016.

Our investment in this area has spawned other new ideas that our team is extremely excited about, so I can also can also say that we have built a pipeline of new memory solutions, continuing to make us feel, as I have said in the past, that memory is again a sexy and great business.

One of the areas that has been slow for us is our licensing of core such as CryptoFirewall or the R+ variance for DDR Memory PHYs and serial links. The slower than hoped for engagement with customers was not unanticipated however, as we have taken a hiatus from core licensing for several years, which is one of the reasons that the pipeline was not full to replace the declining revenues from Sony PlayStation that created somewhat of a growth headwind for us in 2014.

With the hard work of the team over the last two years, however, we have created some very interesting cores and in the fourth quarter of 2014 we signed four new contracts, one for CryptoFirewall and three for our serial links, and have several more deals in progress in all of the various technologies. We believe that this trend will continue building a solid growing pipeline of core licensing and royalty revenue.

For those of you who might be visiting DesignCon, we'll be showcasing both our Memory and serial links technologies and providing a full-day technical training workshop covering various aspects of future system design, in conjunction with our partners Mobiveil and Northwest Logic. We'll also be presenting four papers at the conference. If you are interested in semiconductor design this is a must go to conference.

At CES there was a lot of talk about emerging video formats and super high definition content delivery. With the industry shifting to UHD and 4K formats the importance of content production continues to grow, particularly as the industry grapples with new distribution models and the new ways to interact with video libraries.

We are embracing this shift in our security technologies, both with our IP core solutions, as well as the fundamental countermeasure technologies that can enable an infrastructure that is more robust and more secure.

In fact, as we work more with the Secure Content Storage Association, or SCSA, we see a tremendous need for content protection and have written a security spec for this emerging format with the utmost security in mind. The SCSA just added 21 new members to the organization and is poised to define the future of content delivery and access.

Coming up in early March in Barcelona, Spain is the Mobile World Congress, or MWC, which is the premier wireless conference. If you recall, last year at the conference we launched our Lensless Smart Sensor, the smallest, lowest power, lowest-cost image sensor on the planet and won a Best in Show from Tom's Hardware. Something that, frankly, surprised us and that we are exceedingly proud of.

Last year's show sparked enormous interest especially with the press from prominent outlets such as the MIT Technology Review and Gizmondo, and we were inundated with interest from all segments of the industry from medical to automotive to industrial to consumer. Many of the parties requested us to provide a platform for the industry at large, and especially the maker community in which to innovate. At the risk of leaking too much, we'll be launching such a platform at this years MWC and hope to generate even more interest and, more importantly, some commercial relationships for the Lensless Smart Sensor this the year and next.

While we have not discussed it much in the past, we have been quietly working on our Resistive RAM technology or ReRAM, which is a higher speed, next-generation technology to replace or complement conventional flash memory. We have made significant progress over the last two years and recently signed an architectural license with Tezzaron, where they will be utilizing our ReRAM System IP, specs and validation suites to differentiate their chips, specifically for the government and Aerospace markets.

The functionality of ReRAM is ideally suited to improve the power and performance recurrence in these markets, but is also perfect for embedded storage memory devices where the low-power design integration cost and performance are all important factors. While it will take time for the industry to ramp ReRAM, it seems to be inevitable, making our unique and rich technology and patent portfolio particularly interesting over this strategic.

Looking back, we view 2014 as a year of continued transition and positioning ourselves for profitable growth. 2015 will be similar. As Satish will explain in more detail, we are anticipating modest revenue growth this year. Although when you discount the one-time revenues in 2014, the growth in 2015 is more significant, profitability and cash generation to continue to the to be extremely good. More importantly, as we continue to execute well and hopefully our customers do, as well, we are building a very significant pipeline of solutions so that 2016 should be a much more significant growth year for us.

As we have mentioned at several investor conferences, being a semiconductor IP provider means that we are an ingredient of an ingredient. And since semiconductors take a long time to develop and deliver to market, it is not unusual to spend one spend one to two years in IP development, then have our customers spend one to two years in SoC development for a total of a three to four-year cycle.

We started the transformation of Rambus in 2012, so mechanically 2016 should be kind of a magic year for us as we hit full stride with CryptoManager, the new memory architecture initiative, and new core licensees, not to mention more architecture and patent licenses for DPA and our memory solutions, as well as various monetization options for our binary pixel and Lensless Smart Sensor solutions.

Now let me turn to something different. As the Company has evolved and executed well on the new strategy, we have embarked on a search to expand the Board of Directors with an industry executive that really understands the data center. We were fortunate to find a longtime industry leader in Tom Fisher, who has cordially accepted our invitation to the Board.

Tom is currently SVP of Cloud Computing at Oracle and has held executive positions at Qualcomm, Success Factors, eBay and IBM among other companies. Tom's experience in technical and business insight has already been invaluable, especially in our memory architecture program, so we are thrilled to have him onboard.

Finally, before handing it off to Satish I'd like to touch on one additional topic, which is our cash position and use of cash. Many investors have asked us what our plans are regarding our substantial cast position, especially given our continued significant quarter-on-quarter cash generation.

On previous earnings calls and at the investor conferences we have repeatedly said that our clear first priority is acquisitions that are aligned with our core strategy and generate shareholder value. While this continues to be our preference, it is, unfortunately, true that we have yet to find opportunities that meet our criteria, although we continue to investigate and have good deal flow.

Given this situation the Board has authorized the buyback of up to 20 million shares of stock which we will tactically execute. To be clear, our preference is still for Company-building acquisitions, but we admit that given our significant cash position the best option for shareholders maybe to return it in the form of a stock buyback.

In summary then, 2014 was another good year for Rambus. Our strategy of engaging and collaborating with the industry is working and we continue to set a set a solid foundation for future profitable growth. Our continued execution and that of our customers should make 2015 another good year and 2016 perhaps an extremely good year.

With that I'll turn the call over to Satish to get a readout on the financial results. Satish?

Thanks, Ron. I'd like to remind everybody that on this call and for internal assessment, we use non-GAAP or pro forma numbers to discuss our operating results, as well as a forward-looking projection, which we believe are indicative of complete performance as they include certain cash events and exclude certain non-cash and discrete events, such as stock compensation, amortization, impairment, and restructuring charges, as we believe these are not indicators of long-term performance.

As noted earlier, we will provide reconciliations of most comparable GAAP measures on our website. In the case of any forward-looking projections or estimates containing non-GAAP information discussed on this call, reconciliation may not be available due to the unreasonable effort to make such a determination or provide such information as more fully described on our website.

The Company has made progress on our financial milestones and 2014 was the first year since 2010 when we were GAAP profitable for the full year. The team did a great job in managing expenses that allowed us to profitable growth year-over-year. Let me review some of the financial highlights for the fourth quarter and full year.

Revenue for the fourth quarter was $72 million, within our guidance of $70 million to $75 million, a 3.3% sequential increase and for the full year, revenue was $296.6 million, an increase of 9.2% year-over-year. Due to slower than expected headcount addition in the quarter and the gain of sale from patents, cost of revenue plus operating expenses, or what I will refer to as total operating expenses for the quarter, came in at $44.6 million, slightly below our guidance of $46 million to $49 million and a half million decrease from Q3.

For the full year, total operating expenses were $177.4 million, lower than the run rate we had forecast at the beginning of the year and a decrease of $2.6 million year-over-year. During the year we increased our headcount by approximately 58 people, of which close to half were in cryptography. We also reduced our reliance on outside consultants, as well as legal expenses year-over-year.

For the prior year, OpEx was $43.8 million and $180 million for Q4 and 2013, respectively. Operating income for the quarter was $27.4 million as compared to our guidance of $21 million to $29 million. For the full year income operating income was $119.2 million, as compared to $91.5 million for 2013. We're pleased to highlight that in the year, revenue grew 9.2% year-over-year, but our operating income grew 30.3% over the same period reflecting both leverage in our model, as well as our focus on delivering profitable growth.

For the full year, the sequential increase in revenue of 9.2% was driven by customers such as Qualcomm, Micron, Hynix, and Nanya. We expect to have more long-term predictable licensing royalties from these and other core licensing customers. For the full year, our memory and interface revenue was $226.4 million, cryptography research was $49.3 million, and our lighting and display technology revenue was $20.9 million.

These numbers represent a year-over-year sequential decrease of 2.4% for mid and increases of 51.2% and 202.9% for cryptography research and lighting and display technology, respectively. We made progress throughout the year and EBITDA margin for 2014 was 44.8%, as compared to 39.4% in 2013. Interest and other expenses for the fourth-quarter were $1.4 million and $9.7 million for 2014 respectively.

For the same period in 2013, interest and other expenses were $3.9 million and $13.8 million respectively. The reduction being attributable to the maturity of the 5% coupon convert that was fully paid off in June of 2014. Using a flat rate of 36% for pro forma taxes, net income for the quarter was $16.7 million and $70.1 million for the year.

Overall cash defined, as cash, cash equivalents and marketable securities was $300 million, an increase of $29 million from the previous quarter. Net cash at the end of the year was $162 million, as compared to $77 million a year ago. During the year we generated approximately $77 million in cash from operations.

Now I will provide pro forma guidance for the first quarter 2015, as well as for the full year. The guidance reflects our reasonable estimate and actual results could differ materially from what I'm about to review.

For the first quarter, we expect revenue to be between $70 million and $75 million, relatively flat to last quarter. We expect total operating expenses for the quarter to be between $46 million and $49 million. Q1 expenses are typically higher quarter-over-quarter due to payroll taxes and the accrual for variable compensation. Operating income for the quarter is expected to be between $21 million and $29 million.

2014 included approximately $20 million of royalties from one-time payments and the guidance for 2015 does not include any new one-time royalty payments. We have some maturity maturing contracts in 2015 and we are forecasting our best estimate for these renewals as revenue from new patent royalty agreements and new solution licensing. As Ron mentioned, we signed two new license agreements in memory and interface division last quarter, as well as the license and royalty agreement for anti-counterfeiting with a consumer electronics company.

We expect to sign more of these agreements and will share them with you in our quarterly calls. For the full year we expect revenue to be between $300 million and $315 million. On the investment side during 2014, we continued to make investments to support CryptoManager as well as new member initiatives primarily through headcount.

And in 2014 we are focused on execution of these and other initiatives and we plan to manage expenses to be between $185 million to $190 million, fairly close to the exit run rate of Q4, 2014. We expect pro forma operating margins to be within the range of 38% plus or minus 2% and pro forma EBITDA margin of 42% plus or minus 2%. As we continue to scale operations and leverage our business we expect cash from operations to continue to increase and expect cash generation between $80 million and $90 million for the year.

We are also at a point now where we are comfortable with the cash position and projected future cash generation. As Ron mentioned, our first priority has been and continues to be potential acquisitions that will supplement our growth. But in the past year we have not found any that met our strategic needs and stringent valuation metrics. We continue to evaluate acquisition options, but to provide us with more flexibility, our Board has authorized a buyback program that will allow us to buyback up to 20 million shares, allowing us to return capital back to our shareholders.

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

(Operator Instructions)

Suji De Silva, Topeka.

Congratulations on another strong year you had. In terms of the linearity of 2015 should it still be a front and versus backend loaded revenue ramp here? With the typical security seasonality?

We think second half will be more backend loaded. The linearity might be reversed this quarter because last year if you recall we had more one-time payments in the first half. Without making any assumptions of one-time payments, we expect the second half to be higher than the first half. In 2015.

Okay. And then can you talk about the gaming console business whether there's still a headwind into the first quarter? And what the year-over-year compare 2015 versus 2014 might be like for that business?

Yes. It's just a much smaller number. It's almost like we don't even talk about it so in the 2015 guidance we have given you, does include our best estimate for 2015. But we expect the revenue stream from PS3 to be tapering down.

It'll probably be [esoteric] as their sold to -- at lower prices in other parts of the world. But I haven't broken down what the impact of that is year-over-year but I'd say low single-digit to -- let's say between $10 million to $15 million what the impact is year-over-year.

A great. That helps. And lastly maybe for Ron the on demand -- (multiple speakers)

It's probably in the mid- to high-single digits.

Mid- to high-single digits? Last question for Ron perhaps can you talk about the DRAM business the R+ business and what has or hasn't happened to your expectations as far and what the setup is like for that technology to track going forward?

Sure. It's really hard to separate between the R+ from the Serial Link so the [security's] class technology and the DDR because a lot of times we are discussing this with customers on both.

As I reflected in the prepared remarks, we were somewhat on a hiatus from that for a series of reasons several years into the Company disengaged from that marketplace. Which quite candidly I think was a mistake. And when we started 2.5 years ago we concluded that this was a very attractive market and that we should get focused back on dealing with customers. It's a very natural evolution from the parts that we design to really build our semiconductor IP portfolio. And so it's a great unit of commerce to license. But it took time.

When you exit a market oftentimes, customers are a little bit concerned that you're going to do it again. So we had to earn their trust. And what happened over 2014 is we've built that trust. And as we said there was four new designs, which I was very pleasantly surprised about at the end of the year. And we have several more that are in the hopper that we're hoping to closing this quarter and the coming quarters.

So I think it's just taken time for us to get over the natural trepidation that customers have when you exit a business and then try to reenter it. And as I said that we've earned their trust and respect and that they're counting on us to deliver our great IP for them.

Great. Thanks, guys.

Gary Mobley, Benchmark.

Let me extend my congratulations as well to a strong finish to the year. In looking specifically at CRI that was a great growth numbers for the year, I think growing 50% year-over-year. Do you expect a CRI to continue to be the main growth engine for 2015?

We expect it to be growing in 2015 also. So I don't know what you mean by the only -- it won't be the only growth engine. We have other vectors as we look into the second half of the year. Where we expect to be growth to be coming and CRI a good contributor to that growth.

Okay. The second half growth in revenue, is that a function of maybe some milestone revenue recognition relating to CryptoManager? And can you give us an update on the development of CryptoManager? Are you ahead of schedule, behind schedule, or on target?

Everything continues on plan. We're always trying to make sure we keep up with the customers expeditions, but the team is executing and delivering to the milestone. So that's about on track.

With respect to with respect to the actual sequencing of the revenue and revenue recognition, that's probably part of it, but Satish, do you know specifically?

With some of the design wins that we've gotten, we have some backend revenue. We also have some expectations of signing newer contracts later in the year. So those are all of the items we've built into second-half growth compared to the first half. So we expect second have to be higher. As a Ron mentioned with the collaboration we have we are seeing more traction so when we get more NRE we can recognize more revenue in that period.

So we have milestones internally. And we did sign two towards the end of Q4, so not significant to have any impact in Q4, but expectation is our design teams and our sales team and engineers will win more designs as the year progresses. And as those NREs layer up, we see growth in the second half as compared to the first half of the year.

Okay. And wanted to ask some additional questions about Resistive RRAM. Congratulations on the Tezzaron agreement.

I'm wondering, whether or not the specific product license by Tezzaron had anything to do with the collaboration you announced with Freescale, dating back to 2013. And do you view licensing opportunity for Resistive RRAM as being something substantial? Or is it more important as an underpin for future license agreements as those renewals come up with memory licensees?

Gary, it's Ron. I think it's really both. We had very modest expectations of it because it typically takes a long takes a long time to roll it out. Flash technology with 2.5D or 3D continues to do rather well. On the other hand, the performance of Resistive RAM has been very good. We have a loss of customers that we're working with. We just haven't announced anything.

I don't expect that this is going to be a significant revenue generator in the short term, but the performance of it, especially as you tune it could be very interesting. Probably the biggest hurdle in terms of opening it up is getting the high temperature stability. So in consumer applications, I think the existing temperature ranges that we have are fine. But to really hit industrial and automotive grade we're going to have to continue to tweak -- or with our customer we are going to have to continue to tweak the bit cells to really ensure that they're stable.

So if we can get past that, I can see it becoming mainstream rather quickly. I think it is something that will be attractive. It seems to me that Resistive RAM is gaining interest compared with phase-change and spin-torque-transfer Magnetic RAM, but we'll have to wait and see how that goes.

Okay. That's it for me. Thanks, guys.

Sundeep Bajikar, Jefferies.

First, just to make sure I heard you correctly, that we should expect to see additional licensing activity for CryptoManager in the second half of 2015? If you could just confirm I heard that correctly?

And related to that, how should we think of the Secure Content opportunity with the CryptoManager backdrop? Any parallels you can draw on potential opportunities with respect to the model you have of CryptoManager would be great. And also any comment with respect to potential timing of the Secure Content opportunity. Thanks.

Sundeep, I'll take the first part of your question and Ron we'll talk about the Secure Element portion of it. So just to clarify, we didn't say that we see additional licensing in CryptoManager. I said we see additional licensing opportunities from different businesses. Could be from cryptography. Could be from MID could be from other areas. It's not just limited only to CryptoManager, per se. Ron, Secure Element?

With respect to CryptoManager, the applicability of the platform transcends almost everything. So we've had interest in it from customers that see it as a provisioning and key management system for the Internet of Things. It's not particularly set up to do anything for the Secure Content Storage Association, although key issuance centers are the type of thing that we can do. We have obviously defined the spec. We've been open with that for the Secure Content Storage Association. And I think it's more about how they're going to choose to deliver the content and whether you need to have something like CryptoManager for doing it remotely or realtime over the air as opposed to something that is done in a different mechanism.

So CryptoManager can be used in almost an infinite number of configurations. As we've said repeatedly our focus is really supporting the semiconductor industry today. And really trying to deliver an improved way to configure and document and secure the manufacturing supply chain. But it can be used in downstream applications for almost anything. So it's really it can be customized in any form that you want. And we are talking to all sorts of customers, but our primary interest today is in the mobile space and with the customers that define mobile chipsets.

Okay. Great. Thanks, Ron. Just one broader question. Beyond CryptoManager, how would you rank the other major growth drivers in 2015?

In 2015? I didn't break it down that way. Is there something --

Well, we have like the last you mentioned, record design wins on MID and towards the end of Q4. And we also had anti-counterfeiting which is on the cryptography research side. So we have opportunities in all of these areas and these are coming to fruition now that we've had about 12 months to 18 months to have an open dialogue with our customers. And to sit down and collaborate with them and new ideas are coming out and we are getting design wins.

Secondly, as we've mentioned on various calls we've had, with our new approach to our customers with a new sales team, new business dev team, we are able to have a dialogue with a much broader base of customers and these various sections within our customer base. So all that is proving -- we expect to get more design wins from those and design and those would provide a combination of either NRE -- so basically license revenue and/or some of them may have a license revenue as other royalties in the future. So there are growth areas -- so there's growth potential in multiple areas.

Okay. Great. That's it for me.

(Operator Instructions)

At this time I see no other questions in queue. I'd like to turn it back to Mr. Black for any closing remarks.

Thank you very much. Thank you all for your continued interest and support. We look forward to speaking with you again soon. Thank you.

Ladies and gentlemen. Thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.