Rambus Inc (RMBS) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Rambus first-quarter 2015 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Satish Rishi, Chief Financial Officer. Sir, you may begin.

Thank you Amanda, and welcome to the Rambus first-quarter 2015 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 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 23044511 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 PM Pacific time. In an effort to help provide greater clarity on our financials, we're 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 discussed in the documents we filed with the SEC including the 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may differ materially from our actual results, and we're 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 recon on our website at www.Rambus.com on the Investor Relations page under financial releases.

Now I will turn the call over to Ron to provide an overview of the quarter. Ron?

Thank you Satish, and good afternoon everyone. We turned in another solid quarter with revenue for Q1 coming in at $73 million, right in line with our guidance of $70 million to $75 million. Expenses were below the low end of what we'd expected as some hiring was slower than hoped, so pro forma operating income was $28 million, towards the top end of our guidance.

We were, of course, GAAP profitable, and cash generation was strong again this quarter as we finished with net cash -- that is, cash less our debt -- of $180 million, almost double what it was a year ago. Last year, our revenue profile was a bit confusing for investors as some deals that we expected to occur in the second half actually occurred in the first half. So our first half revenue exceeded that for the second half.

For this year, we expect the second half to show solid growth over the first half with the full year between $300 million and $315 million as we guided previously. Expenses will be moving around quarter on quarter as we staff for some programs and have one-time expenses for various takeouts. Satish will cover guidance in more detail, but suffice it to say that we are on track.

Customer momentum in our memory and serial links business continued this quarter with three more technology license design wins, including one with IBM that involved our high-performance memory interface technologies, as well as a broad patent license for memory and serial link technologies. For the technology license, we will develop and deliver IBM high-performance memory interfaces that will enhance their system and semiconductor offerings. Increasing traction in our technology licensing for memory 5s serial links, as well as our cryptography products that I will discuss in a moment, is encouraging and exactly what we expected.

We were also pleased that IBM decided to take a broad patent license, as they had previously been unlicensed. Clearly the strategy we embarked upon a couple of years ago to set fair rates and engage the industry collaboratively is working, even for companies that have enormous patent portfolios themselves. Of course, we always have to say that we may have to be more aggressive in the enforcement of RFP if the companies using our technology are unwilling to engage us fairly and collaboratively, but clearly this has not been the case so far.

Switching now to our security business, in Q1 we licensed our DPA countermeasures to MStar for their set-top box chipsets. We also signed a reseller agreement with Microsemi that will help expand our reach within the government and military sector, a sector that is increasingly interested in security, and one where we believe we can grow in both patent and technology licensing, as well as possibly full product solutions such as CryptoManager.

Speaking of which, we're making excellent progress in our CryptoManager program. Less than a year from introducing this platform with Qualcomm as our lead customer, we continue to progress in features and functionality that can ultimately revolutionize chipset manufacturing.

As we talk to more potential customers about this platform, however, it is also clear that the downstream advantages to key provisioning and feature management are needed. So we are enhancing this capability, and will be rolling out new revisions of CryptoManager in the future that can be used by, for instance, OEMs to securely provision services or secure transactions of any kind with their equipment. So we continue to be extremely excited about CryptoManager, both for what it can do for the semiconductor industry supply chain, but also the opportunities the platform has for OEMs.

One of the other highlights in Q1 was our presence at Mobile World Congress in Barcelona. For those of you who are unaware, Mobile World Congress has become the go-to show for anyone interested in general mobile ecosystems. In addition to customer and partner meetings, we held discussions with key media where we showcased our latest updates on our Lensless Smart Sensor or LSS program. We've had an overwhelmingly positive response for this technology, including renowned tech publication Tom's Hardware awarding it the best IoT innovation at MWC. This is in addition to the award we were given last year for best new innovation at MWC.

With the ultra miniature form factor and low-power design, the potential applications for our LSS technology are certainly vast. As a way to get the technology into the market and on a path to commercialization quickly, we have launched our Partners-in-Open-Development or POD program with inaugural design firm partners frog and ISDX. The goal of this program is to help define and determine key applications that could benefit from LSS technology.

Our partners in this program will have access to technology development kits, which will be shipping this quarter, built on a range of maker platforms including Arduino, Raspberry Pie and Intel Galileo boards. The kits include maker boards with our LSS test chip, apps, firmware, the software development kit, tutorials and documentation.

To kick this program off, we had a fun, interactive workshop at the MWC, where we had design thinkers assemble the ideas around possibilities that could change the world in various IoT applications. We're deep into this program now and are expecting good ideas to come through in the coming months.

Last year in June when we announced CryptoManager, we alluded to a new strategic memory architecture program but gave no details. Unfortunately I'm going to disappoint you again and not say much about this program other than it is on track, that we remain excited about the opportunity and that you will hear more about it in the summer.

And there's one more thing. The initiative has actually morphed into two strategic programs, one based largely on hardware and the other a combination of hardware and software. Both programs are designed to improve memory capacity and performance at both the server and rack levels with the data center, and the customers we have been talking to under NDA are very supportive, so we look forward to giving you more details in the summer.

I typically do not spend a lot of time talking about our LED lighting division, as it is a bit different from the other Core Business, but we had a fantastic milestone during the quarter and felt that we should share it. Our team in Brecksville, Ohio built and shipped their one millionth light guide.

I'm really proud of the team as they are executing well, serving their primary customer, Cooper Lighting, by churning out many novel designs for Cooper's WaveStream line of fixtures, as well as providing quick turn manufacturing of the most complicated of these designs. As Satish has mentioned previously, we are running the LED lighting business at cash breakeven, allowing the team to reinvest as they grow.

In summary, we again had a solid quarter, we have design win momentum across the businesses and progressed on our strategic programs, so we remain on track for 2015, and are well poised for a great 2016.

With that, I will turn the call over to Satish to give you a read on the financial results. Satish?

Thanks Ron.

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

As noted earlier, we will provide reconciliations to the most comparable GAAP measures on our website. In the case of any forward-looking projections or estimates containing non-GAAP information discussed on the 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.

Let me first review some of the financial highlights for the first quarter. As Ron mentioned, revenue for the first quarter was $72.9 million, within our guidance of $70 million to $75 million, a 1.3% sequential increase and a decrease of 6.9% year over year. Just a reminder that the revenue a year ago included a one-time payment for an option exercise in our med and cryptography research businesses.

For the current quarter, Riggen interface revenue was $54.7 million, cryptography research was $12.8 million, and our lighting and display technology revenue was $5.4 million. Quarter over quarter, these numbers represent increase by 1.3% and 3.2% for med and cryptography research respectively and a decrease of 3.6% for lighting and display technology. Year over year, the revenue decreased by 10.6% and 0.8% from med and cryptography research respectively and increased by 28.6% for lighting and display technology.

Due to slower than expected headcount addition in the quarter and the gain from sale of patents, cost of revenue plus operating expenses, or what I will refer to as total operating expenses for the quarter came in at $44.9 million, slightly below our guidance of $46 million to $49 million, relatively flat to the previous quarter and an increase of $1 million from the quarter a year ago.

Operating income for the quarter was $28 million, as compared to our guidance of $21 million to $29 million. On a sequential basis, this is an increase of 2.2% and a decrease of 18.6% year over year. The decrease year over year was driven primarily by the one-time revenue in Q1 of 2014 since we kept our total Op Ex relatively flat year-over-year. For the quarter, EBITDA at $31.2 million was 43% of revenue as compared to 43% in Q4 of 2014 and 48% in Q1 of 2014.

Interest and other expenses for the first quarter were $1.4 million, as compared to $1.4 million in Q4 of 2014 and $3.7 million in Q1 of 2014. As a reminder, the 5% coupon convert matured in June of 2014, causing the reduction in interest expense year over year. Using a flat rate of 36%, our pro forma operating taxes, net income for the quarter was $17 million, or $0.14 per share as compared to $16.7 million last quarter and $19.6 million in the quarter a year ago.

On the balance sheet, cash, defined as cash and cash equivalents and marketable securities, was $318 million, an increase of $18 million from the previous quarter. Net cash at the end of the quarter was $118 million, as compared to $93 million a year ago. During the quarter, we generated approximately $15 million in cash from operations.

Now I will provide pro forma guidance for the second quarter of 2015, as well as the full year. The guidance reflects a reasonable estimate, and actual results could differ materially from what I'm about to review. As we get in design wins and get upfront payments from our customers, we recognize revenue over the life of the project.

For our contract revenue, revenue is recognized on a percent of completion method or a proportionate performance method. Both methods rely on how much work has been expended, delivered to our customers and accepted by them. For the second quarter, we anticipated higher revenue for the quarter, but due to a pushout of deliverables, we may be unable to recognize revenue from a project in the second quarter, even though we've already received the cash and we have booked deferred revenue.

We still expect to recognize this revenue but in the second half of the year, so it is purely a timing issue. With that clarification, we expect revenue for the second quarter to be between $70 million and $74 million, relatively flat to Q1 of this year.

We expect total operating expenses for the quarter to be between $46 million and $49 million. We expect expenses in Q2 to be toward the high end of the guidance due to additional prototyping expenses and lower gains from the sale of patents. Operating expense is expected to be between $21 million and $28 million.

As Ron mentioned for the full year, we're keeping our guidance unchanged for revenue and operating expenses. Just as a reminder, for revenue our guidance is $300 million to $315 million, and for total operating expenses, it's $185 million to $190 million. For the year, we have multiple patents and solution licensing deals in the funnel, and while there is risk, we feel we have the ability and the momentum to manage to our plan.

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

(Operator Instructions)

Suji De Silva, Topeka.

Hi Ron, hi Satish. Nice job on the quarter there. Can you talk about the visibility you have in the deferred revenue into the back half to help with the uplift you need to hit the full-year guidance?

Sure, Suji.

If you look at our deferred revenue as of Q1 of 2014, it was about $400,000. In December of 2014, it was $4.1 million, and in March of 2015, it was $5.4 million. So we will book some more deferred revenue as we sign more contracts, and we will recognize some of that as it comes through. But despite going forward I would expect we will be recognized in the next 12 to 18 months.

Great.

And as we look at the full-year guidance, which you've kept for revenue between $300 million and $315 million, what would you say are the two or three biggest swing factors that would get you to the high end of that versus the low end?

We have a couple of ad licensing deals that we are working on. I think those will be some of the larger drivers. We have a couple of large companies we're talking to, and some of these take time, sometimes they take longer than we expect.

But I think those will be the largest ones, and then working on some additional projects which could have large upfront payment, but we will recognize revenue over time. I think a combination of those should get us to our revenue guidance.

Okay, the last question for Ron. Ron, can you talk about the new CryptoManager product that's targeted toward OEMs versus semiconductor supply chain companies, and how much that might increase your addressable market and whether that will come on faster or take longer to get those going? Some color there would be helpful.

Sure.

Maybe just by way of explanation to make sure everybody understands that, because if you're not familiar with it in detail, it's sometimes confusing. The system that we built around is a hardware root of trust that goes into a semiconductor device plus an infrastructure for essentially injecting keys into that device and enterprise-class software allows you to manage that remotely from wherever you want.

So our initial target and still our primary focus is semiconductor companies, because they have a very real need to secure their value chain. And also we want more of them looking at configuring their devices using cryptographic keys, which are reversible, and you can change it whenever you want as opposed to blowing fuses, which is irreversible.

Having said that, when you have a hardware root of trust inside any semiconductor device, it allows you to secure transactions or provision it at any point in time. And as we've been working this in a variety of different ways, we found not just in semi conductor companies but their customers, the OEMs, are finding it attractive.

So that ability to configure and do it securely and manage transactions is a really interesting market. So it absolutely dramatically increases our TAM.

Now, having said that, we are also very focused on the mobile space and a few different things. So in terms of the overall TAM, I can't give you the number now, Suji, but it's several times what we currently are focused on.

Great. Thanks.

Atif Malik, Citi.

Thanks for taking the question. This is Amanda Scarnati for Atif.

Just a question on how the slowing PC demand and the slowing emerging market smartphone demand affect the trajectory of new licensees or growth in 2015 and 2016?

This is Ron, Amanda.

It really doesn't affect us at all. One of the things that we like very much is we have a very balanced portfolio, a lot of our exposure, if you want to call it that, on the PC and the handset space is within the memory companies who sell DRAM, but our major contracts with them are fixed. So we believe we have very, very little if any exposure to those type of macroeconomic conditions.

So what might affect us is if they have slowing projects on the technology licensing side that could slow it over time. But quite candidly, we've seen just the opposite. We're having tremendous support, especially for serial links, and Kevin is actively chasing lots of hiring to staff up in selected programs because we're getting tremendous demand. So we're not seeing any of those effects, although Satish and I worry about everything, but that's just because that's normal for us.

Okay, thanks. And the second question is on the legacy if the PlayStation business, which if I'm remembering correctly, is still a little bit weak. How should we understand this business and new opportunities, license agreements offset a decline in the legacy business?

The PS3 we signaled last year that that would be coming to -- tapering down asymptotically. And we're seeing the royalties from PS3, typically Q1 would be the highest royalty revenues for us, but this time around Q4 was higher than Q1. So we have seen that business go away. And we're building the pipeline with the funnel, and the guidance we provided you includes basically very little of PS3 and it being replaced by other businesses that we're winning design wins from.

Great, thanks, and one final question if I can. Is there a specific number of new agreements that we should expect to see, or a ballpark range in order to hit that $300 million to $315 million number?

No. Because not all agreements are same dollar value, and not all are same effort either. So I think looking at number of agreements on our press release is probably an indication.

Okay. Thank you.

Thanks, Amanda.

Gary Mobley, Benchmark.

Hi. Thanks for taking my question. Wanted to start with a question for Satish. Could you run quickly through your Op Ex guide non-GAAP for 2Q and FY15?

The guidance was $46 million to $49 million, which is basically flat that we have for -- the same guidance we had for last quarter. The only indication I made was that we are expecting Q2 to be towards the higher end of the guidance because the last couple of quarters every time we've given guidance, we have come below the low end of the guidance.

So I don't want to start building a model based on that because I know that this quarter we do have some additional Prototyping expenses which will be one time. But they will take my expenses up for the quarter. But for my full year, my guidance remains unchanged.

Okay, did you buy back any stock in the quarter?

No, we did not. This is an opportunistic program, and stock has been holding fairly well, so we didn't feel the need to go and use up the cash. And as we mentioned, the first priority still is for M&A activity and then we are seeing a couple of good opportunities.

And I want to make sure that my business partners have the dry powder in case we decide to pull the trigger on some of them. So we might buy back stock, but we will do it opportunistically.

On that front, is it still difficult to find good M&A targets with realistic valuation expectations?

Yes, it is hard. That's why we haven't closed any, because we've gotten close to a few of them and walked away because the pricing expectations were unrealistic. And we've also mentioned we are looking for something that would enhance our current businesses and also be something that would be accretive in 12 to 24 month timeframe.

So we set a pretty tight box for ourselves. We do see opportunities. Our teams are pretty active, but good deals are few and far between.

Okay. You mentioned perhaps some patent license deals providing for nice second-half improvement in revenue. Are those specifically with some unsigned SoC licensees?

Does it have to do with renewals of existing SoC licensees, and as well, could you talk about your dual license arrangement with IBM? When was that deal specifically signed, and perhaps give us a sense of the linearity, if at all, that revenue recognition for that license deal, and that's it for me. Thank you.

So yes, on the patent licensing, it will be a combination of successful renewals, as well as signing unsigned customers. So we have programs ongoing, and we're in dialog with quite a few of these customers who we expect to close some of them in the Q3-Q4 timeframe.

With IBM, we signed the deal in Q1, and both the deals were signed simultaneously or within a short span of each other, both within the quarter. We may expect to see more of those combination deals where it won't be pure patent license deals because as we change our strategy, we want to be providing additional value to our customers and we want to have combination of technology licensing, but also be paid for our patents.

You will see more of these combinations in terms of more details in IBM. I can't provide any more details in terms of current linearity or revenue. We are bound by the confidentiality agreement, and we had very little leeway in what we could say. And the press release is all we could say.

Okay understood, thank you.

Gary, if I could just add something on because it also coupled to what Amanda was asking about. One of the theses we've for a while is as the cost to do SoC's goes up dramatically, both the teams, the DDA tools, the mask sets, more and more companies are going to look at outsourcing IP and not doing it all in-house. And I think that's in part what we're seeing.

And so coupling to Amanda's question, the more people feel tightness on our customers on their expenses and they want you to make-buy analysis, obviously we're doing a really good job on a variety of different technologies, especially now that people like us and want to work with us. They are not afraid of us as the first thought. And as they make those make-buy decisions, they can see that we are doing these various IP blocks and we can amortize it over many companies. And of course what we're doing -- we're getting paid really well for it, as well.

So it's a nice business for us, and I think it's good for customers. I think we're playing into a general trend on this aggregation of the design part of the semi conductor value chain, not just what has happened over the last 20 years on manufacturing. So that's the backdrop there.

Very helpful. Thank you.

Paul Coster, JPMorgan.

Thanks. Hi, can you hear me okay, Ron and Satish?

Yes we can, Paul.

Ron, 2015 is clearly a year of investment, and I think you've talked in the past about 2016 being something of a payback. I missed your opening remarks, but the good news is that some of the risk is mitigated by the fact you are being paid along the way.

However, you're also taking some risk here that you will get paid back. Can you talk to us a little bit about the way in which you evaluate all of the programs that are underway, how you make the go, no-go decisions along the way and at what point you will know whether or not the strategy has really worked out?

Sure. Maybe just preempting it, I think it is working because what I'm going to tell you is what we actually practice as a company at least since I've in here. So during the process, as we get the team together twice a year formally, informally every month is we go through what I would classify as a classical capital budgeting problem.

So we sit down, and it's a zero-base budget, and you say -- okay, let's go through each of the programs that you're going on and individually and collectively as a whole, is it going to earn its cost of capital? So each of the major business units have to do a valuation, so we do a sum of the parts evaluation. They do what you would call an equivalent to enterprise value to sales, an equivalent of a PE multiple and a BCF.

So these are ways that we actually look at it, and we just judge whether things are working. I think you and I in the past had some different opinions like on the LED side. I will just give you a real example.

We looked at on the LED side, and the enterprise value to sales and PE multiples that people were getting for some of the LED products that -- the equivalent we were investing in was disconnected from the free cash flow that we saw it was going to drive. So we sat down with the team and said -- look, this is a bubble. We're not investing into a bubble.

We're going to back out of this. We are going to go for what we can do and where we can make money with the selected customers. So we chose to disengage from the lamps part of the business, and that's exactly what we have done through the portfolio for the last three years.

What Satish has said a couple times and probably I have as well, is from 2013 to 2014, we spent the same amount of money roughly on R&D. However, what we spent it on was very, very different. So there was a set of programs that we just divested from and we invested into others.

So the way we measure it is to milestones. Are we achieving the milestones that we would think? Are we doing the right things?

We are. We don't call it out, but we're investing fairly substantially. We're not investing all of our money. It's a very profitable business, but we're investing for growth. If we don't, and this I hope investors see this, we have the intestinal fortitude to discontinue that.

In fact the way that we sit down with the team is we start with tell me why we should invest in this at all and not just drop it to the bottom line as retained earnings, because this is the multiple we get onto it. It's a pretty strict process, and Satish loves it, and that's how it works. Does that make sense?

Yes, it all makes sense. And I think with all that said, do you still have confidence you will see growth in 2016 and 2017?

Yes, and I think we're seeing it across the board. We have the strategic programs that we're trying to give you as much indication as we can, which is the feedback. Of course you have to believe is that the customers really like it. We're more excited now than we were a year ago.

And some of the just design win side of it that people were questioning whether we could do it; on the technology licensing, we are. In fact as I said, Kevin had a substantial pipeline and he has more, and he is chasing some selected resources, so that's good.

Same thing on Crypto firewall. CryptoManager we didn't expect to get quite so much interest from OEMs downstream, and we're starting to see that, as well. So everything is still about as we said.

Got it. And then finally you must be a little bit -- sorry --

I will add to that. As I mentioned in the past, a lot of programs, they take 12 to 18 to 24 months before they start generating revenue. So some of the programs are expecting to deliver in 2016 and 2017.

We have gotten good indication from a customer that this is what they want, and we are investing in those programs. But we will not see the revenue from that until we start shipping, whether it's a core or an IP to our customers, and that will be sometime in the 2016 timeframe. So there's a bit of a lag from our investment to the time our customer starts paying us.

There is no contractual obligation on that customer though?

We have an MOU with that customer, and we are working towards signing a contract.

Okay, got it. And then on the patent side -- last question - it always seems to take longer than expected, but it really does seem to be taking a long time to monetize some of the stuff through third parties outside of your control to a certain extent. Are you disappointed by that program?

I'm not sure I understand it. Can you say that again?

The patent licensing, what you set in motion through a third party, as well as through your own means, a strategy for monetizing some of the patents, and it seems to be taking a very long time.

Let me make sure I understand. The only third-party program we have is with Acacia. We transferred licenses -- I'm not sure the technical term, but essentially sold them the patents.

And that's some of the con [technical difficulties] expense that comes in periodically. I, don't know what the total has been, but it's been fairly significant. And it's not something that we plan on having, but it's going and they continue to move down that path.

We don't have any other third-party contracts, so maybe I'm confused. The rest of the patent licensing that we do, we're making actually a lot of progress. It does take time.

It takes time for companies -- it did take time for companies to be more comfortable with us that what we're doing is fair and equitable and that's what we're doing. They see everybody else doing it, so it's one of these classic conditional probability problems.

The probability that you take the license goes up when your competitors or other companies like you take the license, and that's where we are systematically going through. IBM is a little bit different, because they are a semiconductor company, but more of a system company, so it's a little bit longer and different. But in fact, we were successful.

They had not been previously a patent licensee, but they were a technology partner. We licensed them technology that was used in the Sony PlayStation before.

Okay. Thank you.

We continued that.

Thank you.

I'm showing no further questions. I would like to turn the call back to Ron Black, Chief Executive Officer, for closing remarks.

Thank you all for your continued interest and support. We will be hosting our annual meeting of shareholders this Thursday, April 23 at 9 AM Pacific time.

The meeting will be held online like we did last year. We look forward to sharing highlights with you and our shareholders then. Thank you.

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