Rambus Inc (RMBS) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Rambus Inc. third quarter 2015 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Satish Rishi, Chief Financial Officer. Sir, you may begin.

Thank you, Amanda, and welcome to the Rambus third quarter 2015 results conference call. I'm Satish Rishi, CFO. On the call today with me today is Dr. Ronald Black, our President and CEO. The press release with the results that will be discussed here today have been furnished to 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 55741229 when you hear the prompt.

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

I need to advise you that the discussion today will contain forward-looking statements regarding our financial guidance, prospects, our product strategy, demand for technologies, and the restructuring and plan of termination among other things. These statements are subject to risks and uncertainties that are discussed during this call and may be more fully discussed on 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 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. Ron?

Thanks, Satish, and good afternoon, everyone. We finished the quarter with revenue of $73.8 million, which was within the guidance we provided. We continue to manage expenses carefully and have again ended the quarter with expenses at the low end of what we expected, so pro forma net income came in at $17 million, which is close to the midpoint of our guidance.

While we had another decent quarter, I am disappointed to report that we have recently had two setbacks in our business. The first is that one of the larger, more complex licensing and broad partnership agreements we were negotiating in our security business has stalled, and at this point we are unlikely to see it close. As well, we had other smaller deals in the funnel throughout our business that did not come to fruition.

Given the changes we are seeing in the broader economic environment in the semiconductor industry particularly with consolidation and restructuring it is taking longer than anticipated to close deals. While this larger deal or other deals could still materialize, we are taking a cautious and conservative approach as we work to set guidance expectations into next year, which Satish will provide in a next few moments. Given where we are today however with these deals, we are revising our full-year guidance to $291 million to $297 million, meaning that for the fourth quarter we are expecting revenue in the range of $71 million to $77 million.

The second setback we have experienced is in our memory business with our server DIMM chipset. As you know, when new businesses are launched, issues can arise, and unfortunately we are working through a few technical issues that we've recently discovered with one of the chips which will cause us to miss a customer qualification window.

We are in the process of addressing the issues and are taking actions to rectify this as expeditiously as possible. To be clear, we still believe in this product and the strategy and even more so in the road map, but as investors undoubtedly know, working through such technical issues may take time. As such, sales of this new product next year will be lower than previously planned. We're taking this into consideration as we work to set guidance expectations into next year as well.

As both the larger licensing deal and the chipset were significant parts of our expected revenue growth, 2016 is unlikely to be the banner year that we had expected. We will provide more guidance for 2016 in January, but we are currently expected our revenue for next year to be flat year-over-year with potential incremental growth. Of course this estimate is preliminary, and we are working hard to improve things, but we wanted to give you this update at this time.

Given the outlook we are taking actions to streamline our expenses through a restructuring program. These actions are designed to allow us to maintain approximately 38% pro forma operating margin for next year on flat revenue. Restructuring will be across the organization and will involve expense reduction in headcount, contractors, and investments that we had made in preparation for more aggressive growth in 2016. In some cases, we are cutting contractors spend programs where the work is complete so we're not renewing those contracts. Satish will cover the financial elements of this restructuring later on the call.

On a more positive note, we are seeing momentum with our DPA countermeasures. We recently announced that Winbond has taken license to protect flash memory products against the increasingly common side channel attacks. We also announced that the SCSA has officially chosen our cryptography research group to manage and run the Key Issuance Center for VIDITY-enabled devices and services. The VIDITY solution allows consumers to easily and securely purchase, transfer, and view content across multiple devices, and we are managing the secure key provisioning.

We are also pushing forward with our CryptoManager program where we see significant opportunity as we scale beyond the current upstream opportunities with our lead customer, Qualcomm, to further downstream opportunities with in-field provisioning and overall feature management. Certain segments of the IOT market are right for this platform as more and more connected devices become part of our daily lives.

The overall vision for the CryptoManager platform is to create a shift in semiconductor design thinking. This platform can bring feature decisions closer to the end user, which ultimately saves money by eliminating costly silicon spins at the manufacturing level. With any sort of ecosystem shift, it takes time, but we are making progress, and look forward to sharing more in this program in the coming months.

Before turning the call over to Satish, I would like to make a comment about M&A. We continue to opportunistically pursue complementary businesses at fair valuations, but given our current situation we view M&A as less of a priority at this time. With our long-term commitment and belief in the success of our core business, in the short-term we will look to use our strong balance sheet and substantial cash generation to consider stock buybacks under our existing authority to repurchase up to 20 million shares. We view this as a potentially expeditious way to drive value for shareholders that remain committed to the Company.

I will close my portion by saying that we remain fully committed to the strategy and are extremely focused on execution and hitting our milestones. With that, I will turn it over to Satish to review the particulars for the quarter. Satish?

Thanks, Ron. I would 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 as stock-based comp, amortization, impairment, and restructuring charges, as we believe these are not indicative of long-term performance.

As noted, 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 this call, a reconciliation may not be available due to the unreasonable effort to make such a determination or provides such information as more fully described on our website.

Let me first review some of the financial highlights for the third quarter. As Ron mentioned, revenue for the third quarter was $73.8 million, within our guidance of $73 million to $78 million, a 1% increase over the second quarter and an increase of 6% year-over-year. Operating income was $27.5 million, an increase of 5% quarter-over-quarter and an increase of 11% from a year ago. Cash and cash equivalents were $363 million as compared to $348 million last quarter and $271 million a year ago.

Going into some more detail for the current quarter, our memory and interfaces division revenue was $55.4 million. Cryptography research division was $12.2 million, and our lighting and display technology revenue was $6.2 million. Quarter-over-quarter, these numbers represent an increase of $0.8 million and $0.4 million, for MID and CRD, respectively, and a decrease of $0.2 million for lighting and display technology. Year-over-year, revenue increased by $2.9 million, $1 million, and $0.2 million for MID, CRD, and LDP, respectively. The increases were merely due to patent license agreement renewals and payment from a one-time audit.

Cost of revenue plus operating expenses, or what I will refer to as total operating expenses, for the quarter came in at $46.3 million at the low end of our guidance of $46 million to $49 million, relatively flat to the previous quarter, and an increase of $1.2 million from a quarter ago. The increase was driven primarily by costs of goods sold and additional resources in engineering as well as increased spending on EDA tools. We ended the quarter with a headcount of 527 as compared to 513 in the previous quarter and 504 in the quarter a year ago.

Operating income for the quarter was $27.5 million, close to the midpoint guidance of $24 million to $32 million. On a sequential basis, this is an increase of 5% and an increase of 11% year-over-year. The increase quarter-over-quarter was driven primarily by the increase in patent revenue in Q3 of 2015 since we've kept our total operating expenses relatively flat over the year. The increased year-over-year too was driven primarily by high revenue in Q3 of 2015.

EBITDA margin, which we believe is a good measure of our business model, was 41% for the quarter as compared to 40% in Q2 of 2015 and 40% in Q3 of 2014. Interest and other expenses for the third quarter were $1 million as compared to $1.3 million in Q2 of 2015 and $1.5 million in Q4 of 2014. Using a flat rate of 36% of pro forma pretax, net income for the quarter was $17 million or $0.14 a share, as compared to $16 million last quarter and $14.8 million in the quarter a year ago.

Overall cash, defined as cash, cash equivalents, and [marketable] securities, was $363 million, an increase of $15 million from the previous quarter. Net cash at the end of the quarter was $225 million as compared to $210 million a quarter ago and $133 million a year ago. During the quarter, we generated approximately $15 million in cash from operations.

I also want to mention that during the quarter we released a valuation allowance against our deferred tax assets resulting in a tax benefit of $174 million which is reflected in the benefit from income taxes in the GAAP financials. It does not have an impact on our pro forma financials, but it is meaningful since we are not profitable on a GAAP basis, on a cumulative GAAP basis, for the last 12 quarters and expect future GAAP profitability.

Now I will provide pro forma guidance for the fourth quarter 2015 as well as for the full year. This guidance reflects our reasonable estimate, and our actual results could differ materially from what I'm about to review. As Ron mentioned, we did not close on the expected deals that we mentioned in the last earnings call. With that knowledge in hand, we're guiding the full-year to $291 million to $297 million, implying a fourth quarter revenue range of $71 million to $77 million.

As a part of an annual capital allocation process, we have reallocated spending, and we'll embark on a small restructuring to align the resources with our initiatives. With this we expect to take a charge of $3 million to $4 million in Q4 which would be related primarily to a reduction in headcount and programs. With these actions we expect to save approximately $2 million in the current quarter and $10 million in 2016 as compared to the current run rate.

Excluding this charge for Q4, in the pro forma basis, we expect operating expenses plus COGS to be lower, between $42 million of $45 million for the quarter. Operating income is expected to be between $26 million and $35 million. As we look into 2016, it is premature to provide discrete guidance, but as Ron mentioned, both the partnership deal and the chipset were significant parts of our expected revenue growth. As such, it is unlikely that 2016 will be the banner year that we expected. We expect revenue in 2016 to be relatively flat as compared to 2015 with potential for some incremental growth.

We will manage our expenses to meet our operating target of approximately 38% for the year and expect to keep our expenses flat year-over-year. In 2016, we expect to continue to be cash flow positive, similar to 2015, and believe that a share buyback is a potentially expeditious way to drive value for shareholders, and is a good use of our cash. We will provide you additional guidance during the next earnings call after we have completed our annual planning process. With that, we're ready to open the lines for Q&A. Operator?

Thank you.

(Operator Instructions)

Our first question comes from Suji De Silva with Topeka. Your line is open

A couple questions here. First of all, on the memory chip product, how fundamental is the issue there? Is there a [prior] re-spin? Does it affect all the product classes you have, or is it isolated to one of two of them?

Suji, thanks. It's Ron. It's still preliminary. At this point, we just found out about it. We're going through it in some detail. Typically, these are fixed with re-spins. The issue as we discussed before at the Analyst Day and the previous earnings calls we really need to hit the customer windows. When we look at this, we just are concerned that we're not going to hit that window. As a result, we just can't project the revenue that we had thought last year.

Okay. Great, thanks, Ron. Then you talked about some of the deals that you'd required it for the fourth quarter. Can you talk about what areas those deals are in, to give a sense of what you're looking for to meet to guidance?

Sure. They were really across the board. There were a couple of really large deals on the security side. One of them that we were close to moving, it stalled. They were really across the business.

What we are seeing and we tried to reflect in the prepared remarks is it is just slower than it was before. I know there is a lot of change in the semiconductor industry. There's lots of consolidation. People are all pulling on those oars to get deals done, and we're just not seeing the cycles to be able to see them get closed, which is why we wanted to communicate as soon it was clear that this was indeed the case.

Okay. Lastly about the restructuring program you announced here, how much additional room is there in the OpEx or headcount from this point? Are there any particular programs, some of the newer opportunities that are not going to be funded as much with this, or are those still all in the play? Thanks.

Let me answer that and try to be rather precise as we go through it. In the emerging solutions division, the more incubated sides of it, we had completed and launched the smart data acceleration platform. We did this a couple of weeks ago at the Analyst Day, and we used it as a development platform. That was completed. That phase of it was completed when we launched it, and that was one of the affected programs that we concluded that we should really hold at this point. That quite candidly was independent of the restructuring. That was the decision we took previously to say let's hold it where it's at and see, especially as people start to think about FPGA acceleration more.

We are very pleased with the program. We are excited by it. We think it's a way cool thought leadership product, but it's not clear where we need to take that into the future.

We have pared back somewhat on the binary pixel program as well. We are still excited about it, but it does not have a lot of customer traction. That was a very modest investment candidly though.

The rest of the reductions were across the business. It was not program specific. It was more where we had duplication of resource over the last year in anticipating more significant growth. We just did not think it was prudent in the best interest of shareholders to continue that investment, waiting, knowing that next year is likely to be more challenging, or the growth is going to come in a manner that is different the we had thought.

There is nothing of the strategic programs that have been terminated. As we said, we still believe in them. It's just very unfortunate where we ended up with the slower deals and this bug.

Thanks for that detail, Ron. I'll jump back into queue.

Thank you. Our next question comes from Gary Mobley of Benchmark. Your line is open.

Hi, guys. Thanks for taking my question. This issue that you discovered for the memory chipset business or the emergence of that business, has it caused you to reconsider whether or not it makes sense to be a chip company? Are we now looking for a window for that business to eventually ramp in the 2017 timeframe?

Gary, it's Ron. No, we haven't changed our opinion about it. We're more optimistic than ever, but there is a lot of opportunity.

Ron, I think we lost you.

That means by definition it would be more into 2017. The road map we've been sharing with selected customers and they are very attractive by it. They think it's fantastic. It's reassuring that we have something. It's just not in the timeframe that we had wanted.

Okay. You talked about a delay in the signing of a significant deal on the security side of the business. I'm assuming perhaps it might have to do with an additional customer for CryptoManager? Correct me if I'm wrong there, and did you say that the deal that was in the queue is no longer likely to close?

Yes, that was precisely the word. We did not describe where was. It was a broader deal partnership, certainly involved a lot of the security technology, but it was confidential what we were negotiating. It may come back, but at this point we just do not see the likelihood that it will come back. In setting expectations for this quarter and for the fourth quarter and for next year, we just wanted to be more prudent.

What was the hesitation for that particular product with the customer?

I'm not sure I understand the question. What was their particular concern?

That's right.

I'm not sure I can answer that precisely. If you want an answer, then you should probably go on their side. They just preferred to wait, and reconsider later on.

Okay.

It is very hard, and we still are in contact with all of these customers. It's not like it completely goes away, but if you do not see that it's within the reasonable forecast period and there's no driving force for them. Again, just to be prudent you have to assume that that's not going to be the case.

Okay.

Gary, we don't disclose the customers we're negotiating with, so I think it wouldn't be prudent to talk about them.

I understand that. The root of my question is just trying to understand whether or not CryptoManager has legs beyond Qualcomm.

We still have a lot of interest, so we believe it.

Okay.

We've got to close the deals.

The delay or the deferred closure of some licensing deals outside of the security side of the business, I'm wondering if any of those were patent licenses? If there is some delay in closing some of those patent licenses, might we see another round of litigation as a result?

They were some patent licenses. Clearly, we've said in the past that our preference is not to litigate, although that could always be a potential outcome. What we've tried to do is establish market rates, communicate very fairly and openly with all of the customers, and a variety of these, quite candidly, it was much more of an internal focus where they just cannot get things done quickly enough because they have their own problems and challenges on restructurings and M&A. It is just more of cycles, but if somebody is recalcitrant, we will obviously consider that.

Okay. Last question for me. It's just a housekeeping question. Satish, what was your fourth quarter non-GAAP OpEx guide?

Fourth quarter non-GAAP OpEx and COGS guidance was between $42 million and $45 million.

Okay. Thank you, guys.

Down from the previous quarter. Down from Q3. Thanks, Gary.

Thank you. Our next question comes from Mark Lipacis of Jefferies. Your line is open.

Hi. Thanks for taking my questions. In the press release, you mentioned ST and NVIDIA being lower. Are those permanently lower, or is there a chance for those guys to come back up to previous levels?

Hi, Mark. In the near term, they will be lower. I think that's how the deal was structured, where the payments were not linear.

Okay. Fair enough. How should we think about the cryptography revenues looking past the next quarter into 2016? Should we think about that as being a growth business in 2016, or should we think about that being flattish to 2015?

Mark, we do not disclose revenue by the different initiatives within CRD. Within CRD, we have crypto, firewall, and we have DPA, patent licensing, and we have CryptoManager. We don't break it down. We believe overall the security business is something that we believe has growth potential, and CryptoManager is something that we are quite excited about and expect to see future signings in CryptoManager.

Fair enough. Last question for me, Satish. How should we think about the cash flow implications with restructuring going forward? I understand there is a $3 million to $4 million charge this quarter.

Then I think I heard you to say $2 million lower of positive impact on OpEx from that in the December quarter, and then you said, I think you said, $10 million of savings next year. Does that just imply an additional $500,000 saving in the March quarter, and then we're straight line from there? Are there any other restructuring charges that you would expect to hit past the December quarter? That's it for me. Thank you.

Yes, Mark. We expect all of the charges be taken this quarter. I think the cash charges will be between $3 million and $4 million. The best way to model this would be to model flat expenses to 2015. The $10 million savings for 2016 is based on the current run rate we had in Q3, and the $2 million savings for Q4 is also based on the run rate that we had in Q3, hence the reduction in the guidance on the OpEx. For next quarter, I think the best way to look at it would be to quarterize the flat expenses 2015 to 2016.

Fair enough. Do you expect anymore restructuring charges, or just the $3 million to $4 million in the December quarter, and that's it?

That's it.

Thank you.

Thanks.

Thank you. Our next question comes from Atif Malik with Citigroup. Your line is open.

Hi, guys. Thanks for taking my question. Ron, when you say security deals are stalled, I just want to understand. Is that because your customer itself is going through restructuring, or there is no interest in your product?

Sorry. My mike wasn't on. There is still interest, but again it's hard to tell from the customers on what their exact decision-making process is. They certainly have their own actions and things that they are dealing with. I can't really say.

We see a tremendous interest across the board for the product. We were hoping that this deal was going to close and be more significant and timely to contribute to this quarter and more substantially next year, but it's not.

Okay. Then my question on the Cross Point technology, Micron-Intel has launched their product. You guys have tremendous IT on that side with Unity Semiconductor. My question is are the existing memory deals with Micron already factoring in the use of Cross Point IP from Rambus?

Yes, all of the deals that we have with the existing memory providers is a broad license to our patents, so that would include them. For non-DRAM or new licensees, that would not be included.

Okay. Then one last one on restructuring, are you guys considering getting out of the lighting business or anything like that, or is it just trends across the board?

No, the lighting business is not affected by this at all. They've made tremendous progress over the last couple of years, growing rather significantly. We don't expect to have significant growth about it, but we have been rather transparent on these calls, and also with the team. They know that this is not core to the rest of it or synergistic. It's in adjacent business, and they know what that means. At the right time, it would be an excellent candidate for divestiture.

Okay. Thanks.

Thank you. Our next question comes from Paul Coster of JPMorgan. Your line is open.

Yes. I'm sorry to beat a dead horse here, but just on, first of all, the contracts side, on the security side of the problem, it doesn't sound like this has been the competitive loss. Can you confirm that? Nor a price based loss.

It was not.

Okay, got it. Then on the memory chip side, how far had you got to commercial volumes on this? I guess it still feels like it's been pretty late in the day to discover the problem. What in retrospect do you think you might've done wrong at Rambus?

We're in the middle of the analysis on lessons learned right now, but when you have these type of problems there is obviously something in our verification process or modeling early on. That's where we're looking, and we're going to dig deeply. It is really unfortunate that this happen.

As I said, after being in the semiconductor industry for 20 years, this is just what happens. We had a compressed schedule. The team executed really well. It booted Windows right away. Everything was looking very good, and we got caught on something very recently where it was not operating correctly. We just had to go back and fix it.

Okay, got it, Ron. Then to what extent had you invested in volume capacity already?

We have a foundry of course that's running it, but there is no prepaid money associated with this, so there is really no capacity commitments at any point.

Got it. Thank you.

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 look forward to sharing more details on our business at the next update. 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 great day.