Rambus Inc (RMBS) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Rambus first-quarter 2016 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. Now I would like to turn the call to Mr. Satish Rishi, Chief Financial Officer. Please go ahead.

Thank you, Carmen, and welcome to the Rambus first-quarter 2016 results conference call. I'm Satish Rishi, CFO. On the call will be today Dr. Ron Black, our President and CEO, as well as Dr. Martin Scott, GM of Security Division will also be available for Q&A. The press release for the results that will be discussed here today have been furnished to the FCC 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 89975569 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 provide greater clarity on our financials we are using both GAAP and non-GAAP pro forma format in the 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, product strategies, timing of expected product launches, demand for existing and newly acquired technologies, the potential benefits of acquisitions and the growth opportunities of the various markets we serve, among other things. These statements are subject to risks and uncertainties that are discussed during this call and may be more fully described in the documents we filed with the SEC, including our 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may differ materially from our actual results and we are under no obligation to update these statements.

Further, as mentioned we will discuss non-GAAP financial results today and have posted on our website reconciliations of these non-GAAP financials to the most directly comparable GAAP measures. You can find a copy of our earning release and the reconciliation on our website at rambus.com on the Investor Relations page under the 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 $72.7 million, close to the midpoint of the guidance we provided of $71 million to $75 million. From an operating income perspective, we ended the quarter with $23.7 million and net income of $14.6 million, which was at the high end of what we guided, $10 million to $15 million. We continued to generate cash and have a healthy cash balance of $226 million.

The first quarter was an important one in our ongoing strategy of extending semiconductor IP to the products and services they enable. On our last call we announced we had just acquired Smart Card Software Ltd, which was comprised of two divisions, Bell ID and Ecebs. We believe these companies will bolster our presence in the security services arena. The omni-accretive nature of these acquisitions, both Bell ID and Ecebs, reinforce our direction and the opportunity to provide infield services with a secure foundation. We see our security division, which includes Cryptography Research and now Bell ID and Ecebs, as the cornerstone to providing security to enable and improve identity services throughout the ecosystem.

Bell ID is a recognized leader in mobile payments. The technologies they created include a full suite of mobile payment solutions that support cloud-based services using host card emulation, EMVCo tokenization, trusted service management for SIM-based projects and embedded secure element solutions. With Bell ID we can provide banks, governments, and enterprises with the ability to issue and manage credentials on numerous connected devices. We see these mobile payment platforms as having opportunity for world-wide deployment in a secure manner. In fact shortly after the acquisition we announced that Bell ID will support international issuing banks' payment schemes and processors to integrate with Android Pay along with other OEM mobile payment platforms.

On the smart ticketing side, Ecebs is a leader of supplying smart ticketing systems to the UK transport markets and has developed software to meet the growing demand for cloud-based secure ticketing schemes. This platform too can open up the lower cost and future enhanced smart ticketing to wider market. Both of the Bell ID and Ecebs platforms enhance our security division with a portfolio of products and services that provide a broad range of secure provisioning and management solutions.

At the core of what we're working to do is provide chip to cloud to client devices solutions with the ultimate security in configuration billing. To that end, at Mobile World Congress in February we outlined our strategy for enabling downstream or infield provisioning capabilities based on our CryptoManager platform.

This platform allows OEMs and device manufacturers to securely provision features after the consumer point-of-sale, opening up great downstream revenue opportunities. We're enabling what we refer to as features as a service, or FAS, for mobile and IoT applications, which provides a possible new revenue stream with new customers in the value chain as well as better insight into what end consumers, OEMs and service providers are really looking for.

To make a finer point, we recently collaborated with the Global Semiconductor Association to explore the current state of the semiconductor industry through a white paper that outlines different approaches to driving growth in the overall industry. We all acknowledge that the semiconductor industry is facing changes and some challenges, including rising development costs, shrinking margins, slowing growth, and rapid consolidation. Consolidations is a natural and logical step for maturing markets so the industry overall is doing the right thing to improve profitability, at least in the short term.

The key question is whether consolidation can also spur growth. Frankly, the excitement, or possibly hype, about IoT is yet to produce the semiconductor growth that we have experienced in past phases of the industry, which may simply be because the part of the value chain that is benefiting is closer to the data and services that such data provide. We believe that more substantial growth may be achieved through collaborative engagements and innovative, or even disruptive, business models that allow the industry to tap into those parts the value chain where there may be better monetization options, specifically, turning data into information and providing services based on this information.

With the semiconductor market clearly at the center of multiple industries, from medical to automotive to industrial to consumer, innovative or disruptive business models may allow companies to more directly benefit from the inherent failure of the products that semiconductors enable and not just what they are sold for in the current customer model. Frankly speaking, that is exactly what we are trying to do with CryptoManager as a platform for services provided by applications such as mobile payment, smart ticketing, and content production, improved consumer experience in security with revenue sharing back to our customers and partners.

Continuing on the security side, we signed a couple of new deals during the quarter, including an interesting new engagement with the Athena Group, a leading provider of security, cryptography, anti-tamper and signal processing IP cores to many of the world's largest semiconductor companies, defense contractors and OEMs. The Athena Group now has the ability to license our DPA counter measure innovations, essentially becoming a reseller for our technologies.

We've also just released our latest DPA workstation, Version 8. This is the next generation of our side channel analysis platform that tests and analyses cryptographic chips to determine vulnerabilities. Through this tool, our customers have a quick and easy way to identify potential security flaws in SoCs, making it a valued tool for running security chip vendors, product companies, testing labs, and government organizations to evaluate and certify their secure semiconductors.

Moving now to our memory and interfaces division, we are making good progress on our server DIMM chip set, where we are working to through the various final phases of qualifications for both Broadwell and Skylake platforms. We are moving into the production phase for this product and are continuing to test and evaluate the parts to be fully ready to ship to customers in the coming months.

For our technology licensing part of the business, we are seeing good traction in both our SerDes and memory PHY solutions to meet the demands of the data-heavy enterprise and server markets. These markets are in constant need for bandwidth to manage huge amounts of data while being cognizant of the associated power. We have several design projects underway and we expect to be delivering our designs and solutions to our tier-one customers shortly.

Within our emerging solutions division, we are excited about the reaction we are receiving from our smart data acceleration, or SDA, research program. You'll recall we introduced this development platform last year and have been working with the Los Alamos National Lab on an evaluation of the platform. We are happy to report that we now have additional customer partner evaluations underway that while we can't specifically disclose them yet, let's suffice it to say that we are very encouraged by the reaction we are receiving to our NDA discussions.

Another exciting innovation area we showcased at Mobile World Congress was our Lensless Smart Censor technology. We've spoken at length about LSS and the ability to capture images without the bulk or expense of a lens and reconstruct those images uses algorithms. What we demonstrated at this year's MWC was a bit different, however, our thermal imaging capabilities using this technology as the technology works in both the optical and infrared spectrum, of course with different diffraction gradings and capture technologies.

Taking the LSS technology to the infrared regime allows us to dramatically broaden the applicability to even more IoT applications, including automotive passenger detection and smart home or smart building presence detection, in addition to the optical applications of virtual and augmented eye reality tracking. We're making progress on the path in moving this technology closer to commercialization.

To reiterate, we see all of our businesses as having opportunity to grow and expand with enhanced engagement models. By adding in accretive businesses and continuing to innovate in our core areas, we believe we're well positioned to connect the value of our products and solutions to the services they enable which, in turn, provide further opportunities for growth. With that, I'll turn the call over Satish to give more detail on the quarter.

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. We believe these numbers are indicative of complete performance since they exclude certain discrete events such as stock-based compensation, amortization, impairment and restructuring charges as we believe these are not indicative 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 in this call, a reconciliation may not be available due the unreasonable effort to make such a determination or provide such information as more fully described on our website.

Let me first view some of the financial highlights for the quarter. As Ron mentioned, revenue for the first quarter was $72.7 million, close to the midpoint of our guidance of $71 million to $75 million, a 5% decrease over the fourth quarter and flat from a year ago. Operating income for the quarter was $23.7 million, at the high end of our guidance of $16 million to $24 million, a decrease of 29% over quarter over quarter and a decrease of 15% from a year ago. Cash and cash equivalents were $226 million as compared to $288 million at the end of the last quarter and $318 million a year ago.

Going into some more detail, for the first quarter our memory and interface revenue was $53.6 million, security was $14.1 million and our lighting and (inaudible) technology revenue was $5 million. Quarter over quarter, these numbers represent a decrease of 7% and 15% for MID and LVT and an increase of 4% for our security division. Year over year, MID revenue decreased by 2%, our security division increased by 10% in the lighting business was down by 7%. In our lighting division, a major customers is seeing increased competition and a market shift to less differentiated solutions along with a market adjustment of inventory levels, thus impacting our revenue for the time being.

As Ron mentioned, during the quarter we completed the acquisition of Smart Card Software, which (technical difficulty) two business, units Bell ID and Ecebs. Since both of these are software customization companies, upon acquisition not all of their existing revenue is reflected in our consolidated revenue number.

Under US accounting rules, we have to determine which signed contracts record minimal or no further effort. For these contracts we can calculate the fair value of their future cash flows and record them as an intangible asset on our balance sheet as favorable contracts. When the customers pay us we are able to recognize the cash but no revenue and reduce the intangible asset by the corresponding amount of cash received.

As we completed our purchase accounting, we have recorded approximately $8 million as favorable contracts, which implies that we will not be recognizing this $8 million as revenue (technical difficulty) businesses we acquired contract on multiple elements with their customers. That is, they sell licenses to the custom software, they provide personal services for the customization, and they provide service and maintenance contracts.

Once we signed a contract, we provide the intervening services, deliver and receive acceptance from the customer before we can recognize the license revenue. The time between signing a customer contract and delivery is typically six months, so the new contracts we signed post-acquisition will generate license revenue along that timeline.

Cost of revenue plus operating expenses, or what I'll refer to as total operating expenses, for the quarter came in at $49 million, below our guidance of $51 million to $55 million, a 13% increase over the previous quarter and an increase of 9% from the same quarter a year ago. The quarterly increase was primarily due to addition of about 126 employees for the acquisition of Smart Card Software as well as an increase of payroll and social security taxes that are typical for the first quarter of the year.

Year over year, the increase was due to the addtional headcount that resulted from the acquisition. In terms of headcount, we enter the quarter with a headcount of 626 employees as compared to 494 in the previous quarter and 500 a year ago.

Operating income for the quarter was $23.7 million, close to the high end of our guidance of $16 million to $24 million. On a sequential bases, this is a decrease of 29% and a decrease of 15% year over year. The decrease quarter over quarter was driven by lower revenue and a combination of higher headcount expenses through the acquisition as well as higher payroll and social security taxes which, as I mentioned, are typical of the first quarter. The decrease year over year was driven primarily by higher headcount related expenses.

Interest and other expenses for the first quarter were $1.2 million as compared to $1.1 million in Q4 of 2015 -- Q4 of 2016 and $1.4 million in Q1 of 2015. Using a flat rate of 35% or pro forma pretax income, net income for the quarter was $14.6 million, or $0.13 a share, as compared to $20.7 million last quarter and $17 million in the quarter a year ago.

Overall cash, defined as cash, cash equivalents and marketable securities, was $226 million, a decrease of $62 million from the previous quarter. We made an initial payment of $93 million for the acquisition and expect to pay an additional [$12 million] for working capital adjustments plus the cash we acquired from in the entities in the current quarter in Q2. So during the quarter we generated approximately $16 million in cash from operations.

Before I turn to guidance, just a couple of points on the acquisition that we announced. The final purchase price for the acquisition will be $105 million and it will be reflected on the balance sheet as follows: cash and cash equivalents acquired, $12 million; intangibles, $60 million (corrected by company after the call); goodwill, $47 million; deferred tax liability, negative [$15] million; other assets and liabilities, $1 million.

Now I will provide pro forma guidance for the second quarter of 2016. This guidance reflects our reasonable estimate and our actual results could differ materially from what I'm about to review. For the second quarter we expect revenue to be between $72 million and $77 million and total operating expenses, including COGS, to be between $49 million and $52 million. We expect operating income to be between $20 million and $28 million.

It is too early to make any change to our initial revenue guidance for the year of $310 million to $325 million. Once we get to midyear we can evaluate and provide any changes to the guidance. I do want to reiterate that our guidance is not without risk and does take into account the signing of new customers across our various businesses.

We are now ready to open the lines for Q&A. Operator, can you please open the lines?

Thank you.

(Operator Instructions)

Gary Mobley, Benchmark.

Thanks for taking my questions and good afternoon. Looking at your FY16 revenue guide and taking into consideration some of the comments that you made on your last earnings call with respect to the valuation multiples you paid for SCS, we can assume, and correct me if I'm wrong, that what is built into that FY16 revenue guide is the assumption of about roughly $20 million in revenue from SCS?

It's a little more than that, but yes, approximately between $20 million and $25 million is we built in.

Okay, and you are saying that because of accounting rules, you are taking roughly an $8 million revenue haircut in FY16. So just in shoring up the accounting issues you should see roughly that delta increase in 2017 revenue for SCS?

The $8 million is not just for the fiscal year because some of these contracts, they go out for a couple of years in terms of, say, the service and maintenance contracts as well as the licensing arrangements. Some of them are three years, some of them are five years. The $8 million is really a present value of future contracts but the overall value is much higher. But because it extends out a couple of years, that's why we have a fair value but the present value of those cash flow is about $8 million.

Okay. Let me ask it in a different way. Looking at your second quarter revenue guide, how much would you have been able to recognize from SCS, or how much more perhaps asked differently, than what you are assuming if you didn't have to take this accounting haircut on the revenue recognition?

Firstly, Gary, I know we'll be asked this question multiple times. We will not be breaking out the revenue for SCS. (Technical difficulty) I think at the initial stages we did talk about it but because this is not a different division. We don't want to get into a situation where we will start disclosing as a separate reporting unit because it is part of the security division that Martin runs and there will be collaboration between the CRI team as well as the Bell ID team to provide combined products. So over time it'll become very, very difficult to say what's coming from where. We don't want to start off by providing guidance.

What I can tell you is the amount of cash we will collect is much higher than the revenue we will book and 2016 and 2017, just by nature of how the accounting works. I think you've probably seen similar acquisitions on software and that becomes one of the issues being how do you recognize revenue for licenses where a lot of work has already been performed? So you do lose revenue, unfortunately, but that's just the nature of how the accounting works.

Gary, it's Ron. Let me just add a bit more to round this out because it will be discussed quite frequently. The favorable contracts is it the one piece as Satish is describing over the series of years. But also as Martin and team close new deals on our side with US GAAP, some of those will be recognized revenue in the future as well. I think this is going to be hard to piece together other than just looking at it in the totality and whether the business is growing. Quite candidly, we're already working on joint things between, for instance, CryptoManager and the payment platforms with real substantive customers.

It will be absolutely impossible to peel this out. It's really one business unit, one team and what I think is so good is that we have a significant demand for the products. This is a very interesting part compared with the historical semiconductor industry which as we know, we've discussed has had a lot growth challenges. This has a lot of upside opportunity. But bridging to each one of these things every time will just be problematic.

Okay. I appreciate all the color and I appreciate the fact that you have to generate some turns business in the quarter to hit your Q2 revenue guide. Would you say the turns requirement is higher than normal or lower than normal? If I recall in the past, you don't typically give such a hedged statement.

I think it's probably similar to what's been in the past. I wouldn't say it's more or less one way or another. The way we provide our guidance is we have an internal forecast that rolls up and then we look at where some of the risks are, what the potential downside might be and also where the opportunities are what the potential upside would be and that's how we set off our range we would like to give. We want to provide a range that we don't miss.

Okay. Last question for me and I'll jump in the queue. As it relates to your server dual in-line memory module chip set, you mentioned that you expect to ship product in a couple of months. But should we really still view this product set in the revenue potential really more of a 2017 event? Or has that timeframe moved up?

The answer is yes, Gary. As we tried to moderate expectations given the pickup that we had last year, but yes, we're running real production volume now anticipating the close of the final parts of the qualification. It's one of those upside potentials as we're moving from design to production and really it's about selling now. We have multiple speed source, obviously, and there's multiple speed grades and we're working through it and we have the next road map item in design as well now. We continue to be very excited about this from a strategic positioning standpoint and we're looking forward to hopefully, and so is Luc's team, driving some upside this year.

Great. Thanks, guys.

Suji Desilva with Topeka.

I'm going to follow up on Gary's questions. When did you start to recognize the revenue from SCS when the deal closed just to understand where that started?

We closed the deal on January 25 so we have some revenue as recognized starting January 26 timeframe. We have about two months of the non-favorable contract revenue that we can recognize.

Great, [that's what I was] looking for. And then as you look at the next of contract revenue, that's been in the 13% to 15% range. Is that something that would stay in that range or is there other projects that would help that grow in the mix? What's the anticipation there?

As we book -- are you talking about with SCS or without SCS?

Pro forma with SCS [then, right] would that bump it up?

We expect it to grow. As we move into more of the IP core business with the [30s and also with the 5s], I expect that to grow as a percentage as well as with SCS coming from the contract revenue on the professional services we provide that will also part of contract revenues so I expect that to grow as a percent of total revenue.

Okay. That's going to help us triangulate. The other question is somewhat similar. Security did a 10% year-over-year growth here and obviously now you're layering in SCS. Is there a long-term growth rate you would want us to think about for that segment pro forma? The new business or organically or whichever way you want think about?

I think when we provide guidance for growth purposes, we've provided numbers for the whole Company, not individually segment by segment. We did that at the last Analyst Day and we will provide that as we go forward on annual basis, but not -- it won't be segment by segment.

Fair enough. I'll jump back in the queue. Thanks, guys.

(Operator Instructions)

Atif Malik, Citigroup.

Thanks for taking my question. Firstly, Satish, do you still expect SCS acquisition to be accretive this year?

On a pro forma basis, yes, it will be accretive. They are -- on a standalone basis they will be breakeven in pretax basis, so expect them to be pretax pro forma accretive. On a GAAP basis, because of the amortization, they probably will not be, but I think the guidance we had given was on a pro forma basis we expect them to be accretive.

Okay. I understand it's too early to change the full-year revenue guide of $310 million and $325 million, between that. If I remember correctly, last -- in January you guys were thinking that revenue were going to be were first-half loaded versus second half. Is that still the expectation? If you can talk about the revenue loading for the year.

I don't recall saying that the revenue was loaded one way or another. I think what we had said was with the acquisition we expect more of it in the second half because the way the licensing contracts work in the US GAAP is once we sign a license agreement, because the customization required we have to provide professional services which takes on average six months, sometimes three, sometimes nine. On average it takes about six months, after which then the customer has to accept the license or the software we provide them. It's only then can you recognize the revenues. So we may receive the cash up front, but we can't recognize the revenue until we've provided the service and the customer accepts. By virtue of that, there is no way it could be front-end load. It has to back-end load from the acquisition.

Okay. Ron, a question on China. China is expanding into memory market where we've seen a couple of announcements in the DRAM side, hi-fi and UMC for specialty DRAM. I'm curious what your take is in terms of your licensing opportunity for licensing DRAM IP to China and if you've had any discussions with any of these entities?

We certainly are very, very focused on watching this space. I think we've reported a while ago that we've been running, in one of the Chinese manufacturers, a resistive RAM test chip that's come back and performing really well. This is done with Tsinghua University in a joint collaboration.

We just hired a new Vice President of Sales in the region, Gary Wang. He is going to be doing a lot of business development for us. Gary is a long-term industry veteran in the semiconductor space with a lot of experience in memory. We have our team regularly spending time there so I think it's a very attractive space for us. Obviously, we don't have anything forecasted in this as we are just in business development phase but it's attractive, I think, on multiple levels. Everything from the patent licensing to technology licensing to the buffer chip to SDA the platform, those each of these I think is a very attractive element and something that we think could generate a substantial opportunity for us probably starting next year.

Great, thank you.

I'm not showing any further questions in the queue. I would like to turn the call back to Dr. Ron Black for any final remarks.

Thank you all for your continued interest and support. We look forward to continuing the dialogue with you in the future. See you again.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Have a wonderful day.