Rambus Inc (RMBS) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Rambus second-quarter financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to hand the meeting over to Satish Rishi, Chief Financial Officer. Please go ahead.

Thank you, Karen, and welcome to the Rambus second-quarter 2016 results conference call. I am Satish Rishi, CFO; and on the call with me today is Dr. Ron Black, our President and CEO.

This, incidentally, is my 42nd and last earnings call at Rambus, and I want to thank all of you for the support you have shown for Rambus. The Company is in good hands, and I look forward to following its progress and successes in the future.

The press release for the results that we will be discussing 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 465-88-543 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 webcast with 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 in the financials, we are using both GAAP and non-GAAP pro forma format in both our press release and also on this call.

I need to advise you that the discussion today will contain forward-looking statements regarding the financial guidance, prospects, product strategies, timing of expected product launches, demand for existing and newly acquired technologies, the expected closing of recently announced acquisitions, the potential benefits of the 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 file 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 reconciliation 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 second quarter with revenue of $76.5 million, which is at the high end of the guidance we provided of $72 million to $77 million. EPS was above consensus, so a strong quarter financially.

We've clearly had a very active quarter from an acquisition perspective, utilizing our strong cash position to bring on strategic additions, most recently in our memory and interfaces division. In June, we announced agreements to acquire the Snowbush IP business of Semtech, and the Memory Interconnect Business of Inphi.

We'll share more on these acquisitions in a moment, but before doing so, I wanted to remind investors that we continue to generate cash from operations, and maintained a healthy cash position of $259 million prior to these acquisitions, and after the acquisition of Bell ID and Ecebs in January and an accelerated stock buy back late last year.

Over the past few years, we have articulated a desire for synergistic acquisitions to fuel and accelerate future growth. With both the Snowbush IP business and the Inphi Memory Interconnect Business, we saw opportunities in a consolidating market to scale for success, and we took them.

By bringing on the Snowbush IP assets, we are bolstering our position with advanced SerDes solutions for the strategic networking and data center markets, accelerating our development work to more quickly deliver 56 gig and beyond. The Snowbush IP team we're bringing on has extensive experience in this space, and gives us immediate access to some strategic relationships with customers and partners, which will help to scale the Business more quickly.

Furthermore, as I shared in the call when we announced the acquisition, the business also comes with a customer-funded networking chip that will ramp production in late 2017 or early 2018. While the program will remain in stealth mode for a while, what I can tell you is that it is targeted at a market with dynamics similar to the buffer chip that we are so excited about, TAM of $200 million to $300 million, relatively high gross margins, a few key customers, and core IP that we differentiate. So, an exciting new chip opportunity for us.

We've also shared the news about acquiring the Memory Interconnect Business from Inphi. This is another strategic acquisition that not only gives us instant market share in the memory chipset business, but enhances our ongoing development work in the buffer chip program and rationalizes the segment. We launched our first Rambus-branded DDR4 memory buffer chipset last year and made excellent progress, with the solution in the final qualification stage with partners.

After closing the transaction, we will rationalize the road maps and product plans as quickly as possible to deliver optimum solutions to our customers and value for shareholders. We hope to give you a more complete picture of the status at our upcoming analyst day in September.

In the meantime, I want to let you know that we have received very positive feedback from our DRAM customers and the ecosystem overall. Bringing together the technical expertise of both groups, along with established commercial relationships and an established supply chain to complement ours, we are well poised to accelerate the business and deliver even better offerings with the talent from both companies.

Moving now to our security division -- as we announced last quarter, we've added key tokenization technologies and product offerings, with the acquisition of Bell ID, a leader in mobile payment solutions for banks, and Ecebs, a leader in smart transport ticketing solutions based on the ITSO standard. Acquiring these entities enables us to get closer to the consumer in these growing markets -- utilize our strong security foundation to help create an economy of digital trust.

Our approach of providing value from the chip to the cloud with CryptoManager, and now directly to the cloud with key applications, is getting great feedback from customers in the ecosystem overall. So we are already seeing synergy benefits.

Turning to showcasing the in-field capabilities of our CryptoManager platform, this quarter we announced and demonstrated in-field functionality in the automotive space. At the TU-Automotive expo in Detroit, we demonstrated secure, over-the-air updates for a Dodge Ram truck utilizing our CryptoManager platform and our partner, Movimento's, infrastructure.

A lot has been written about the need for high levels of security in the era of the connected car. And that is exactly what we demonstrated at the show with CryptoManager: in-field provisioning of encrypted keys through secure communication between the vehicle and the cloud.

Also within our security division, we're excited to have announced this morning that Dish TV India will be using our CryptoMedia platform. This platform, which includes a hardware root-of-trust core embedded in the set-top box, ensures the secure distribution of high-value content for India's leading satellite TV operator. Importantly, CryptoMedia not only provides the security, but also reduces cost by eliminating the need for an expensive smart card that was historically used in the set-top box.

Dish TV has roughly 13 million subscribers today, with a plan to dramatically grow that customer base in the coming years. So this is a nice revenue opportunity for us, and possibly significant if other players in the industry begin the transition away from expensive smart cards as well. Note: Both automotive updates and set-top box authentication are examples of improved security and services for IOT end points, a space where we feel we offer differentiated value.

Turning now to our emerging solutions division, we are continuing the development of some interesting and innovative programs. With our Lensless Smart Sensor program, we shipped our latest Partners in Open Development, or POD, kit to enable our customers and partners to quickly evaluate the performance of LSS and develop custom algorithm for their specific application.

One application in particular that is gaining interest is smart buildings, where our smart sensor technology can optimize efficiency, productivity, comfort, and safety of buildings and occupants, while protecting privacy. With its tiny form factor, low power, low cost, and wide field of view, our LSS is ideal for building automation systems.

Also this quarter, we hosted a very positive showing of our Smart Data Acceleration system at CompuTech's, where we held private demo's with some prominent internet companies to showcase the capabilities of the platform. If you recall, our SDA platform is a card-based solution that utilizes FPGAs and large quantities of DRAM to dramatically improve performance in some key application areas.

While the platform is only a development and demonstration vehicle at this point, we are gaining valuable feedback from three partner customers that may allow us to productize this solution in the coming year, although we are still deciding on the exact unit of commerce and what the go-to-market strategy would be. Needless to say, it will be an interesting and natural extension of our memory business.

That provides a quick overview of the quarter as a whole. Before I turn the call over to Satish to review the financial results, I'd like to take a moment to thank him for his contributions over the past 10 years. As announced previously, Satish will be retiring in the beginning of August; and, as he stated, this will be his last quarterly earnings call with us.

We will certainly miss him, but business continues, and I'm happy to report that we are in the final stages of the interview process for his replacement. And as Satish himself said in his opening remarks, we will be in good financial hands after his retirement.

With that, I'll turn the call back to Satish to review the financial results for one last time.

Thank you, 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 items, such as stock-based compensation, amortization, impairment and restructuring charges, as we believe that these expenses or charges 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 on this call, a 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.

A quick comment about the recent acquisition that we announced: As of the end of the quarter, neither Snowbush nor the Inphi Memory Interconnect Business transaction have closed, and the quarterly financials I'm going to discuss with you reflect that.

Now let me review some financial highlights for the quarter. As Ron mentioned, revenue for the second quarter was $76.5 million, close to the high end of our guidance of $72 million to $77 million, a 5.3% increase over the first quarter and 5.1% from a year ago. Operating income for the quarter was $26 million, again, towards the high end of our guidance of $20 million to $28 million, and an increase of 9.7% quarter over quarter and relatively flat from a year ago. Cash equivalents and marketable securities were $259 million, as compared to $226 million at the end of last quarter and $348 million a year ago.

Going into some more detail for the first quarter, our memory and interface revenue was $54.5 million, security was $16.4 million, and our lighting and display technology revenue was $5.6 million. Quarter over quarter, these numbers represent an increase of 1.9% for MID, 16.3% for our security division, and 12% for LDT.

Year over year, MID revenue was flat, our security division increased by 39%, and the lighting business was down by 12.5%. The increase in revenue from our security division was partially driven by the Bell ID and Ecebs acquisitions in Q1. Q2 was the first full quarter of results for Bell ID and Ecebs acquisitions, and we are on track to meet our internal [addle] targets for that acquisition.

Cost of revenue plus operating expenses, or what I would refer to as total operating expenses, for the quarter came in at $50.5 million, at the lower end of our guidance of $49 million to $52 million, $1.5 million or 3.1% above the previous quarter, and an increase of 8.6% from the quarter a year ago. The quarterly increase was primarily due to the increased cost of revenue, partly offset by seasonally lower payroll and Social Security taxes.

Year over year, the increase was driven by the acquisition of Bell ID and Ecebs into our security division. In terms of headcount, we ended the quarter with a headcount of 622, as compared to 626 in the previous quarter and 513 a year ago.

Operating income for the quarter was $26 million, close to the high end of the guidance of $20 million to $28 million. On a sequential basis, this was an increase of 9.7% and flat compared to the quarter a year ago. The increase quarter over quarter was driven by higher revenue across all of our divisions.

Interest and other expenses for the second quarter were $0.4 million, as compared to $1.2 million in Q1 of 2016 and $1.3 million in Q2 of 2015. The decrease was driven by FX gain resulting from the revaluation of a deferred payment obligation in British pounds related to the acquisition of Bell ID and Ecebs.

Just a quick comment about foreign exchange and the impact of Brexit -- with the acquisition of Bell ID and Ecebs, we do have some foreign exchange exposure, but not much. In Ecebs, their revenue and expenses are in British pounds, so we have natural hedges. In Bell ID, the revenue stream varies and is a handful of currencies. Our expenses are primarily in euros, so there is a small exposure to US, Australian and Canadian dollars, and other currencies.

In the second quarter, as I mentioned, we recognized an FX gain of $0.6 million related to stronger dollar against the British pound. Using a flat rate of 35% for pro-forma pre-tax income, net income for the quarter was $16.7 million, or $0.15 a share, as compared to $14.6 million last quarter and $16 million in the quarter a year ago.

Overall cash, defined as cash, cash equivalents, and marketable securities, was $259 million, an increase of $33.8 million from the previous quarter. During the quarter, we generated approximately $32.6 million in cash from operations.

We expect the two acquisitions that we announced earlier in the second quarter to close sometime in Q3. Revenue from these acquisitions will be dependent upon the timing of the close. So, in our guidance, we are excluding the impact of the two acquisitions, and will update the full-year guidance in September once these two deals are closed. Our forward-looking guidance reflects a reasonable estimate, and our actual results could differ materially from what I'm about to review.

Since we had a better-than-expected Q2, with some early acceptance from some customers which allowed us to recognize revenue in Q2, for the third quarter and without the impact of any acquisitions we expect revenue to be between $75 million and $80 million. We expect total operating expenses, which includes COGS, to be between $50 million and $53 million. Operating income is expected to be between $22 million and $30 million.

For the full year, it appears that the consensus without the acquisitions is around $313 million. Our current internal forecasts are quite close to that number. So with the variability built in, our guidance would be $313 million plus/minus $5 million for the full year.

As and when the Snowbush and the Inphi Memory Interconnect Business acquisitions close, we will provide an update. Either way, we will be in a position to update you on the full year with acquisitions when we see you at our Analyst Day in September. Our Analyst Day is scheduled for September 20 in New York, and we will be sending out a formal invitation with details soon, but please mark your calendars for that date.

With that, we are ready to open the lines for Q&A. Operator, can you please open the lines?

(Operator Instructions)

Gary Mobley, Benchmark.

Hey, guys, can you hear me okay?

Yes, we can. Hi Gary.

Okay. Satish, first of all, I want to start off by saying congratulations on a strong 10-year run at Rambus and it's been a pleasure working with you. And I wish you the best in your retirement.

Thank you, Gary.

I wanted to start out with some clarification. I missed the last part of what you just mentioned about the FY16 revenue comfort level. I think your last revenue guidance range for the full year was $310 million to $325 million. I'm assuming you're more comfortable at the lower end of that range, which would still imply a pretty healthy sequential ramping in Q4. Can you give us some color and the puts and takes as the balance of the year unfolds, independent of any discussion between Snowbush and IMI?

Yes, sure. So for -- you're right in terms of guidance. So I think we are more comfortable with $313 million, plus/minus $5 million, so it would still be -- the high end would end up being at the midpoint of the original guidance. We do have a couple of deals in flux, and as you know, some of the [patent] deals can be binary. They either happen or don't happen, so we are working on some of those.

And we also have some deals in flux that relate to the cores, both on the mid-side, that could also potentially provide additional revenue. So yes, it is a back-end and a Q4 weighted forecast that we have. But we have a couple of deals that we're working on. And if there are any changes, we'll provide a better update to you in September time frame. Okay, all right. Ron, regarding the dual in-line memory module chipset, something you launched already from internal resources and soon to be complemented with Snowbush and IMI, could you give us an update on where you see the dual inline memory module chipset business in terms of revenue recognition? The final stages of qualification and where the road map may move towards? Or is that something you wanted to go delve into in greater detail during the Analyst Day?

Yes, it is going to be more towards the Analysts Day, but maybe just to give a high-level rounding out, this is a classic consolidation and what is in the best interests of customers and shareholders is to ultimately converge the road map as quickly as possible. Of course, we can't do any of that work until the deals on both sides close. So we certainly have a point of view, but we're not prepared to share this at this point in time.

So the spirit of what we've always said on these is we take the best from the best, from both companies, and that's the way we're going to approach it. And the team is off working it.

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

(Operator Instructions)

Matt Robison, Wunderlich.

Thanks for taking my question and also thanks, Satish, for your help in my short tenure as an analyst for Rambus. Good, great getting to know you. On the SoftBank call this morning there was a fair amount of focus on ARM trustzone. Ron, I was hoping you could help us understand how your hardware roof-of-trust is positioned, along with the Smart Card Software acquisitions to -- how you're positioned relative to ARM? It seems like they're focused on automotive with that, and you seem to have a bit of a foothold in automotive already yourselves.

Yes, we do. So trustzone is an interesting technology using some CEO simplification liberties. It is kind of a small OS, not a rich OS, that allows you to have a trusted execution environment. So -- and there's many of these types of things out there. You can think offer it a bit as slipping a bit and then you can execute something in that particular container.

The area that we've been trying to facilitate and help the industry with is to have a even more robust bootstrap sequence where you know the state of the system and can guarantee that security. That is the hardware root-of-trust.

So, in fact, what we do can be absolutely complementary to that trusted execution environment or any other one. So we look at ARM as a great partner. We always want to work with them and we think we will be able to do that.

We are very passionate, our security team, that the only way to be successful long time and to have a very secure solution is to have that hardware root-of-trust, which is why we 're pursuing it the way that we have. Yes, automotive is a key area for us. So that's one of the areas we're putting a lot of effort in with our team in business development and creating solutions in partnership with companies like Movimento, that we think have a pretty interesting download over-the-air kind of business model.

So we have been thinking about the recurring component, that this activity being the service fees for key management or is there a royalty component?

So these are often done on a case-by-case basis. In general, for a CryptoManager solution that we would provide, there is a license fee, a royalty element to it, and a transaction fee.

What we tried to show in the last year's Analysts Day is that the closer you get to the data and turning the data into information, the more value that you have in the total solution. I think some of you have seen or read our think piece that we did with the GSMA, which outlined some of the challenges that the industry faces as there is more stagnant growth, I'm talking about the semiconductor industry. And that our approach is to look at monetizing less in the hardware per se and royalty models but more at the high value data side.

So that's where we would like to go with this long term. And quite candidly, if you look at the solutions, for instance, that we provide with Ecebs or Bell ID, we're at the application end. And what we're working very closely with them on, and it was really the start of our discussion with them long before we bought them, is through that hardware root of trust, provide that improved security, offer more confidence for people that need things like payment to be sure that they're going well and to tie that to a transaction fee. So that's our objective, that's where we're trying to take it.

Is that your first major licensee for a couple of years now? Have you started to see any form of recurring revenue from that?

So in that particular business, no, it's still ramping up. We are working very closely with them. In fact, in other areas like in automotive, where we would have that first downstream revenue.

Satish, can you tell me what the CapEx and depreciation was in the second quarter?

You caught me flat-footed there.

Or we could take it off-line. No problem.

I think given that the cash went up about $33.8 million and our cash from operations are $32.6 million, CapEx was very, very small. But I can definitely give you that number.

Appreciate it.

Thanks, Matt.

Atif Malik, Citigroup.

Thanks for taking my question and congratulations, Satish, and best wishes in the future. For my first question, I'm just trying to understand the revenue for the full year being slightly lower than the prior guide, what's driving that? Is that revenue recognition of SCS, or are we seeing [lightning] market being lower? Or can you just help us out on what's driving the $2 million downtick.

Well, when we give guidance, we set the guidance sometime in January time frame and we have 12 months to go to deliver the guidance. So things change. Some things get pulled in, and some things get pushed out. So the change, having a variability of 1% to 2% in the overall revenue for the full year I don't think is that dramatic.

So I think really what's happening in some cases and what we mentioned earlier, I think in Q1 I'd mentioned that LDT might be slightly lower than what we had expected because some of the issues that the end market that they were serving was facing. So that has come in, but other groups have stepped in to cover that shortfall.

So I think that's part of [where it's] missing some of the variability between the different divisions. And from a process perspective, every division gives their own forecast, but there's always a range that they provide. Because this [turns] business, everything [tend] to be closed, new things come in, some things are pushed out. So I think there is some change in the range over time. So nothing that is out of the ordinary, from my perspective.

Okay. And just to summarize the sales and the OpEx contribution from the two remaining open acquisitions, Inphi and Snowbush, I have $40 million in sales for calendar 2017 from Inphi and $17 million from Snow, and then $5 million to $6 million OpEx run rate from Inphi. And then what is the OpEx run rate for the Snow acquisition for next year?

Sorry, you said $5 million OpEx for Inphi?

Yes, $5 million to $6 million OpEx for Inphi.

On a $40 million revenue? That's a very good business. No. Where did that number come from? I don't remember providing that at all. That's not -- with the $40 million revenue and the 50% gross margin, and a $5 million OpEx, that's $[15] million on $40 million; that is a very, very lucrative business.

No, no, $5 million to $6 million OpEx increase per quarter, so annualized it would be more like $20 million to $24 million.

Yes, so we'll submit a better guidance when we close the deal. Because the reason why we are cautious is these are businesses that are in flux. And what we thought for the rest of the quarter at least or rest of the year at least when looking at it, it all depends when we close what the order book looks like, what the inventory looks like.

So we'll provide a better guidance when we have all those numbers. Otherwise, we'll be guessing and we'll be wrong again one way or another, more or less. So why don't we wait till September to give you better guidance on that?

Sure. And then, Ron, you mentioned in your prepared remarks that you have received positive feedback from DRAM customers, both the Inphi. Can you just give a little bit more color on what the feedback has been, whether it is the consolidation, the (inaudible) in [IDPI] or you guys are bringing something more to the table?

Yes, I think there is a couple of things, consolidation for stability and strength is always important. I think in both of these acquired businesses when we look at them, they're very core to what we do, but not necessarily core to what the divesting companies we're looking at. So the team I think is going to be excited about being in Rambus and we're going to be able to deliver great solutions.

I think if you look at the history of these two Companies just being very dispassionate, Rambus has clearly been incredibly innovative in developing new IP that gets embodied into all of these standards and doing different things while it be the high speed serial banks or DDR. And that's the core to what we do and we're embracing moving into products.

On the Inphi and Snowbush side, they certainly generate IP, but they're fundamentally a product-based company and thinking about the product. What we're trying to do is blend these two outstanding skill sets to get the most innovative, most creative, driving and working with the ecosystem to drive the solutions and in different ways to think about them, and at the same time, improve our productization skills.

One example where you see Rambus doing that in thought leadership is the project that we announced with Microsoft and looking at next-generation data centers and architectures. So the work that we're doing there is very natural to flow into possibly other types of product-level solutions. So I think that's the simplest answer of what customers like is tremendous innovation, improving product skills, right, a totally committed team, aligned strategically where the Company is going. In many ways, you can't have a better solution than that.

Great. Thanks.

Thank you, and that concludes our question-and-answer session for today. I would like to turn the conference back over to Dr. Ron Black for any additional comments.

Thank you, operator. As you can see, we believe we have a set of -- set up our businesses to be well positioned for growth in our key strategic programs I'm proud of the progress we've made and we look forward to sharing more with you at our annual Analyst Day on September 20th. For now, thank you all for your continued interest and support. Have a nice day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.