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Rambus, Inc. (NASDAQ:RMBS)

Q1 2013 Earnings Call

April 18, 2013, 05:00 pm ET

Executives

Satish Rishi - SVP & CFO

Ron Black - President & CEO

Jae Kim - SVP & General Counsel

Analysts

Matthew Galinko - Sidoti & Company

Hamed Khorsand - BWS Financial

Mike Crawford - B. Riley & Co.

Operator

Good day ladies and gentlemen and welcome to the Rambus First Quarter 2013 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Satish Rishi. You may begin.

Satish Rishi

Thank you operator and welcome to Rambus first quarter 2013 conference call. I am Satish Rishi, CFO and on the call with me today is Ron Black, our President and CEO. Also joining us today for Q&A is our newly appointed General Counsel, Jae Kim.

The press release for the results that will be discussed here today has 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 32237211 when you hear the prompt. In addition, we are simultaneously webcasting this call and along with the audio we’ll be webcasting slides. So 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 5:00 PM Pacific Time.

In an effort to help provide greater clarity on the financials, we also use both GAAP and non-GAAP proforma format in the press release and also on this call. The discussion today will contain forward-looking statements regarding our financial prospects, pending and current litigation and demand for our technologies, among other things. These statements are subject to risks and uncertainties that are discussed during this call and maybe 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 earnings release and the recon on our website at rambus.com on the Investor Relations page under Financial Releases.

Now, I’ll turn the call over to Ron.

Ron Black

Thank you Satish and good afternoon everyone. Q1 was a very good quarter for Rambus, as Satish will review in more detail later we ended the first quarter with revenue of $66.9 million well within our upwardly revised guidance and proforma net income of $13.4 million which exceeded our guidance.

For Q2, which is typically down primarily because of lower running royalty payments that are based on prior quarterly sales along with certain customers who pay us annually in Q1, we are expecting revenues in the range of $53 million to $58 million. This range does not include several deals that we are currently negotiating, so it is possible that we could have significant upside in this quarter as well. But we prefer to be conservative when setting guidance.

In previous earnings calls, I explained that Rambus has adopted a strategy of increasing collaboration with the industry to better deploy our outstanding technologies in the marketplace and then ultimately deliver value to our shareholders. This strategy is summarized by the evolution of our tagline which used to read, a company of inventors and now reads bringing invention to market.

Based on this philosophy that we decided to transfer certain display patent assets to a subsidiary of Acacia Research, allowing us to ultimately deliver value to our shareholders while focusing our resources in other areas. As part of this transaction, we received an initial upfront payment in Q1 and expect to receive subsequent payments as Acacia rolls out its licensing program.

The transferred patents read on certain display technologies using backlights for smartphones, tablets, computers and high-definition TVs, all very high volume markets. So these payments maybe significant. However, we are not including them in our guidance until there is an established run rate. We do believe however that we could have further upside to our financial results later in the year.

Another testament to our commencing of engaging with the industry is the signing of a patent licensing agreement with LSI last quarter. This agreement allows LSI to include our patented innovation in all of its products and as part of the agreement we've settled all pending disputes. This patent licensing agreement will terminate in 2018.

Also during the quarter, we announced our collaboration with GLOBALFOUNDRIES. To support this expanded relationship, we are developing a portfolio of complex semiconductor IP optimized specifically for GLOBALFOUNDRIES’ leading edge process technology. Our collaboration with GLOBALFOUNDRIES will enable mutual customers to more seamlessly integrate our enhanced standard interface solutions until the next-generation of electronics for faster time to market. These silicon proven IP blocks will address the growing needs and applications ranging from high performance computing to smart mobile devices. Global foundries will compensate us for our designs with upfront payments and then royalties as the technologies are integrated into customers’ products. We expect revenue to be recognized in the second half of this year and continue into 2014.

Turning now to our focused markets; our memory and interface division was very busy this past quarter. At the end of January, we introduced our R+ family of enhanced standard solutions including our first LPDDR3 memory architecture. Fully compatible with industry standards, R+ solutions provide our customers with improve power efficiency and performance helping them differentiate their products in a cost effective manner, while improving time to market.

At DesignCon 2013, where we announced and demonstrated our R+ technology, Rambus engineers presented six papers and subsequently won a best paper award for our 3D Silicon interposer design and electrical performance study. Also with the 2013 International Solid State Circuit Conference, our engineers presented a paper and were invited to demonstrate our innovations for future main memory systems at this premier event.

Our cryptography research division also had an outstanding quarter, as they continue to gain traction and licensing as DPA counter measure technology as well as its CryptoFirewall security core. Just this month we announced a signing of a DPA license agreement with StarChip where they will incorporate our DPA countermeasures into their line of smart card integrated circuits. We also announced new license agreement with Echostar technologies, this leading provider of video delivery services will integrate our crypto firewall security core into their products to protect against TV signal theft.

Marvel has similarly chosen the CryptoFirewall security core for inclusion in its consumable security chip, which can be used in anti-counterfeiting applications in a variety of products. The CRI team also spoke in two conferences this quarter, at the (inaudible) conference the CRI team exhibited, demonstrated and led two sessions that address side-channel attacks as well as participated in a seminar where our team taught important essential security and technology concepts.

At the Europe design, automation and test conference our CRI team presented certain design methods to help prevent counterfeiting. Furthering our strategy of bringing invention to market is our Imerz multimedia platform announced early in Q1 and demonstrated at the Consumer Electronic Show, Mobile World Congress and South by Southwest where it help us land a spot in the Forbes list of 10 companies at South by Southwest to look for in 2013.

This platform exemplifies our standard model of developing innovated solutions that address the growing trends of access and interactivity in a very compelling way. We are seeing great interest in this platform and look forward to showing more on the development in the future. On the lightening front we are seeing great progress on our revolutionary LED light bulb. We are actively engaged with our commercial partner The Elite Group and have received the first orders for this new bulb. Next week at Light Fair International in Philadelphia our customer Cooper Lighting will be showcasing fixtures based on our edge-lit technology showing further manifestation of how we are not only inventing and developing innovative products but getting these inventions to market through our partners.

Given the commercial progress with our bulb and Coopers launch of product based on Rambus Technologies, our [LED] business is on track to show growth in the second half of this year as previously stated. Rambus Labs, our research team announced our binary pixel technology at Mobile World Congress which generated substantial interest from such industry publications as DPReview and Engadget not to mention many of our customers.

Our binary pixel image sensor in image processing architecture can dramatically improve the quality of photos and videos taken from app mobile devices in any lighting condition. Specifically the technology achieves single shot, high dynamic range and improved light sensitivity. Using the same form factor costs and system power of current and future mobile and consumer imagers, our technology can be easily adopted and is very cost effective. We are exploring a variety of monetization schemes based on the positive feedback from this technology, although these will likely be a 2014 event.

Finally last quarter we announced a change to our Board of Directors reducing its size from 10 to 6. I believe this streamlined structure will enhance our ability to be more entrepreneurial and agile, as well as work with our customers in the industry, equally important it will support our renewed focus on shareholders value.

Okay, that's a quick update on the business side of the quarter and I will turn the call back over to Satish to review the financials. Satish?

Satish Rishi

Thanks Ron. As a reminder we use non-GAAP pro forma numbers which we believe are indicative of complete performance as it includes certain cash events and exclude certain non-cash and discreet events such as impairment charges and restructuring charges which are not indicative of long term performance. Customer licensing income as a non-GAAP measure that includes cash payments that are received under a signed agreement. It is how we measure the top line of a business and it maybe different than revenue within a particular period when the amount of cash received from a customer is different than the revenue recognized.

Let me start by reviewing some highlights for the first quarter before going into additional details. Customer license income for the first quarter was $72.1 million and revenue for the quarter was $66.9 million within our revised guidance of $65 million to $69 million. Pro forma expenses came in at $48 million for the quarter also within our guidance of $51 million to $46 million and we are continuing to manage expenses tightly and drive towards higher operating leverage. Pro forma net income was again up $13.4 million as compared to a guidance of $4 million to $10 million.

Now I would like to provide a little more detail related to the first quarter. As stated customer licensing income for the quarter was $72.1 million. During the quarter, we signed an agreement with LSI and recognized a one time settlement payment. In addition as Ron mentioned, we sold a portion of a display patent portfolio and expect to receive future royalty payments from engagement with Acacia. We also received clearance from the courts to consummate the Elpida patent purchase. From an economy perspective the patent license agreement and the patent purchase agreement with Elpida are considered to be linked and be only recognized the net amount as revenue.

For the first quarter, the new businesses represented approximately 15% of total CLI higher than the run rate we had at the end of last year. Depending on the mix this ratio will fluctuate quarter-over-quarter, but for the full year we expect the new businesses to be between 15% to 20% of total CLI. Pro forma operating expenses which exclude restructuring and impairment charges, retention bonuses, stock based comp and amortization of intangible assets were $48 million, 6% higher than the previous quarter. These pro forma expenses include litigation expenses of $2 million which were flat to the previous quarter. The operating expenses were high primarily due to bonus accruals at higher rates as well as higher payroll taxes which is typical for the first quarter of the year.

Proforma interest and other expenses were $3.2 million, relatively flat to the previous quarter. For pro forma tax expenses we are using a flat rate of 36% on pro forma pretax income. Based on that pro forma net income this quarter was $13.4 million as compared to $8.3 million last quarter. Overall, cash, the final cash, cash equivalent and marketable securities was 215 million, an increase of 12 million from the previous quarter. Cash flow from operations was an increase of 15 million as compared to an increase of 2 million in the prior quarter. We have had positive cash flow from operations for the past three quarters now and have managed to slowdown our cash burn.

Now let me shift to guidance. We continue to manage expenses to reduction in annual spending by 30 million to 35 million that we had communicated last year when we announced restructuring activities. As Ron mentioned, we typically see seasonality in the second quarter and in addition Q1 included certain one-time payments. While the second quarter could have similar payments related events, our practice is to exclude such events from our guidance and announce them when they occur.

As a part of the agreement with Acacia, we expect to share in the future royalties that they receive on the display assets that we transferred earlier this year. Given that this is a new relationship, we are not including any potential royalties from the relationship in our guidance. That being said, for the second quarter, we expect customer licensing income to be between 56 million and 61 million and revenue to be between 53 million and 58 million. We expect pro forma operating expenses which exclude restructuring charges, retention bonuses, stock based comp and amortization of intangibles to be between 48 million and 53 million. These amounts include an estimate of litigation expenses of between 2 million to 3 million. Pro forma net income is expected to be between breakeven and 6 million.

I would like to close by saying that we had a solid quarter and are well positioned for growth and improve profitability in 2013. We came in higher than an initial guidance range for Q1 while continue to deliver operating leverage. We have been focused on execution while investing in areas which will drive future revenue growth and profitability.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Matthew Galinko with Sidoti. Your line is open.

Matthew Galinko - Sidoti & Company

Hey, thanks for taking my question. I was just hoping if you could share a little bit more detail on that initial order you mentioned on the LED bulb?

Ron Black

Sure. Unfortunately, we can't name the particular buyer. It's through the collaboration we announced early in the quarter with the Elite Group. They have a large lighting business and they are connected with pretty much all of the do it yourself type stores. So you can imagine where we would likely be targeting first. It is to set expectation just in initial order, but we really feel like we are gaining traction. The bulb is a very unique design. Because of the way that we architect it, it runs much cooler than others. So we see it as being very interested not in just the retail space, where these orders came from but also the commercial space.

Matthew Galinko - Sidoti & Company

Okay, thanks. And then, do you expect to go to market with it through, are you exclusive to the Elite Group, or do you have other plans that help to bring that to market?

Ron Black

We have a unique relationship with the Elite Group for some selected segments and we have a small internal sales force and we are building a rep network that is focused more on the commercial side here in Europe and Asia.

Matthew Galinko - Sidoti & Company

Great, thanks.

Operator

Thank you. Our next question comes with Hamed Khorsand of BWS Financial. Your line is open.

Hamed Khorsand - BWS Financial

Hi, I just want to ask you, where are you seeing any weakness from your revenue streams and royalties? Is there any particular product category?

Satish Rishi

We see some seasonality quarter-over-quarter typically because we get paid in arrears from our customers sometimes some one quarter arrears, some two quarters in arrears. So in Q1 and also in Q2 as one of the shipments from the holiday season tapers off, royalties are slightly weaker. On the DRAM side with the PC shipments with the recent reports that came out, the Q1 PC shipments are fairly low. As we look at the DRAM market, many of the analysts are still projecting about a $34 billion DRAM market which is up from $28 billion last year.

Many of them haven't quite revised their forecast yet, so I think there might be some revisions, but what’s happening in the market is that even though the PC in shipments maybe going down, many of the united patches are moving to low power memory and there is actually now a shortage of commodity products. It’s actually more on, but the prices for DDR3s that going into the PCs are probably stable to even going up at this point in time.

Secondly another reason why we think the analysts are not reducing the number for the full year for DRAM is because Intel expects Ultrabooks to kick in Q3, Q4. And so from a total revenue perspective in the DRAM market we will increase year-over-year, those go to $34 billion or not time will tell. And in our case we saw a weak year in DRAM, you know $28 billion last year and we in our second half, when we look at second half from DRAM revenue we expect it to be higher than what we have in the first half of the year.

Hamed Khorsand - BWS Financial

Okay. And then just a quick question on the image sensor, the Binary Pixel technology, what's the next milestone that we could expect from you guys on that front?

Ron Black

Well, we continue to tune the architecture and we are fully engaged with a set of partners to take the evolution of what we've done and the test chip that we’ve produced and actually implement this in a high volume product in silicon. So it will take a little bit of time that's why I was managing expectations so that you will see it coming in 2014, but the demand and interest in the marketplace has been incredible.

At Mobile World Congress I attended some of the meetings and we've subsequently had many more, the fidelity, the image improvement and quality under low light conditions and the dynamic range, so you don't have the classical problem I have of fading out my family when I take the pictures of the sunset at the beach is incredible.

So we really think we've gotten something and I'm cautiously optimistic that we are going to have somebody come in as a partner and want to take this to market. We are also working very closely with the end consumers not just the technology providers because I think it’s completing that loop.

Hamed Khorsand - BWS Financial

Okay, great. Thank you.

Operator

(Operator Instructions) Our next question comes from Mike Crawford of B. Riley & Co. Your line is open.

Mike Crawford - B. Riley & Co

Thank you. Could you just briefly walk through some of the litigation front including any thoughts on when we might see something from Judge Whyte and DCA?

Jae Kim

Yeah, sure. Hi, Mike, it's Jae Kim. So the case in front of Judge Whyte has been fully briefed and we had oral argument and so we are still waiting for a decision. Obviously we won't be able to speculate as to when we might receive that or what the outcome would be. So we are still sort of just waiting for an opinion on that.

With respect to Micron and the Delaware case, we did file our Notice of Appeal to the Fed Circuit and our opening appeal brief will be due in May. With respect to the price fixing case in San Francisco, the initial briefing has been done or the next milestone in terms of briefing will be in May for our reply. And then I would say some time in mid-to-late 2014 before there's any decision on that.

The ST matter and the sole defendants remaining in the SSC litigation, the ITC had ruled and we are appealing that decision. And then with respect to the parallel case in the northern district there have been trial dates set with respect to unclean hands for August and then the patent trial to begin in April.

Mike Crawford - B. Riley & Co

Thank you, Jae. And then just turning back to the business, the cryptography business, it’s been I think a year and a half or couple of years since you bought this business for I think $342 million. What are your thoughts on the value of that business? Is that -- looking back, does that seem like a steal or maybe a stretch or how would you comment on what you think you have with that business today versus what you paid for it?

Ron Black

This is Ron. I mean, obviously, I will answer this not having been part of the team looking back at it. Clearly, $342 million is a lot of money, $1 million is a lot of money, a $100,000 is a lot of money. As you say, we've been pretty parsimony as we've gone through and continue to look at cost reductions.

One of the things that Satish and I have done since I came on board is we work very closely with the businesses unit heads and we drive valuation models for them and we believe that all of the businesses and investments we make are going to pay out handsomely for shareholders. You haven't seen all of the flow through obviously. And we believe that the cryptography business for the plants that we have in place and the customers, of course you don’t have the benefit of seeing the customer engagements that we have going forward that it will be significantly higher than that value.

Mike Crawford - B. Riley & Co

Okay, thank you very much.

Operator

(Operator Instructions) I am showing no further questions in the queue at this time. I will hand the call back to Ron Black for closing remarks.

Ron Black

Thank you for all for your continued interest and support. As a reminder, we will be holding our annual meeting of shareholders next week, but this time it's a virtual meeting. We look forward to addressing some of the questions that have already commenced through the shareholder forum and expect to continue sharing updates in the coming weeks. Have a nice day.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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