Rambus, Inc. (NASDAQ:RMBS)
B. Riley & Co. 2013 Annual Investor Conference
May 22, 2013 05:00 pm ET
Ron Black – President & Chief Executive Officer
It’s my great pleasure to have Rambus back at our conference. For those that don’t know we used to have official coverage on Rambus in my first go around here on the sell side at B. Riley.
And the company is really undergoing a remarkable transformation right now engineered by the new CEO Ron Black and the rest of the Management Team and Board. We also have CFO Satish Rishi in the audience. And finally the company’s moving away from being so confrontational with some of the companies that would like to collaborate with them and it’s also developing some interesting products that are coming to parket this year. So with that, please Ron.
Thanks, Mike. So just a few slides on a couple of different areas. I’ll try to give you a little review of the company, try to keep it into that twenty minutes or so. There’s a lot of slides in the backup where we talk about the products, and those if you’re interested we could spend a lot of time afterwards because there’s a lot of really, really good content.
So as Mike said I came to the company a little less than a year ago. My history is I’m technical but I’ve always worked with companies that have transformational issues that they’re going through, and Rambus is a great example of that. So on this slide it shows the history of the company.
The core of the business since its founding has really been on intellectual property, so the designs of interfaces between chips especially for memory devices – so DRAMs, dynamic random access memory devices; and also chip-to-chip communications like serialization/de-serialization chips. And up until about 2009 that’s really all the company did.
Subsequent to that, from 2009 on, the company embarked upon an acquisition strategy where they diversified the portfolio of companies, still keeping the same logic of having very, very rich IP but in different areas and particularly their cryptography and LED lighting, or a particular part of LED lighting; and then some other memory-type devices for nonvolatile and also some multimedia technology. So I’ll cover some of those through time.
One of the things, and Mike alluded to this, that Satish and I did differently in the company is we started to move away from the focus on litigation as a strategy. It’s still a key tactic when you’re in the intellectual property business or even product creation as Apple and Samsung have found out and have gone through time. It’s not something that I favor.
As an engineer I tend to like working on projects that go into the mainstream but we don’t do it as businessmen because we think it’s the great thing to do or the nice thing to do. We do it because we think it’s a ruthlessly better way to monetize value for investors, and let me tell you a couple of reasons why.
The first is this company has without a doubt the best technology in the areas we’ve invested, bar none. We’ve never had issues getting engineers to say our stuff is good. So when you actually engage with the customers and you engage in a way that’s collaborative it takes a little bit more time but that relationship that you build is a very sticky relationship and it leads to a much more long-term view of driving revenues.
And if you look at companies like ARM this is the ultimate in probably imagination technologies. As the penultimate example of these IP companies they are true partners with the customers they have, and they have revenues or multiples of their revenue and a price value of revenue multiple of let’s say six or something like that for Imagination and up to 20 for ARM.
So until recently where we’re trading at a multiple of 2, a trailing twelve-month multiple, as I think we’ve gained some traction in the marketplace we’re now up to more like 3, 3.5. So the market cap over the last six months has gone from roughly $400 million, $450 million to the market’s down today but close to $900 million. So I think we’re starting to gain traction. We’re not there yet.
But the strategy is not altruistic – the strategy is ruthlessly based on financial value for investors. And embracing that is the little bit of stuff that you have here. Originally the company spoke about itself as a company of inventors and we still are, but the difference that we’re trying to drive is not just inventing but bringing invention to market.
And by doing that we’re looking beyond the patent itself or what we’d like to call the micro-ingredient – that’s the piece, the very basis – and looking to drive value for customers as you go up the stock. It’s everything from cores, so parts of devices, to devices. You’ll see later an LED light bulb believe it or not we’re bringing to market – we have our first orders for it from a big do-it-yourself chain in North America that you will well know; to complete software systems.
And what that means for the business model, bringing the invention to market, is that patent license is kind of the basic. So the patent license is “I won’t sue you for infringing on my technology in exchange for a payment.” A technology licensing is “Okay, you get the patent licensing too but here’s a core, here’s a design that’s going to help you build your business. And oh, by the way – when you like it and you like how I do it and it saves you money, you’re going to come back and buy more from me.”
And then the product is a complete product in and of itself. It’s a standalone thing. It’s a chip or an LED light bulb or an end-to-end multimedia system. So we’re really on all of those.
So Mike, I think this was your comment – “change is afoot” is something that he wrote. So what we really embarked upon is going in a way back to the future for Rambus. We’re really going back to what we did originally, what made this company great in terms of driving the technology from the engineering know-how and partnering with customers.
The reshaping means there’s lots of management changes; there’s people who have been here a lot and are no longer here. We’ve also streamlined the Board, so some of the Board members – and it was a self-directed thing from the Board – have left. We have a much tighter group, faster to make decisions, faster to understand the business so I feel really good about that.
We’re developing a lot of new products and solutions. We’ve announced them; I’ll show you some of them. We have a lot more in the lab so this is a very intensely rich company from an IP standpoint. We’re focused on bringing invention to market, to collaborating and first and foremost, everything that we do is based on shareholder value creation. Nothing is sacrosanct.
In fact, sometimes there are some things that we’d like to do but in discussing with them we’re actually bringing them to the market say as an asset for sale, and you’ll see later on we’ve actually partnered with other companies who would be better at bringing the value to the marketplace and to our investors as opposed to keeping it inside.
So what does that mean at a very gross level? It’s really these four things. On the right-hand side it’s a lot more focus on customers; it’s a lot more focus on getting momentum in the marketplace through what we’re doing. And on the costs side there’s a lot less expenses and of course, when we don’t have to litigate there’s less litigation expenses. These are dramatically down year-on-year. If you’re interested Satish can go through some of the pieces for you.
I know that’s a statement of the obvious but the company was spending a lot of money and one of the first things we did was we cut out about a $40 million annualized run rate last year which moved us from being loss-making to on a pro forma basis positive from an operating level and also generating cash. So a lot of simple things but very, very different inside the company – I can’t express how differently the people are behaving; a lot of focus on driving that value.
So here’s a few recent highlights. The first, and I’ll cover some of these in more detail later is that we’ve announced a new memory interface standard, and what’s different here is it’s actually a standard with enhanced features. So before we tried to do proprietary things – we don’t do that anymore. Think about it as something that has backwards comparability. It’s a processor, it does all sorts of new things but of course it runs the old code. So that’s the analogy in the microprocessor basis.
We’ve partnered with Global Foundries, it’s something we wouldn’t have done before. They see our technology, they saw the value and came to us and said “Hey, maybe we can work on designs together. You can do the designs for us, we can give them to our customers,” we said “Absolutely, this is what we’re going to do.”
We had litigation with LSI. We closed that litigation in a very favorable [way]. It gave us a bump in Q1. We also had signed EchoStar, that’s on the cryptography side, not the memory side. The next two I’m very, very proud about. I always tell the guys it’s very difficult when you’re talking to investors and you keep saying how beautiful your company is.
It’s much easier to have a customer say “Wow, you have really good stuff,” and that’s what both Broadcom and Marvell, two very impressive companies have said about our cryptography stuff. They’ve deployed the DPI Countermeasure, I’ll explain that in a minute so you can get a sense of it, and also CryptoFirewall which is actually a core that we provide, a security-based core to Marvell.
We introduced the multimedia platform. We’ve received orders for the LED light bulb. We’ve announced a binary pixel technology – this is for a CCD camera-type application for a mobile phone camera. It’s a way to get high dynamic range by doing some very, very neat tricks.
What it allows you to do is take a picture without having a washout. I always have this problem when I’m at the beach with my family. I take a picture, the sunset’s beautiful and all I see of my family is a black outline. Instead, with this technology just the normal sensors that you have – you have to integrate the logic in them but you’re able to get that complete dynamic range, so you see your family and you see the sunset.
It’s a really cool technology; we launched it at Mobile World Congress and we’ve gotten a lot of traction on that. No revenue – it’s not something for today. In fact I won’t talk about it in the subsequent slide but it’s something if you just Google that and spend some time on it, it’s way cool.
Transfer of a set of display patterns – so part of our LED business had patents that read on backlighting for PCs, for TVs, for mobile handsets. And we had decided to pursue a different path where we focused on general lighting, and we weren’t [focusing on] displays. So this is an asset, it’s a very powerful asset – almost every TV and handset and desktop or notebook computer infringes on these patents but we weren’t pursuing them, and that’s the wrong thing to do for shareholders.
We weren’t going to monetize them so we partnered with Acacia, it’s a little different company – they don’t develop technology like we do; they acquire patents and then assert them. They have very good relationships with their partners. I mean nobody likes to pay money but they have a very professional way about it, and so we formed this partnership that the technical term is “transferred” – in effect it’s a sale of the patents for a simple engineer like me, and that sale, we received a small upfront payment but we have great beliefs that it’s going to generate a lot of revenue for us in the future.
And last but not least, I’ll touch on this, that we received a very I would say positive ruling in a matter we have been litigating Hynix for twelve years, and I think we’re finally coming to the end. And Judge White issued his ruling. We’ve submitted some papers. When you read the press it sounds not so good for Rambus but it’s actually really, really good and I’ll hit that at the end.
So I think we’ve gained a lot of traction in the marketplace and to say it simply, I think the strategy is working. And this is the stuff that you see; I won’t go through this but the presentation’s on the website – I think many of you have it. So for all of the different areas I think we’re starting to get that feedback from the marketplace, that Rambus is a different company, that they’re really focused on creating a lot of value and that they’re being successful.
So this list of things, the hero of slides as we call them, are how we look at the business – the memory and interfaces, cryptography, the security piece, the Imerz multimedia platform, lighting and displays, imaging, and Rambus Labs which is really where we develop some of the most advanced features. In fact, the Imerz platform and the imaging were originally in Labs and now we’ve kind of elevated it to a product level because we’re engaging the market in a more open way.
So I’m not going to go through all of these given the limited time. I’m just going to touch on a few of them that are let’s say in the next year or two big drivers in our business. The first is of course, the memory business which is the core of the company, represents about 85% of the revenue. We think it’s going to grow but we think the percentage is going to go down because the other new businesses are going to add a lot more revenue really starting in the second half of this year. But it still is going to be the core of the business for a while.
So what we’ve done is focused a lot less on the standard DRAMs, the commodity parts, and focused on two other areas. The first is mobile and the second is the cloud – yeah, it’s the big data aspect of it, servers if you will. What’s interesting about this is our company, the secret sauce here is signal integrity. We know how to take a bit from one chip, put it in another chip, make sure it gets there and it gets there clean, and it gets there really, really fast. And the way you do that is you switch the circuits fast, so you turn it off and on very, very fast.
Now the beauty of that is when you go fast you get fast data, but you also get low power if you optimize around that because the current and the voltage – the area under that curve is power. So if you can turn something off and on fast you can get low power. So what we do on the mobile side is to say “Look, I want the absolute lowest power to keep the battery life down, and what’s the fastest rate I can get at that lowest power?” And that’s what we can do with our R+ technology.
And on the server side you say “I want the fastest data rate that I can go through and what’s the lowest-power device when you do the fastest data?” Well, that’s Rambus too with our R+ technology. So that’s what we did, that’s what we’ve announced. It’s gaining I would say a lot of traction. It’s stuff that’s more advanced and new. We’re doing some of the devices in collaboration with Global Foundries so they can offer it to their customers.
I think it’s something you’re going to see especially as we get into 2014 is going to be very, very important. Again, this is a little different than the company did before. It’s not something that’s proprietary. There are proprietary features but you think of those as advanced features that you can choose to use, but the rest of it is completely standardized.
The benefits as you look, it’s not just at the chip level. It’s really at the end user level, and in discussing with one of the customers they said “Wow, this R+ - what is it really going to do?” Well, it’s 25% to 30% better in power consumption at these [IOs]. “Well, what does that do?” and the technical team has done a very thoughtful analysis.
And for most of the systems they said “Well, [how about] a 5% battery life?” And before coming [here] I ran a handset, a small French handset company before. To get 5% battery life this is really important especially on a small piece that we do. So I think what we’ve done is focus on exactly the right things in this business for what’s valuable to the customers and what’s valuable to us as consumers.
The cryptography side – in terms of growth rate this is probably our biggest area for growth rate. It’s probably the most important for the simple fact that whether you know it or not we really all need improved security. This security, you hear about security, it’s many, many things, it’s billions of dollars. This is really focused at this point on hardware-level security and it’s built around this secret sauce which is DPA – that stands for differential power analysis countermeasures.
And what those are, countermeasures means protecting against and differential power analysis is when you have a system, say a handset or a tablet – when that is switching, as you look at it say with a simple antenna hooked up to an oscilloscope, in the most leaky of systems as the system switches if you know the signature of an encryption algorithm you can actually see it in a voltage versus time or a current versus time. And so when you look at that encryption you know what comes right after that is the secret key.
So on many of these very leaky systems, you can take an antenna, point it at a cell phone, hook it up to the oscilloscope that you can get from a high school physics lab and read the secret key off. What does that mean? You give me your handset and a very leaky one, even if it’s not a leaky one – within 24 hours we can give it back to you and have access to every single piece of confidential information you have. Now we don’t do that because we’re kind of the white hat hackers. We actually provide ways around that and that’s what these guys have done.
It’s an acquired business; it’s a business we’re growing. We’ve tripled the size of the team over the last twelve months that I’ve been here. They’re very talented in this area. The entire smart card industry, for little chip and PIN cards coming from Europe – it’s the banking cards; they’re essentially every company except for a couple in China are licensed for this technology. Very small rates but where it’s going is on every single device that’s out there and I’ll give you two examples on this slide really quickly.
The first is conditional access, a set-top box. Remember I said that Broadcom announced that they’re using our technology? Well, Broadcom is the leader in making systems on a chip for set-top boxes, this is what they’re using. So what that allows you to do is not hack the keys. So when your service provider turns on the system and sends you the key it’s really, really hard if not impossible to hack and that’s why Broadcom has adopted it.
So every single device that’s out there I believe will end up using this technology over the next ten years. So we’re talking literally billions so you can get a feeling of the unit count – the question is how much money can we get from each device, which will be different.
The one on the right is a little bit different. It’s using the same type of core in an anti-counterfeiting application. We have a customer in a large printer company that you would probably know because there’s only really four or five of them that are the primary providers of that. And you know the model they have there is the razor and razor blade, kind of the Gillette model – they give away the printer and they make money on the printing ink.
Now, when you have a high value item like that and it’s really high value it’s bound to be counterfeited. So what we do is provide a little core to companies like a Marvell who would put it inside the ink, and then the core is integrated into the SOC, the system on a chip that runs the printer; and the ink cartridge authenticates itself. So you could even stop the printer. Not all of them do that; they just send a little signal that says “Hey, you’re using counterfeit. That’s naughty, don’t do that,” but you could also even stop the printer.
So when you look at the numbers – Satish knows the numbers much better than I do, but there’s about a $6 billion printing counterfeit business. So this is an enormous value and you can take this to network cards – big companies that produce networking equipment, they’re always counterfeited, a lot of stuff coming out of China. You can think about it in airline parts, single-use medical instruments – almost everything that does that has a counterfeit piece on it and we’re systematically attacking those segments.
So this just happens to show the name of all of the partners on the conditional access. The important thing down here is we have about 75% of the set-top box chipsets. Now, that doesn’t mean set-top boxes, right – they’re introduced and they take some time to get out there. But we believe in 2014 we’re going to have a very strong revenue stream from this hence our belief in the growth.
LED lighting – the secret sauce. The secret sauce in here, there’s really three but what we’re practicing mostly are the left two and I’ll explain them. We don’t do LEDs, the semiconductors; we don’t do general lighting pieces. What we do is we make the light guides, the optical wave guides that when you couple the LED, the middle picture to the light guide you shine the light in there and then you manage its escape. And those are the two things.
The middle piece on the diagram is we have a very efficient patented way to couple the LED to the light guide and that allows you to have very efficient transmissions so you get all of the light getting in. Once you get the light in very efficiently the question is how do you get it out, and most of the people just oblate the surface via sand blast or etch it chemically – and that scatters the light out but it scatters it out randomly.
So the secret sauce that the guys came up with is what happens in the injection molding process if you actually created little essentially mirrors in that – little deformities in a very specific shape so that the light scatters not randomly but precisely where you want it? And that is the secret sauce that has been used in two places.
One is LED light bulbs. So this is a complete flyer. I know it’s different than what you think a company like we’d do but I’ll tell you it’s the small companies that usually capitalize on big market discontinuities. Cisco’s a big company today but in 1990 when they bet on Ethernet and IBM was betting on token ring they were not a big company, right? IBM should have won but they didn’t so Cisco did.
So we’ve bet on this. It’s a very interesting one. We’ve partnered with a Canadian company, we really don’t have a channel to do this and they’ve gotten us our first design. We have a provisional EnergyStar and in part the way we got that provisional EnergyStar is through this very novel design. So I know it looks funny, here it’s hard to see but it’s actually a cylinder and that cylinder has the micro-lens technology on the outside that allows us to have a perfect distribution of light like an existing light bulb.
If you look at most of the LED light bulbs today they kind of snow cone like, where the light goes up but it doesn’t go around. So to get EnergyStar you have to have the right light distribution and because it’s uncapped we can scatter the light in the cylinder piece and it allows airflow to go all around it. That’s really important because there’s a lot of heat generated by these LEDs and if you have a snow cone kind of traditional lamp on it you have to just pull it out through conduction – so atoms bumping into atoms, pulling it out through the bottom.
When you have the open air you can go through conduction and convection, so the air currents flow through and suck the heat away. So ours is 12 degrees Celsius cooler than traditional ones when we’ve measured it. And most of the failure phenomenon if you’re physics-oriented is usually associated with temperature but in an exponential way – it’s called a Boltzmann e exponential - ε2/kT. So it’s a very, very strong function of it, so 12 degrees Celsius can have the lights last a lot longer. So it’s new, it’s very small revenue but the first orders show that we’re moving positively.
The second step is in general lighting. So you look at the lights up here, this is a general lighting mostly on the professional side. These are not LED lights but they’re coming and I think the entire industry is in that transformation. And this model is more of a licensing model for us. We have licensed two primary providers – GE and Cooper. These are two very big names in the lighting industry as you can imagine.
We had about a month ago Light Fair in Philadelphia – that’s the big lighting trade show and both GE and Cooper were showing many, many different products all based on our technology. So today it’s small, we have our first orders and we’re starting to see product, so the second half of this year and going into 2014 again should be very positive.
So that’s kind of the high point, so as you see the core business is great. We have a strategy that’s really collaborative. We have cryptography and lighting, new businesses – both of them poised for significant growth. So we perceive that we’re going to start to do better than what we’re showing you here.
This is just the last few quarters of the financial results. We went through a little bit of a trough earlier in 2012. We somehow stabilized. Q1 was somewhat higher because we had a one-time payment from closing LSI but the revenues have been very solid.
What’s I think very important is when I came onboard we sat down with the team and said “We’re really spending too much mostly on G&A. We really need to be a leaner, more startup-orientated company, much more focused on creating value for shareholders.” So we did some cuts. It really wasn’t around R&D – all the programs are there. Some of them were tweaked. Those that were working on things that were 12 years out we said “No, no, no – three to five years is where we’re going to focus, not twelve” and you saw we had a reduction in expenses.
They went up in Q1 not because we added a lot but because we accrued for higher bonuses because we’re projecting to have very significant growth. So that’s not a bad thing – we want to reward our employees for doing a good job. And that has allowed us to produce on a pro forma net income basis a significant improvement in profitability. So I think the company is very much on track.
In terms of the litigation, while it’s certainly not our focus, it’s not what we want to do it is inevitable that there’s some of us – there’s always a carrot and a stick in the tech business. But we also have some litigation cleanup. So we closed Fujitsu, we closed LSI, we have a few others that we’re working on. And we also have in the DRAM business Hynix and Micron who are not licensed and we’ve been going through litigation for these twelve years.
We had a ruling on May 8 by Judge White and this ruling is very favorable for us in the following sense. He denied all of Hynix’s motions. He corrected some findings of fact to limit spoliation – I can explain that in a second; and he basically said “Yes, your patents are infringed. But because you spoliated” – which is a legal word for you destroyed documents, this was in 1997 I think or 1998. I wasn’t here, I don’t know what happened, I don’t care, it’s something that’s come up repeatedly. Everything else is clean from 2000, that’s the findings of fact so everything is clean, we have a very strong patent portfolio. But he said “Because that we not it we’re going to subtract $250 million.”
So we and Hynix filed our… What the judge asked us “Okay, now you have the ruling, give us your interpretation of that and he’ll make a final ruling or judgment on it.” And when we do it’s a very complicated one, if you’re interested it’s a piece you can go through, painful piece by painful piece but it’s what he awarded us before plus some interest plus a mandatory license for a period where they weren’t licensed and this is just for stuff that was 2010 and before. They don’t have a license going forward.
You add all of that up, it’s $500 million, you subtract the $250 million – we’re roughly around $250 million, that’s our interpretation of what they owe us. So that’s on the table, we’re going to get the final ruling. They will have a different number in their calculus that they go through; you can go and look up how we view this for yourself if you want to go to the dockets. Net-net is I think this is a good deal for us, it’s a good deal for our shareholders and I think this it’s a basis to drive resolution with Hynix and also with Micron.
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