Rambus' (RMBS) CEO Ron Black on Q2 2014 Results - Earnings Call Transcript

Jul.21.14 | About: Rambus, Inc. (RMBS)

Rambus Inc. (NASDAQ:RMBS)

Q2 2014 Results Earnings Conference Call

July 21, 2014 5:00 p.m. ET

Executives

Ron Black - President and Chief Executive Officer

Satish Rishi - Senior Vice President and Chief Financial Officer

Analysts

Suji De Silva - Topeka Capital Markets

Gary Mobley - Benchmark

Atif Malik - Citigroup

Sundeep Bajikar - Jefferies

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2014 Rambus Inc. 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 is being recorded. I would like to introduce your host for today's conference, Mr. Satish Rishi, CFO. Sir, you may begin.

Satish Rishi

Thank you, Vincent, and welcome to the Rambus second quarter 2014 results conference call. I am Satish Rishi, CFO and on the call with me today is Dr. Ron Black, our President and CEO.

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 70409115 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 are 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 5:00 PM Pacific Time.

In an effort to help provide greater clarity in our financials, we are using both GAAP and non-GAAP pro forma format in our press release and also on this call. I need to advise you that the discussion today will contain forward-looking statements regarding our financial prospects and demand for our technologies 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 Web site reconciliations of these non-GAAP financials to the most directly comparable GAAP measures. You can find a copy of our earnings release and the reconciliation on our Web site at rambus.com on the Investor Relations page under Financial Releases.

Now, I will turn the call over to Ron.

Ron Black

Thank you, Satish and good afternoon everyone. We had a great second quarter with revenue of $76.5 million which came in at the high end of our upwardly revised guidance and was up 32% year-over-year. Our pro forma net income was $18.9 million also above our guidance and we were again GAAP profitable sticking to our goal of maintaining that profitability quarter after quarter.

As a result, we are very happy with our first half financial performance, especially in light of the fact that there were some significant downsides such as the revenue expected from Sony PS3, that were offset by securing new customers. Satish will provide more detail on this in his section but in summary while we are ahead of our plan today, we are not raising our full year guidance. As I have mentioned on previous calls, our approach to setting guidance is that multiple ways to achieve the range and always avoid creating a situation where a customer will demand price reduction in order for us to achieve the quarterly forecast.

Sometimes this results in us exceeding our guidance range or lumpy revenue, but I can assure you that this is the result of what we believe to be an appropriately forecasting methodology. So while there are scenarios where we can exceed at the annual guidance of $295 million to $305 million, at this point we simply can't commit to them.

One of the big highlights of the quarter was the launch of CryptoManager, our secure feature management platform with Qualcomm as lead customer. This platform provides chip and device companies with a hardware root of trust as well as an infrastructure that enables end-to-end security through the SoC design and manufacturing process. We are working closely with Qualcomm to integrate this solution into their application processes to provide advanced hardware based security provisioning throughout the manufacturing process.

Feedback from the market on CryptoManager has been excellent. We are engaged with several new customers as we come out of stealth mode. We have a wealth of information about CryptoManager on our Web site and have created a video that shows the benefit of CryptoManager solution in a fund easy to digest manner. Please check it out. Touching on the strategic and tactical relevance of CryptoManager, I think that you all agree that security is an important topic as the news is often highlighting enormous security breaches. We believe that CryptoManager platform can be a game changer in helping our customers and their customers improve security.

If you recall, we have been speaking a lot about the importance of collaborating with the industry and finding ways to more broadly engage to deliver our solutions. This was the basis for our decision last quarter to join the JEDEC JC-40 committee and it provides us a platform from which we can work with the industry to help define and drive important requirements to improve power and performance in cloud and server based memory environments.

One of the things that I am happy to consistently report on is the fact that the memory industry is once again healthy and consequently becoming more influential in driving system architecture. We believe that some of our architectural innovations can dramatically improve power and performance and we hinted at some strategic programs at our Analyst Day in June although we were necessarily vague because the program is still in stealth mode. What we did indicate, however, is that the opportunity was on the order of $450 million today growing to over $600 million by 2018.

I am happy to report today that we have signed a memorandum of understanding with a large, strategic customer and have initiated development on the program which will run through 2015 and is expected to generate significant revenues for us in 2016. At Satish will outline in more detail later, we are increasing our expenses in the second half given the enormous growth potential for this program.

Looking back over the last two years, we are proud of our accomplishment. We started with profitability through a modest restructuring, augmentation of the strategy to collaborate with the industry and profitably resolve litigation, refinement of our portfolio by curtailing investment in some areas to afford more in other areas, and most recently with the launch of truly innovative solutions like CryptoManager. With this positive momentum in completion of the turnaround, we are increasingly looking forward to determine how we best collaborate with the industry and influence future architectures in the cloud, in mobile and in the Internet of Things.

To this end, we have created chief scientist positions and promoted Paul Kocher, who we previously was the General Manager of our cryptography division, and Craig Hampel, who is a Rambus fellow focused on memory and system architecture, to be Rambus chief scientists. You will be hearing more from both Paul and Craig in the near future. Martin Scott, formerly our CTO, will be taking over from Paul running our cryptography division. Martin has extensive experience as a General Manager having scaled several businesses in HP and PMC-Sierra. Laura Stark will expand her role and strategy and also run Martin's previous group which included Rambus labs, our lighting division and our new initiatives. Laura's group is called emerging solutions division.

In closing, I believe we are well situated to capitalize on the right opportunities and are properly structured to grow the business. We are building the right teams and investing in the right areas to build for the future growth and I am confident that revenue will follow suit. We believe we have several avenues in line that could more than double the size of the company in the coming years. With that, I will turn the call back over to Satish to give a read out on the quarterly results. Satish?

Satish Rishi

Thanks, Ron. I will begin with a review of some of the financial highlights for the second quarter before going in additional detail.

Revenue for the second quarter was $76.5 million, at the high end of our revised guidance of $75 million to $77 million. Even though we tried to maintain steady revenue streams, sometimes the revenue is lumpy and in this quarter we had additional quarterly payment from one of our customers which pushed our revenue higher than original guidance.

Year-over-year revenue was up 32% and sequentially revenue decreased by 2%. Due to slower than expected headcount additions as well as the pushing out of some prototyping expenses, pro forma operating expenses for the quarter came in at $43.8 million, slightly below our guidance of $47 million to $44 million. Pro form net income from the quarter was $18.9 million as compared to our initial guidance of $12 million to $17 million. For the quarter, revenue for MID, CRI and LDT business units was $58.6 million, $12.8 million and $5.1 million respectively. These numbers represent a 4% and 1% decrease and a 20% sequential growth respectively for MID, CRI, and LDT.

Growth year-over-year as investments for the new business start to pay off, were 19%, 61% and 825% for MID, CRI and LDT respectively. For the quarter, revenue from DRAM customers was $37.4 million as compared to $38.9 million last quarter and $25.4 million in the quarter a year ago. Total cost and operating expenses which exclude retention bonuses, stock-based compensation and amortization of intangible assets, were $43.8 million for the second quarter relatively flat to the previous quarter and a 6% decline from a year ago.

Our overall cost and expenses continue to decline year-over-year due to lower litigation and consulting expenses. We continue to manage our resource allocations as we continue to streamline expenses and invest in areas where we believe we will have the greatest impact to our customers.

Pro forma EBITDA margin was 47% for the quarter as compared to 48% last quarter and 26% in the quarter a year ago. We paid down 172.5 million convertible notes this quarter and pro form interest and other expenses for the second quarter were slightly lower at $3.2 million due to the pay off of the convertible notes in June. Using a flat rate of 36% for pro forma pre-taxes, pro forma net income for the quarter was $18.9 million, a decline of 4% quarter-over-quarter and an increase of 273% year-over-year.

After paying off the $172.5 million notes, the last interest payment of $4.3 million and the final retention bonus for CRI, cash decreased by $157 million and we ended the quarter with cash and cash equivalents of a healthy $246 million. Cash from operations was approximately $10 million, slightly below than what we expected due to timing difference between signing deals and collections.

Net cash, defined as cash, cash equivalents and marketable securities less outstanding debt, was $108 million as compared to $93 million last quarter and $33 million a year ago.

Now I will provide some guidance for the third quarter of 2014 as well as for the full year. This guidance reflects a reasonable estimate and actual results could differ materially from what I am about to review. For the third quarter we expect revenue to be between $68 million and $73 million. We expect pro forma operating cost and expenses which exclude stock-base comp and amortization of intangible assets to be between $44 million and $47 million, pro forma net income is expected to be between $12 million and $18 million.

When we estimate our revenue for the quarter or the year, we try to include only those deals which we believe have a high probability of being signed during the period. For the quarter we provide a range of $4 million to $5 million when we make our estimates, so we are more flexible in the upside and we are more likely to miss on the upside than on the downside. When we gave the full year guidance at the beginning of the year, we had built in higher revenue estimates from the PS3 royalties but given the success of PS4, we have seen a faster decline in the royalties from PS3 which we have tried to replace from other signed deals.

In addition, some deals moved faster than expected and we closed them a quarter earlier than expected. So even though we exceeded guidance in the first and second quarters of this year, with the offsets we have we see no change to our full guidance. As Ron mentioned, for the full year we still expect revenue to be between $295 million and $305 million. We expect total operating cost and expenses to be closer to $185 million. As Ron mentioned, we are making investments both for the CryptoManager platform as well as other new strategic initiatives in the memory and interface technologies and have been adding some headcount to support these initiatives.

We have been generating cash from operations for the past four consecutive quarters now and we expect to continue doing so. For the full year we now expect that cash from operations to be between $65 million and $75 million.

Before we open the lines for Q&A, I would like to take a moment to thank those who joined us New York in June for our Analyst Day. Our goal is to provide more transparency into our businesses, highlight some of the growth opportunities, provide a longer-term operating model and of course to introduce our team of executives to you. Thank you for your attendance and we appreciate the time you took from your busy schedule.

With that, operator, can you open the lines for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Suji De Silva. The line is open.

Suji De Silva - Topeka Capital Markets

So first of all, the full year guidance being unchanged with the 3Q guidance, does that imply that 4Q up sequentially? Is that something you have visibility with and comfortable with at this point? Just to clarify the full year ranges there?

Satish Rishi

Well, we are giving a range of 68 to 73. So right now there might be some push out between Q3 and Q4. So for the full year I will keep the guidance that we have but I don’t want to parse it down to what Q4 would be right now. We have some expectations signing some licenses in Q3 and if some of those happen then we might be able to give better guidance for Q4.

Suji De Silva - Topeka Capital Markets

Okay. So there's some possibility of push out from 3Q to 4Q and that’s what challenges the guidance it sounds like. And then also how much of the Sony PS3 revenue run rate is left that that could fall off in terms of the headwind, just to understand the magnitude of that.

Satish Rishi

Well, most of the revenue for PS3 for us comes in Q1 of the year and we have some in Q4. So Q4 typically is the best quarter and then -- you know it is a good quarter than Q1 for PS3, typically the best quarter for us and we can see that. So everything from the fall off of PS3 now has been built into the revised guidance we have given you.

Suji De Silva - Topeka Capital Markets

Okay. And then maybe a question for you Satish and Ron also, perhaps. It sounds like you are growing the R&D headcount whereas you have been perhaps in more of a redeploy mode last few quarters. Should we take from that that the cord R&D deployed right now is at a level you are comfortable with where everybody is kind of being put to a use that you would like to and at this point you need to grow R&D to grow with the business.

Satish Rishi

Yes. I mean we are comfortable where we are but we just introduced CryptoManager, so we will be hiring some additional people to manage some of the infrastructure that we have to build and also for developing the CM program after that. Paying for the other initiatives that we are talking about on the memory side, that Ron mentioned, we will be adding some more headcount to that. So we might be expanding our R&D quarter-over-quarter. Ron?

Ron Black

Yes. Suji, that’s what we tried to reflect in it. The core business is performing exceedingly well. It's highly leveragable as we have described multiple times. Some of the newish initiatives, the CryptoManager and the new one that Martin described briefly in the Analyst Day, are somewhat different. Still very rich, high margin businesses with enormous growth potential but it's a little bit different than the historical business. So we have had to add different skills. So there will be less portfolio management which we have done pretty ruthlessly over the last year. Of course, we always tune them up as we go year-on-year but we are pretty happy with everything we have.

Suji De Silva - Topeka Capital Markets

Okay. That helps clarify it. And then last question from me perhaps. CryptoManager, you said you had customers in the pipeline behind Qualcomm. I was curious what the size of those customers are relative to Qualcomm and more importantly, how far along they are versus Qualcomm? Are they still in early stage or further along. Any color there would be helpful. Thank you.

Ron Black

So I am going to obfuscate the size because it would start to indicate who they are, that would be inappropriate at this point. They are strategic customers to us. They participate and understand the importance of this type of technology in the handset and mobile space. And they are new, they are not very advanced but it's the type of thing that can go very quickly to a potential deal.

Operator

Thank you. And our next question comes from Mr. Gary Mobley of Benchmark. Your line is open.

Gary Mobley - Benchmark

I'm going to start off with a question on clarification. Satish, could you mention again what the CRI revenue was for the quarter?

Satish Rishi

CRI was $12.8 million.

Gary Mobley - Benchmark

Okay. Thanks. And (indiscernible) what kind of relationship (indiscernible)?

Satish Rishi

Sorry, Gary, you are cutting off. Can you repeat the question, please?

Gary Mobley - Benchmark

Looking at the revenue delta that you are expecting between Q2 and Q3, it's about $6 million. Could you walk through what that revenue delta is? How much of it has to do with the timing of the Qualcomm license relationship?

Satish Rishi

Well, every quarter is different and you know we do have lumpy quarters. So in Q1 we had a couple of one time annual payments and we also had the excise of one of the options that one of the customers had. So that was in Q1. In Q2 we had another customer pay us for an extra quarter and we also had an annual payment that came in. So not every quarter is exactly the same. There is a certain portion of our revenue, whether you call it 85%-90% that is repetitive quarter-over-quarter but there's other variabilities that are built in quarter-over-quarter. So I can't give you a bridge between Q2 and Q3 but I can tell you that the estimate we are giving you is a best estimate and we believe that we will come in between $68 million and $73 million for Q3.

Gary Mobley - Benchmark

Okay. And can you talk about any major renewal, contract renewals that might be coming up for the balance of 2014 and maybe even into 2015 without having to name specifically the customer?

Satish Rishi

We don’t have any renewals in 2014. In 2015, we have a couple of SoC renewals coming up and we will probably talk a little more in detail about them in our next call.

Operator

Thank you. (Operator Instructions) Our next question comes from Atif Malik of Citigroup. Your line is open.

Atif Malik - Citigroup

You guys talked about recognizing some cash from the Qualcomm deal at the tail end of this year and revenues more in the second half -- I mean in the first half of next year. In terms of -- assuming your $300 million is a conservative outlook for the full year and then Q4s are growing 5% sequentially. Is it fair to assume Qualcomm is a major driver in that revenue increase in Q4?

Satish Rishi

Well, Qualcomm is a large customer, an important customer to us. I really can't talk more about the magnitude of Qualcomm's payments because of confidentiality.

Atif Malik - Citigroup

Got it. And then you guys talked about a large strategic customer in your prepared remarks, with revenues ramping in 2016. Can you provide a little bit more color without naming the customer? Is it an OEM, is it an IDM or a fabless customer and is it an existing customer or a new customer?

Ron Black

We really would prefer not to mention anything about this. We try to outline the general direction. If you go back to the Analyst Day and see where we articulated, so it gives you a few hints about the total available market, the richness of what we were doing. But neither the customer, it's confidential, would like us to do that nor do we believe it's appropriate at this time. It's just an explanation of why we are doing what we are doing. And quite candidly, I think we have delivered consistently over the last few years and we are pretty excited about this new growth opportunity which we didn’t have, quite candidly, last year. So it's great. If anything, I would say that this is another indication that our collaborative approach is working and I would say that this opportunity would have never been presented itself if we had not changed our engagement model.

Atif Malik - Citigroup

Got it. One last one for Satish. Is there a seasonality in terms of your revenue recognition for the CRI business. It looks like in the Q1 always a little bit better and then Q2 is flat. So is there any kind of seasonality in revenue recognition for the CRI business for Q1?

Satish Rishi

Yes. I mean CRI has a couple of contracts where they are paid annually. So they had paid in Q1 and I think there is one also in Q2 but then they don’t get paid for the rest of the year. So it's not linear, it's not quarterized. It's one payment every year from a couple of different customers.

Ron Black

Yes. And just one other comment. As we deliver solutions like CryptoManager, some of those while in general it's a general purpose solution that can be used anyway, there is always a small amount of customization that customers will want to address their particular needs. And as a consequence, there will often be revenue recognition in pieces. So, we may actually get paid for some customers upfront and recognize the revenue in the future. There will be more of that as we go forward. So, we may actually have success with the customer, payments with the customer, but revenue recognized one or two quarters later.

Operator

Thank you. And our next question comes from Sundeep Bajikar. Your line is open.

Sundeep Bajikar - Jefferies

So Rambus recently joined the JEDEC standards group. Does that mean that certain Rambus technologies would be on a faster path to adoption than they would have been otherwise? I guess where I am going to that is, if there is any connection between joining JEDEC and starting this new strategic development program with the new customer that you just announced.

Ron Black

So JEDEC is more general engagement model. The customer that we are working with is a more specific one. And we will always try to be standards compliant although these two things are not necessarily connected. But we are really trying to bring to bear and some of these is our own unique technologies to differentiate or help the customers differentiate. So I wouldn’t draw conclusions between these necessarily but just look at them. It's steps for us to participate in the industry and hopefully, yes, have our technology be more influential in doing so.

Sundeep Bajikar - Jefferies

Okay. Great. And then another question about the LabStation validation platform. Can you give us some color around the types of customers that might choose to use that platform and perhaps the framework to think about the size of the market and potential timing of revenues there?

Ron Black

Sure. I would look at that in a very modest way. Just to make it clear, we are not a tools vendor. We have engaged a variety of the EDA tool companies just to articulate some of the things that we have and look at partnering with them as a potential channel. Some of them do board level work, this is what this is. It can be used by chip companies, it can be used by system companies. It's kind of the classical, what I would call IDE type environment, or where I came from in microprocessors, that aids the customer in really understanding the margin that they have in our design and in being able to do it in a very controlled way. So you can program registers and really look at the responses. So this is very modest, although we are incredibly excited by it. And right now it tends to focus on working with our technology but we are also expanding that. We are really improving the user interface. We have a group of experts in user interface. So we think that when this is done, it's going to be one of the most usable tools out there. And as a consequence, I mean there is always a business rationale for it. We are going to have really nice sticky customer relationships because the engineers will love the tool and as a consequence like to reference our technology.

Sundeep Bajikar - Jefferies

Okay. Great. And then last one from me on CryptoManager. Can you remind us of the sequence and timing of revenues from that new CryptoManager platform. It is a new business model so I think you have talked about, at least three different types of revenues at different times. When should we expect steady revenues to start if they have not already?

Satish Rishi

Yes, so we will have revenue coming from three different legs of the transaction. One would be for the core, and when we ship the core for engineering services we will get paid on that. And as Ron mentioned, even though we may get the cash the recognition of revenue might be spread out over a time where at least some of that work is being done. The second part would be modest but on the infrastructure structure side as we deliver to them what we call, security appliances or modules that we provide to them, for them to be able to manage the infrastructure. The third one would be from the key management when this part taking their next gen design into production and when they are injecting the keys into that core. So that would be the third leg of revenue and the timing of that would be anywhere from some starting now and some starting somewhere down the road depending on, you can figure out how long it takes to get from core to actual production.

Operator

At this time I am showing no further questions. I would like to turn the call back over to Dr. Ron Black for any closing remarks.

Ron Black

Thank you very much and thank you all for your continued interest and support. We obviously are very pleased with Q2 results and our growth opportunities and we believe we are well positioned to capitalize on the excited trends. Thank you and we will speak to you again.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may all disconnect. Everyone have a great day.

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Rambus (NASDAQ:RMBS): Q2 EPS of $0.16 beats by $0.01. Revenue of $76.5M (+32.1% Y/Y) beats by $0.5M. Shares -5.61% AH.