Rambus Management Presents at UBS Global Technology and Services Conference - Conference Call Transcript

| About: Rambus, Inc. (RMBS)

Rambus, Inc. (NASDAQ:RMBS)

UBS Global Technology and Services Conference

November 15, 2011, 16:00 p.m. ET


Satish Rishi - CFO

Unidentified Analyst

I think we will probably get started. Thanks for joining us for our 4 o’clock Rambus presentation. And Satish Rishi is going to go through a quick presentation on the company and then we will open it up for Q&A. Satish?

Satish Rishi - CFO

Thank you, Doug. Good evening, everyone. Before I begin, let me just remind you of some of the Safe Harbor provisions and some of the Safe Harbor language here. I may be talking about some forward-looking statements. And you got some more details here up on the slide. And I also might be showing you some slides that relate to some non-GAAP measures and we also have our reconciliation of that in our presentation.

So, what I want do is take about 15, 20 minutes and give you a quick overview of Rambus and then open up for Q&A. Rambus was founded in 1990 and our two founders, Mike and Mark, they were PhD, inventors and they are both being very involved with the company ever since. They are both still on the board. And what they discovered what they invested that point in time back in the late 90s was really a way to break through the bottleneck that existed that in point between a memory and memory controller interface.

The company grew, we went public in 1997. We have been growing since then. We recently moved, last year we moved from Los Altos where we have been for last ten years, moved to Sunnyvale. We have offices in different parts of the world and at the end of last quarter we had about 440 employees. We hired about 50 to 55 employees over the course of the year.

And as of last quarter our revenue as of the end of the last quarter was 233 million, of which about 100 million came in Q3. I’ll have more of the financial in a couple of different slides.

This curve basically shows how we are growing our patent position and over a period of time as you can see, we have been growing our patent position and at the end of the day, we are an IP licensing company. And what we really produce are innovations and technology and patents, which we then license to our customers, who then pay us a royalty for the use of those patents.

So, at the end of last quarter we had approximately 1300 patents issued and about 960 applications were pending, and this includes patents in the areas of in the semiconductor space, in lighting and display, some in packaging, some in multicore, and also in the cryptography and security.

A little bit about the company and how we do business. So, basically what Rambus is we have both the platform that really has built up on innovation, patent development and licensing. These are three things we do really well. We have been very successful and fortunate being able to hire good people and retain them. We have been able to challenge people, we are trying to solve problems three to five years down the road that our customers may face in the future and then we challenge them, we are trying to come up with solutions.

We have overtime developed a very good team that writes very good patents, so basically patent prosecution. And then we have a team that goes and licenses patents, so we have grown overtime and these are competency that we have built in the company in which we are very proud of.

As we have grown, the company as I mentioned we started off in the semiconductor space, but overtime in the last couple of years, we have built additional competencies, additional markets, so additional areas that we have been able to grow or want to grow, and one is the lighting and display area, the other was a cryptography area and I’ll talk a little more about each one of these three in a few minutes, but all of these are enveloped in the Rambus platform.

All of these businesses have very common theme in terms of their overall licensing models. We don’t build products, we don’t sell products, we don’t sell physical products. What we do is, we create patents and then we work with the customers and they use those patents, they use our technology and then they pay us for the technology they use. We also in some cases take it a step further and in the semiconductor space we actually build complete architectures and we allow our customer and we brand them. So, if you hear our term XDR DRAM, that stands for extreme data rate DRAM. In the past we also had Rambus RDRAM, these are branded products and these are our proprietary technologies which we license to a certain customers and then when they ship and build these products with that branded name, when they ship the product they pay us a royalty based on the unit shipments. So, we have patent licensing and then the second part we just talked about was what we call solutions or technology licensing.

In addition sometimes, we also get our customers who come to us and they want us to either work on a certain project for them that may further our engagement with them. And if they have some sort of an NRE, a non-recurring engineering cost, which also we recognize as revenue but we recognize that as a contract revenue. So, you will see in my presentation, we will talk about these three different streams of revenue flow that come to Rambus.

So, part of the reason why we undertook the acquisition strategy and diversification was basically to derisk the company, but at the same time, to create future avenues for growth for the company. In 2009, we were purely in the semi space, at that point in time, the addressable market for us was about $230 billion. In 2010, it was a good year for the semi space and that itself grew to about 304 billion, but additionally we also added the lighting and display side. And the display market itself is about $180 billion if you measure that as based on the ASP of the backlit units that are sold. And then the general lighting industry is about 100 to $106 billion depending on who you ask. And in that case, the penetration of LEDs today is limited to about 5 or 6% and slated to grow in the 40 to 50% in 2015, 2016 timeframe based on the numbers that we have seen.

So, with the technologies we have developed it will allow us to grow in these areas. What I don’t have here which is 2011, we also acquired a company called CRI Cryptography Researching, and we were able to challenge in terms of trying to figure out what the addressable market is for that business, because almost everything you think about today need some sort of security. And I don’t want to put some number out there, that’s hundreds of billions of trillions of dollars, but there is a huge addressable market and as we are able to size the market my graph I’ll be able to show what we believed the addressable market would be for that market.

I talked a little bit our business model already, but very briefly what we do is we create the technology, and we work with our partners and allow them to license our technology that pay us the patent licensing royalty for that. In addition, we also work with them when we have proprietary technology. We help develop the customer’s products for them with them, and in that case they pay us what I call solutions licensing which is a separate royalty stream over and above what’s sometime different then the patent licensing stream from the same customer. An example of that is XDR DRAM as I mentioned, and Sony uses that for in the PS3. So, every time our PS3 ships we get royalty revenue from the manufacturers of XDR DRAM that is in the PS3, which right now are Samsung and Elpida. And we get additional royalties from Samsung and Elpida on the patent licensing.

So, let me briefly talk about the three verticals that I mentioned. So, in the semi space the technology we have it ranges anywhere from the high performance, low power circuits and architectures all the way to high serial link technology. When we formed the company and as we grew the company, we developed an expertise in both the memory side as well as on the controller side, but really on the interface and that’s what we excel that.

There are many good memory companies out there who know a lot about the memory and the memory interface. And there are many good controller companies out there who know lot about the memory controller and the memory control interface, but there are very few companies that understand the nuances of both the memory as well as a memory controller interface and how do you optimize both, so that you can maximize the efficiency for the actual interface. So, we spend a lot of time in there, but as we have gone through that process we have also developed technology in board package and design, in industry standard memory products. So, we have a fairly wide gambit in the semiconductor space and intend us to grow in other areas.

We recently announced that we hired Dr. David Stork, who is a renowned leader in the space of imaging and optics. As imaging moves into a competition analysis, it becomes very, it's getting more digital and that’s where we are very good at digital/analog design. So, that’s part of the reason we would like to grow in that area and imaging is one area that we will target as to make a business out of that in the future.

On the lighting side, and lighting and display side, this is a business that we acquired in December of 2009, and what we acquired were patents and technology and we also hired the inventor along with a team of 13 employees which is now close to about 40, 42 employees as of today. And in this case, the technology they had was in the use of LEDs on the edge of any kind of a display panel to allow it to produce light in the uniform fashion over a large surface. So, the technology that we have is in the microstructure and the crystalline structure of the depositions you would do, so that you can bend the light, so that closest to the LEDs is not the brightest and farthest are not the darkest. But how do you make an even flow. And also how do you improve the efficiency of the light output, how do you get to the 90% plus of efficiency of light going in light coming out, because BLUs, only about between 5 and 10% of the light actually comes out from one end to the other. So, any efficiency gains you can get is very, very useful because you can reduce the number of LEDs, you can reduce the power and so on.

We also have technology in how you couple the LEDs, we have technology in the actual production and manufacturer of low cost but high processing films. And then we also developed a lot of technology in system level in terms of how do you design lighting fixtures and our first licensee that we signed was General Electric back in June, July of 2010.

And in Light Fair this year, both in GE’s booth and also in our own private booth, we had quite a few prototypes that we show to our customer that to use edge lit LEDs to create light fixtures and the business model in this case is that when our end customer ships a product that use our technology, we get a percentage of the ASP. So, this is a business that we expect will start ramping in 2012 and will become material to our revenue sometime in 2013 timeframe.

As I mentioned in June of this year, we purchased the company called Cryptography Researching, business arm of Cisco, and in this case what they have is they have fundamental innovation in securing semiconductor devices. There is something called differential power analysis and I won’t try and explain that because it will probably get too technical, but at the end of the day when there is encryption decryption occurring you can follow the power signals and there is surge of in power signal when the encryption decryption is occurring, if you map that and follow that far enough, you can come out with algorithms and you can actually decipher the keys in any secure device.

So, what Paul Kosher and his team developed was countermeasures on how do you make that all happen, how do you protect the device. And this technology is found in smartcards that are used in credit cards, some subway systems around the world, some payment devices, but also the next step was to use this in pay TVs, so in pay TVs there is also a card that goes in or plus some of the pay TVs networks and the wireless television network providers. So, there also we are providing technology that allows you to secure the network. We this technology can also be used in protecting counterfeits where if you have, in this example, we are showing a cartridge where you could show a cartridge and a printer, there has to be one-to-one correlation between the two for the cartridge to work, and if it's counterfeit obviously it won’t work.

So, these are the areas that we already know that exist, that we are looking at monetizing this technology. And there is ample growth in other areas as people look at securing networks, securing handheld devices, mobile devices as you just start making payments with them, you have a lot of your personal data that is stored in that information. How do you secure that, so those are all areas that we are very excited about, and we expect that we will be able to monetize and have our customers use many of our technologies in future of solutions and we will be able to help them protect their devices and their content.

In the last 18 months, we have renewed or signed new licenses and these are some of the key player where we have signed licenses with Samsung, AMD, GE, where we mentioned, Free Scale we signed in Q2 of this year. So, some of the questions that I’ve been asked in the past is these are term licenses, what happens after five years? So, what I remind people is that many of our fundamental patents from the Mike and Mark had, the firm will holds its patents we had, many of them expired in 2010, yet we have many renewals that have occurred post the exploration. So, obviously the industry believes and we believe also that our patents continue to be used and we will continue, as you saw in my second or third slide, we continue with improving our patent position. So, we do have patents today and tomorrow and the future, we expect the industry will continue to use and it is for us to continue creating new innovations that the industry desires and want to use. So, we will have a continuous stream of revenue into the future and not have a cliff in five years time. So, people were expecting there might be a cliff in 2010 when we came to the renewal, but some of these companies that they are on the second or third renewal.

So, very quickly on the financials. As I mentioned, last quarter we had revenue of about $100 million. The way we look at our revenue where we have different metrics for it, we call it customer licensing income. And the reason why we did that was because there were times when we were getting royalties from our customers which under GAAP, we are not allowed to recognize as revenue. But this really was something our customer was paying for the use of our license. So, we started showing it as customer licensing income and that’s what you are seeing over here. And last quarter revenue was about $100 million and CLI was about $92 million.

But what’s important to point out is, if we look at between Q3 of last year and Q3 of this year, there is a significant increase that has occurred and is a good ramp that you can see. Q3 of this year did have some one-time benefits from couple of licenses that we signed. We had some catch up payments from smartphone manufacturer as well as from Free Scale that we had announced, but despite that the point that I’m going to make is that, we are in a good ramp and we have seen growth in the business.

From an expense point of view the orange bar you see on the top is our litigation expense and yes that is $24 million that we spend in litigation last quarter. It is significant and I don’t expect that to be the norm, but we had quite a bit of legal activity, or preparing for legal activity in the previous quarter. I’ll talk a little bit about that when I give you an update on litigation, but something which in our business you have to be able to spend the money to protect your IP, because as an IP company people are using your IP and you have you stand by and not protect it. Obviously you will get a business very quickly.

So, from an expense perspective, we have been fairly between 40 and $45 million. We have grown, I said we had about 50 people, but we are managing to keep a tight lid on expenses. We do continue, we do expect to continue to invest in our nascent businesses, so I’d expect some of the expenses to go up overtime, but that is part of the investment that we are committed to make as we grow, expand the business and diversify the company.

This is just a quick snapshot to show you what the sources are between patent licensing, solution licensing and our contract revenue. As we can see patent licensing is by far the bulk of our revenue, but we do have other sources of revenue as I mentioned on the solution licensing as well as the contract revenue.

From a cash perspective, we ended the quarter at about $293 million. One of the questions I got asked was, all the money you spend was that all on litigation, and then the answer was no. The litigation is expensive, but not that expensive. We bought CRI for about $342 million accommodation of stock and cash in Q2. In addition, we also paid out about $100 million to Samsung when we had entered into the agreement with Samsung back in January 2010, they had made an investment that company put $200 million. But as part of that agreement we had agreed that they could put back the stock to us back at the same price they had bought it at in 18 months time. It's stock hadn’t depreciated and stock had not appreciated. So they gave us back about 4.8 million shares and we give them $100 million. So, that’s part of the reason why you see the reduction in cash from Q1 to Q3 for a combination of acquisitions as well as a $100 million to Samsung.

So, just a quick update on litigation on the price fixing side. This is a case that we had filed back in 2004 against Samsung, Micron and Hynix. And this related to price fixing. Our allegations were that these companies, they colluded to unfairly block out what was Rambus RDRAM from the market at that point in time. It took a while for this case to actually get to trial, and I might think the other parties tried everything they could to delay the start of this trial and eventually it did start. The trial ended on September 21st, and right now this is the 8th week and the jury will be deliberating this week until they do not deliberate today and yesterday. So, we are right now, in a wait and see mode, waiting for the jury to come back with what all the verdict would be. From our perspective we have put our best foot forward and we will see what the jury comes up with.

On the Hynix and Micron cases, which are patent cases that date back not quite a decade but many years, and we had been awarded our judgment by Judge White, which is appealed by Hynix. And then Micron the case was in Delaware and Judge Robinson ruled against us, so we appeal that. Both of these went to what’s called the CAFC, Court Appeal of the Federal Circuit. And that appeal was heard in October. So, in both of these the panel they remanded the verdict or the decisions back to the two respected judges and they are having some case management conferences with the two judges, to further this, so now it's up to the judges to come up with either a different decision or the same decision or to modify decisions. We have a hearing with Judge White on December 16 and hearing with Judge Robinson on January 26.

On the NVIDIA case you have over here, we had sued NVIDIA in the ITC and the ITC ruled in our favor, and NVIDIA entered into a license agreement with us in 2010. And that case was appealed and that appeal of the ITC was also heard by the CAFC and right now we are awaiting the decision of the CAFC.

On the ITC Broadcom case that I have here, in that case we had an ITC investigation against Broadcom, LSI, MediaTek, STMicro and against NVIDIA, not on the memory interface side, but on the (inaudible) side. And in this case the hearing took place and we are waiting for initial decision which we expect some time in January 2012 from Judge Essex Court.

So, in summary, why do I think Rambus is attractive, we have a strong licensing momentum, we have growing market opportunities, growing our addressable market, two acquisitions. We continue to innovate and we have we are innovating in areas that are growing like mobile and lighting and security. We have been successful in attracting and retaining some very smart people and we have a strong balance sheet.

With that we will open up to questions.

Question-and-Answer Session

Unidentified Analyst

Couple of questions. You may have said it on the conference call, I apologize, but the 9 million reversal in royalties you had in Q3, where is this coming from, it seems like a large reversal payment, the 99 million you had [in ‘09]? If you look at your slide on your revenue?

Satish Rishi

Like I said when we talk about CLI, CLI is based on the royalties we received from our customers. And it's not necessarily equates to GAAP revenue. So, in Q2 we had a customer that who signed with us but we were not able to recognize revenue because they didn’t have a release. But we got part of the cash, so we recognize CLI in the previous quarter. So, next quarter when you recognize revenue because they had a release, they didn’t pay us extra cash, so that’s why you have that negative on that slide.

Unidentified Analyst

So, it’s pretty fair to say your revenue recognition is a bit aggressive for an IP company? I mean I covered IP companies before, I have never seen reversal proportion vis-à-vis cash flow?

Satish Rishi

Like I said, it's not a reversal, it's just to be consistent with what the definition of CLI is, what we are saying that we recognized revenue when we received the cash and all of the obligations have been served which in some cases if there is not a release we can’t recognize revenue. But if gotten the cash we counter CLI but it's not GAAP revenue.

Unidentified Analyst

All right. And secondly, looking at display IP, you explained what you are doing in LED backlighting. So, it's candid question I apologize, but do you intend to be as aggressive in seeking IP payment who potentially litigation, we have a panel makers or chip makers as you have been in memory or you have learned to have stabilized 10 plus years of maybe a different productivity in long-term?

Satish Rishi

Let me talk about aggressive, so these losses that we have with Hynix and Micron I think people don’t realize that, we were not the ones who sued Hynix and Micron. Hynix and Micron they sued us, they did it what’s called a DJ, declaratory judgment. And they are the ones who filed suit against us first. They filed suit against us one day apart, and they filed suit against us in two different jurisdictions. So, that has evolved overtime, but it is not our intent to go sue people but after you have talked to companies for 5 years, 6 years, 7 years and you get a stiff arm. At some point in time the customers who are paying you, they start coming to you and say, why am I paying you? So, we have to take certain actions. So, I don’t think we have been aggressive, and I think maybe we have been tainted or fainted as been aggressive in litigation. All we are trying to do is protect our IP, and the technology we have developed that people seem to use without wanting to pay us. On the lighting side and also in the memory side our initial approach was to really go and work with our customers in a collaborative fashion which is what we did we did our DRAM. That will also be an initial approach with the lighting side. We intend to certainly work with a collaborative fashion, we are not going to go to our customer and say, we think you are infringed pay us or else, I mean that is not our style.

Unidentified Analyst

Can I ask you two questions, one is, the IP judgment that was vacated on Hynix, but up held with Micron. I’m not sure I understand that I thought the two were together. And then the seizure you have right now is antitrust, Hynix and Micron there they are actually quite, the two of them not sharing the liability. So, can I just understand how the IP judgment went, why it was up held in the case of Micron but a sanction was being send back to the Court of Appeal and then for Hynix it was vacated. So, I’m not sure I’m trying to understand what happened there?

Satish Rishi

The judicial system is a very interesting one, and something which I really can’t comprehend sometimes, but it is something where different with the same facts and circumstances judges can’t come up with different decisions and it is within the purview of the judicial system to allow that to happen. So, in this case, in the Hynix decision some of the decisions were up held and some were vacated. So, it's not all or nothing. Same thing in the Micron case, it was not all or nothing. So, I think in both cases, there are certain aspects of the decision that were upheld and certain that were vacated. And then on the sharing that you mentioned, in the antitrust case that we have, in that case both parties or all parties are jointly and severally liable. So, what that means is if there is a judgment of one can’t pay, then the other has to pay. So, it's a joint in several liability.

Unidentified Analyst

Second guess was going over to jury, but we are now, I can in the 8th week of deliberation which has gone on longer than most we pull that initially anticipated. I mean the trial was three or four months, and then the jury deliberation has gone on for the second month now. I don’t know when do you think technically if you start to see this wind down and which calculate judgment and have some closure on this matter.

Satish Rishi

I guess we get closure in the matter when the jury decides they are ready to issue a verdict.

Unidentified Analyst

If you look at previous cases that has gone on the antitrust will technically have one day of deliberation of every month of trial. So, this should have been done in like 5, 4, 6 days.

Satish Rishi

I’m not aware of any formula that say if you have three months of trial then you can only go to.

Unidentified Analyst

There is no formula, but I mean such was the base we’ve had so other cases will stay anyway. Couple of questions, let me ask you about the cryptography business. You still are trying to figure the business model for that potentially from what you said between your presentation. What do you think the IP model for that is, because that could be a much bigger business in terms of the scope of what you can touch and everything you have right now, but any how any color you can give us as how you are thinking about this. As to how you want to IP method.

Satish Rishi

Yes, so if I imply that we are trying to figure out the business model, then I stand correctly because I never meant to imply that. It is an on-going business when we bought CRI, they were a profitable company, they have customers, they have technology, they have licensees. So, it's a business model that’s already exists and what we want to do is make it grow much faster than they could have done it on their own. And yes, as you mentioned, the market itself is fairly significant and huge, because almost everything you can think of that is electronic could do with better security as we have seen from the various news articles and everything that we have seen and heard. So, what we are trying to do is figure out, we work with them to figure out which are the best resources could be deployed. So, that we can get to market faster and be in the market longer with the technology that we develop and be able to really create value for our customers.

Unidentified Analyst

Sorry, again on the jury, are there two alternatives that you believe will come back and find in your favor, find in Micron Hynix’s favor or is there a third alternative of hung jury or retrial, or is there other alternatives. How should we think of what are the options.

Satish Rishi

I think there are quite a few different alternatives and the jury from what I understand is, they have significant packet which I know has, I don’t know how many questions that has, well they have to go through. But it goes through a process of some of the high levels they have to really agree upon or pine up on is whether or not what the parties did was unlawful and then whether or not what the parties did was of harmful to Rambus, if Rambus get hurt by it and thirdly, if they get hurt by it, by how much. So, I think at the high levels, those are the things they have to really come to decision on.

Unidentified Analyst

And then specifically on the joint several liability, is Samsung by nature of the settlement agreement with you removed from that joint and several liability from a industry-wide standpoint?

Satish Rishi

Yes, Samsung is no longer a named party in that.

Unidentified Analyst

Okay. And what about some of the unnamed parties that it may have been.

Satish Rishi

No, this suit is against Micron, at this point in time it's just Hynix and Micron.

Unidentified Analyst

Okay, well thank you very much.

Satish Rishi

Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!