Rambus Inc. (NASDAQ:RMBS)
Barclays Capital Global Technology Conference Call
December 8, 2011 1:00 PM ET
Harold Hughes – Chief Executive Officer
Good morning. We are very excited to have Rambus here with us today. We have CEO, Harold Hughes.
Thank you for that wonderfully short introduction. Good morning, everyone, and thank you for those joining us on the web. I’ll get started right away. Rambus was founded in 1990, went public on NASDAQ in '97. Our headquarters is in Sunnyvale, California, with offices throughout the world, Bangalore, California, excuse me, Ohio, Chapel Hill.
Our customer licensing income, which is how we track our revenue equivalent for the first nine months of the year was $233 million and our guidance was roughly in the high 60s to 70s. So I’ll leave the math to you. We’re under the normal Safe Harbor provisions, which I’ll also leave to you.
At the end of the day, Rambus develops and then licenses patents in one form or another. So a good way to talk and a good way obviously to look at our raw materials, if you will, is to track our patents, as you can see we have a large number. The growth has actually been accelerating over the past few years. We have 1,280 issued patents and another 960 pending applications.
It’s difficult, I should say to be a high-tech patent licensing company and over the course of the last decade, we’ve learned a great deal about what is needed to be successful and we call it the Rambus platform here and I’d like to start from the bottom, obviously, innovation is most important part, if you haven’t created technology in advance, the market anticipation of that technology is unlikely to have great value, you need to hire those people, capable looking far into the future, anticipating what problems will be, solve those problems and then attempt to drive the market in the direction of those patents so as to create value.
The patents have to apply to large businesses because you are licensing your patent with the relatively small percent. So to generate a lot of revenue on your own you must address large markets. Patents are not born equally and we have learned in many cases through the school of hard knocks as to how to structure a patent, so that it’s value is clear, it is more licensable and haven’t profound it, if we get to litigation it is more likely to found valid, once you get to the litigation. So we have a relatively large group that focuses on the construction of patent, the proper wording, et cetera and that has held us in good stat.
Lastly, the licensing aspect is also difficult, in many cases you will been in litigation with someone, so the licensing process can sometime a bit challenging and we developed those skills, I think that allows us to be successful.
It is very, very difficult to be a small technology start-up in today’s world. The costs are inordinately high relative what they use to be. The development costs are prohibitively high to do an ASIC at a 22-nanometer or 28-nanometer, the mask sets alone are worth millions and millions of dollar, so it difficult to become public.
As a result, we have found literally hundreds of opportunities, where we see great technology, which can’t be developed beyond where it is and large part because of the need for more cash, and we have developed a group of people who have as part of the acquisition team, knowledgeable people regarding technology, regarding patent licensing or regarding patent themselves. Just to give you a benchmark in the first six months of this year, we looked at 400 companies, we only purchased one, CRI, about which I’ll talk later, but it’s a process that’s been able to turn over a great deal of licensable technology. Over the last four or five year we have done 15 acquisitions, two of which of are large acquisitions, and I’ll go over them in a moment.
So the concept in is to take the platform that I described and layer on top of it technologies, I think, you are aware of our semiconductor group and we’ll obviously spend more time about it, but that’s been the bulk of the company.
About two years ago, we bought the lighting and display business, and before going into these businesses, I’d like to describe what is a perfect acquisition as we would at it. Technology best look at it as more organic and inorganic, if you buy a patent, it’s a point product, we have found its much more advantageous in the acquisition to acquire bad choice of word, to hire those people who created the technology, so they can continue to create technology generation after generation. Most of the acquisition we do come with those two parts, great technology, patent haven’t been created and then ability to hire the individual keeping at Rambus and continuously develop that technology.
While a go, I said we brought the cryptography company here located -- here in the San Francisco giving us three large platforms right now, each of these individually is an interesting business. But if I have you step back and look at how our go-to-market strategy is impacted by the technologies we buy, let me give you the model of the cell phone.
If you think of a cell phone, going left to right, obviously it contains a great deal of semiconductor content. It is a mobile platform, so it focused a lot on low power, relatively high bandwidth. So we have many types of technologies within semiconductor, we believe apply to a cell phone, essentially also cell phone have backlit screens. The importance here is that we have great deal of technology there that we continue to develop it.
And then lastly, everybody wants their device to be secure be it for a banking transaction or be it to receive over the top or through some type of channel, more control channel, high value content that can be individually secured by the device, be it television on this particular, example, I’m using a cell phone.
So when we go up to license technology now, we have the ability to show more and more technology create more and more value for our customers and probably more with regard to increasing the chances of our getting a license done, short of litigation and to show great value. But also potentially then to raise the value of the licenses we have over time as we add more and more technology.
Taking a quick look at TAM, our semiconductor business in 2009 was roughly $230 billion, so that would be the market we would attempt to license. The acquisition of the lighting group basically doubled it, to close to $600 billion and by so doing obviously we’ll significantly our addressable market.
We decide it’s difficult to come up with A number for cryptography, cryptography in large part is a small part of many, many devices, so creating a TAM slide is really not that meaningful. But obviously I think we’re aware of the fact that everyone wants their device to be secure, all delivers of content wants the devices to be secure.
A bit more in detail about the individual aspects of the business and I’ve shown down the left hand side the three main businesses. If you have created technology far enough in advance of the markets need, you have the ability through what we call solutions licensing to have a different type of licensing discussion with potential customer and example here would have been XDR memory that we created about seven or eight years ago, which was a very high bandwidth technology, which Sony saw is necessary to make their play station effective, that, well, it comes with a patent license, is a license of a technology more or less anticipation of where the markets going. So it’s a different type of relationship, wherever possible, it is that type of relationship that we like to establish with customers.
Having said that, many times it’s difficult to get people to agree that you -- they want to work with you on a patent, on a technology license which then regard -- results in our fall back which is patent licensing. All three of our businesses have those interactions.
So the three businesses have technology licensing capability and patent licensing capability. And then together we look at the patent the platform is having parts that applied to basic devices that you would buy everyday, that is the overlap of the system and something that we think can be very effective going forward.
In semiconductors, where we started much of what we do comes from a fundamental innovations and high performance and low power and the attended problems in device they arise from that. We have within our company a large number of very capable analog and digital design experience. Generally as it happens in the creation of that interface you undoubtedly become involved to certain extent in the package into which the device goes and then the board on which the device goes.
And we take all of that and as I said earlier we have both industry leading types of semiconductor such as XDR. But we also have standard products that we would sell to people. In addition to the memory side, we would have high speed serial links where system is talking to systems, chip to chip.
In lighting, our main innovations are in optical design nanostructures and light extraction diffusion, then creating films that allow those light guys to be more effective, finding ways that we can tool machines so that the creation of this technology can be replicated very, very cheaply, basically the price of plastic pellets, then taking that forward to a system level and down the line.
One of the products that we have been working on is a bulb and the technology that Rambus has is edge lit, meaning that there is no top to a bulb you create significant convection cooling, which we think will be a very, very big advantage.
The other advantage we have as referenced here is the ability to direct light to the implementation of microstructures in lens. Many -- standard for a live bulb obviously shooting light up is one thing but how do you shoot it down and with our MicroLens architecture we believe we have another very major competitive advantage.
Nothing we do is the LED, in large part of the extent of the LED increases both in terms performance, lower power, less costs is to our advantage and frankly, as an old semiconductor guy, as I look at the LED market, it looks like the next DRAM market, it has all those indicia, it’s relatively high concentration of capital equipment and there is a very large number of manufacturers, it’s rapidly going down a cost curve, that’s exactly what the DRAM industry.
Now it’s a math, it is what’s the only major difference is there is not the presence of market control such as Intel executed. But alternatively, I think the delivery of the LED will start to centralize in many of the factors that came to bare in the LED market will happen in DRAM, since our technology builds upon LEDs we see that as very beneficial.
Cryptography, as I said everybody wants their device, be it a television, be it a cell phone, they wanted to be secure and we think we have fundamental innovations in securing devices.
The second block here is differential power analysis, we have a very interesting demo, which I didn’t bring, but by analyzing power spikes on the device that is hiding the key, you can extract the key relatively easily. What Rambus technology does is to mask that effectively, this particular technology is present in probably 80% of the world smart cards and as it migrate, it will migrate in the cell phones and all types of devices that want to be secure.
The third block here is CryptoFirewall, there are many ways in which high value content gets distributed, many of those go through series of controls, such that your content arrives safely, many of those types of controls are licensed by Rambus to setup box manufacturers, et cetera.
To the extent that you can secure the end device with cryptography, the route that the passage of the high value content takes becomes completely open, and obviously, as you talk about over the top distribution of content, regardless of how it got there, if it is secured at the individual cell phone, you have quite interesting combination.
The fourth block here it’s -- these are printer inks, ink, the counterfeiting of high-value content can be addressed by this technology, but putting end to whatever be the controller for the interface between the system and whatever is the medium that wants to be secured be it a airplane part, be it a print cartage or any number of capabilities.
So the business model in both of this, in second, excuse me, the third and the fourth column is to work with ASIC manufacturers embed your our CryptoFirewall basically work with them as a partnership then as people use that silicon there is the ability then to obviously generate some revenue and to a certain extent actually share with the ASIC manufacturers, so it’s quite a change in business model.
On the ink side for example you can lock down the system to extent you want to make sure that only certified high value ink cartages are used. Now, I would take a step back and point out that that may not be what you want to do because obviously you are going to create some customer relationships as you make competitor ink less valuable but that’s up to you, to the individual.
We had pretty good success in the last few years in licensing. In 2010 we licensed Samsung, GE, AMD, NVIDIA, Elpida, Renesas and in early 2011 we licensed Panasonic, rough estimate is that the value of these licenses is about $1.3 billion.
I have a few financial slides. This is the annual revenues starting in 2006 and then going forward to 2010 and 2011 the three quarters. And then to the right it shows our normal expenses the orange bars here on top of the blue, amazingly enough, is the amount of money we spent on litigation over a long period of time, we probably over $400 million in litigation.
One of the reasons that we’ve created the model that we created is to reduce the likelihood of litigation by continuously addition technology value to potential licensees and by certainly hopefully convince them that litigation is not the path to take.
In the interest time I’ll skip the quarterly numbers, but they are on the web and this is a breakdown of a few quarters here. Cash, we’ve got a good amount of cash, we generate cash but at the same time, it’s important not only for acquisitions, but to the extent that we are in litigation that we appear financially strong, so this is an amount of cash with which we feel quite comfortable.
A bit on protecting our intellectual property, very disappointed at the outcome of the San Francisco price-fixing case where the jury found in favor of the defendant and obviously we are review our options for appeal.
We have a very important case which we won against Hynix, large amount of money has been set aside as bond that’s in appeal process right now. Obviously, we will work with Hynix to find if there is a way to come to terms and to work together.
Hynix is excellent manufacturer. We believe we have technology on the interface aspect of their technology that could make them an even more effective participant in the market. NVIDIA we have been in litigation with them and a large number of people in ITC action.
So a quick summary and highlights, good, strong, licensing momentum, it is difficult to license while you are in litigation often time the filing of the lawsuit alone will push out just about any type of licensing that notwithstanding we been able to get several people to work with us.
Diversification is extremely exciting, as I said, it’s almost dispiriting to see all the small firms, who, when I started in technology a long time ago, we’d probably made it to be public companies and we’d grown their businesses, a very, very small number of them now, specially on the hardware side actually can become public, most of them get purchased by bigger firms.
And I think as a results and this is use to work for very large firms. It’s difficult for a big firm to buy a small firm and actually develop that technology in a way that grows the economy in my opinion. There is very little evidence that people do that well. So I think it’s the attachment of the country that we’ve created such an impact to make it difficult for small firms to be successful.
Our innovations and in these areas have allowed us to bring into the company a large number of capable people, we have roughly 15 people at Rambus, who have been either CEO’s of other companies or founders of other companies, it’s always a management challenge to keep them happy and productive, but it creates a very exciting opportunity for everyone, growth opportunities are bound. We’ve been lucky to retain people and as I said, I think we have very strong balance sheet, one that allow us to move forward.
So, with that, I’m on time and I’ll open to any questions.
Yesterday, we had a few other patent players present and they were discussing their views on the litigation landscape into 2012 and some of them had voice that they saw, it would continue to increasing what’s your, I guess, broader view on litigation regarding patent, it’s obviously such hot space at the moment, so what are you seeing?
I haven’t done any statistical analysis, but at this point in time, I think, there are more product companies suing one another over patent and just pure patent licensing companies. At a certain level of abstraction I can understand the problem to manufacturer a product requires that you use either license or unlicensed incredibly large number of patents.
Having said that and having leave through it, road to getting resolution of patent cases is ridiculously long. You’re dealing with the extremely complicated technical issues and often presenting them to 12 people many whom, most of whom don’t have engineering degrees, so is bit of a crap shoot in doing it.
I think looking at from the perspective of the country, it’s very much in the benefit of America to establish protection rules for technology, if we can’t win in technology exactly where can we win. Again, I understand how difficult it is for manufacturer to manufacture a product without violating someone’s technology.
But it is the, it has become for quite sometime heavily skewed in favor of the large manufacturers, large manufacturers generally will create standards and often the standard is created without regard to whose technology you’re violating, creating a very so called position we find ourselves there quite frequently.
I have no simple answer, much of what we have done at Rambus is to in recognition of that is to find the platform that continuously add technology by hiring the right people, acquiring the right businesses. So that, it just simply make sense to work with this I suppose to fight with this and that is the goal, yeah.
It is difficult to run a company, especially a relatively small company, when you have major litigation going, it’s very defocusing for employees, it’s difficult to explain to them all the nuances. I get to spend a great deal of time with lawyers at Rambus and I rather spend time with customers about how we can improve their products. I don’t that helps but that would be my off-the-cuff answer.
Can you talk about how well these your patent protection works in places like China and India, different parts of the world, I think, in the States and Europe is probably sticky, but what about the rest of the world?
To a certain extent it’s more of a win questions than if question. We’ve prided ourselves in going very, very far out into the future, often to the point that the indigenes firms in China and India haven’t gotten to the point of needing the technology we’ve created.
Having said that, the win will ultimately will come about and our general strategy is especially with regard to light, because that -- we believe that will be the first place where our technology will potentially run into local people using it.
And we have two approaches, number one, by virtue of that we are making a product that want to very, very quickly and need to be manufactured at low costs, much like everyone else in America, we will go to the Far East and have gone to the Far East to find manufacturing partners who will manufacture our products.
Having established a relationship with them, we look to use them as our marketing and sales partners in those regions, excuse me, so if you had someone helping you manufacture a particular type of bulb in China, you would then work with them that they could use what sales channels they have to sell your bulb with your technology in the market.
Now it’s hardly perfect. We do look and we do file patents in China, if I patent throughout the world, obviously we are long way the way from being capable of litigating in China. I would assume as there is an awful lot of capable engineers in China. They are filing a lot of patent. Alternatively they want to protect their IT. So there is a, this, like all questions of licensing its complicated.
Okay. Well, thank you very much for coming. Appreciate your attention.