Rambus Management Present at the 14th Annual Needham Growth Conference (Transcript)

Jan.10.12 | About: Rambus, Inc. (RMBS)

Rambus Inc.(NASDAQ:RMBS)

14th Annual Needham Growth Conference

January 11, 2012 04:10 pm ET


Satish Rishi - SVP & CFO


Satish Rishi

Good evening everyone and welcome. My name is Satish Rishi and I will walk you through a brief presentation and overview of Rambus and then will open up to Q&A. Before I begin I would like to point you to Safe Harbor provision that we have over here. I may have some forward-looking statements in my speech or in my Q&A. So please read the Safe Harbor provision and we have more information available on our website.

So let me start with an overview of Rambus. Rambus was founded in 1990 and we have grown over that period of time obviously and two of the initial founding members on the board till about last year when Dr. Horowitz resigned to pursue other interests. But we have a strong involvement with the founders of the company and we have been public since 1997, headquartered in Sunnyvale, California, used to be in Los Altos most of the time, but then two years ago moved to Sunnyvale and we have offices in Bangalore, Brecksville, Chapel Hill,. Pforzheim in Germany and San Francisco, Seoul, Taipei and Tokyo.

We have been growing both in headcount as well as in revenue and the top line. As of Q3, our revenue was $229 million and we had about 440 employees. We also did preannounce our quarter, at the beginning of last week, we announced that we would be, our revenue would be approximately $83 million. The initial guidance we had given was $67 million to $71 million. So we upped the guidance considerably. So you know overall, it will be a pretty good year for us and we will talk about that when we have our earnings call in a couple of weeks.

So what we are good at and let me just step back and say. What we are really is an engineering company. And we are very good at hiring good people, people who are innovators, who can develop good technology and then we go ahead and introduce technology to the market at an early stage, get the market to adopt the technology, work with the partners to get the adoption there and we then work with the partners so that as they use our technology, they are paying us for the use of our technology, the patents they are using or the technology they are using.

So, basically at the end of the day the products, we don’t have any products, we are an IP licensing company and basically our single largest asset, our employees and their creativity and their innovation. So, what we have done over the last 20 years is really build a platform of innovation, patent development and licensing and I’ll talk a little more about our diversification strategy on how we are using this platform to diversify and introduce additional businesses that have been slightly different than what we started the company with. So, we started the company with memory interface technology and overtime we have evolved into lighting and display and also in cryptography.

What we have today is really three sort of sub-segments in our business. We have semiconductor and lighting and display and cryptography. The semiconductor is by and large the largest of our business, largest revenue stream. The other two, the best to describe them would be they are new businesses and they are in the beginning of their growth phase at this point in time, you know we have high expectations of them.

And I’ll talk about each one of these segments individually with a little more of depth as I go through my presentation, but lighting and display, we acquired this technology and the patents and as well the and we hired the inventors and a team back in December of 2009 and Cryptography was a company called CRI or Cryptography Research Inc, 30% companies have a Cisco, again involved in patent licensing and technology licensing, good group of engineering people. But here too, whenever we do our acquisitions, we always try to hire the inventors along with patents that we have so that we can probably say that almost close to 95% to 96% of the patents we have today either have a Rambus employee or Rambus ex-employees name on it.

So we don’t typically acquire portfolios and go monetize or certainly then we typically develop the technology inhouse and we have a lot of expertise inhouse, in each one of these areas and the intent is to continue to grow in all of these areas. When we look at the acquisitions and we have done a few of these in the past, we ask ourselves who is the perfect acquisition and it’s a company that comes with innovators, it’s a company that comes with substantial business potential of their own and something that really enhances the energy that customer experience because at the end of the day, we have taken upon ourselves to have a mission where we want to enhance and improve the customer experience of an electronic device that anybody uses.

A part of a reason for a diversification strategy is we are looking at expanding our market or to a [level] market that we have. So with semiconductors in 2009 timeframe, the semi business was about $290 billion of which in 2000 about $35 billion to $38 billion of this was in the DRAM space and the balance was all different type of controllers and other types of IC devices, we have licensed about half of the DRAM industry and the other half we have been trying to license and we’ve got some struggles as we go through the process; I’ll talk about that later.

So in terms of diversification you know we've seen this market grow, but we want to have other areas where we can use our expertise and this process that we have learned and developed over the last couple of decades. So in the lighting and display side the lighting and by lighting I mean the general lighting side, the general lighting itself is about $100 billion and then the display side is about $180 billion at this point in time.

So within the lighting, the lighting and lighting fixture market is about $100 billion and we expect right now the LED penetration is probably about 5% to 6%. The expectations are that as LEDs proliferate during around the world at some time in 2015, 2016 timeframe, it might be at 40% or 50% so we are at very early stages and our business is not really in the LEDs. We don't make LEDs or we don't have technology that goes into LEDs per se, but we are more in the LED applications space. So the more the proliferation of LEDs, the better it is for us, because we can create more technology and enable our partners to create fixtures that use our technology.

Very quickly I’ll just talk about our business model and as I mentioned we are an IP licensing company, we develop innovations that are typically ahead of the market; two to three years ahead of the market and with two to three to four to five years ahead of market. We work with our customers in terms of developing technology that we think maybe in dissecting the current technology in the future. And we have a couple of different ways of monetizing; one is through patent licensing. And in this case, we license our customers to a broad portfolio of our patents for a limited field of use. And they can use any of the patents that we currently have or that we would create or generate in the next – in between the term of the license and they can use it for developing their technology and their products.

The other part of solution licensing in which case the customers come to us and we work with them to use certain ingredients of a technology or certain patents to really enhance their products and we work with them and in that process we also take a group of engineers if needed and we work with them. We work with our customers for them to embed our technology in their products and then when the customer sells product that uses technology, they pay us a license fee for every product that they sell. So two different kinds and in each of these businesses that we have at this point in time, the mix will change overtime.

The solution licensing requires more touch, but also creates more collaboration and we work with our customers for longer period of time. It creates more connectivity with the customers, more longevity. On the patent licensing side it is, they can use our technology anytime they want and they are back to us any of the patents they have in the portfolio.

So moving on, (inaudible) semiconductors, lighting and display and cryptography one by one. If you look at the spectrum we have, in each one of these you will see we have a pretty broad spectrum of technologies, all the way from fundamental innovations in high performance low power circuits all the way to high speed serial link technology.

A lot of the technology we have really is between the interface between a memory chip and a memory controller. Overtime, we have been looking at other areas also. We do have multi-core patents. We also have some patents in TSV and some packaging, so we are expanding, but we are looking at and you know I’ll talk about a new area, a new initiative that we have taken to develop our business in that area.

So in the semiconductor business, you know, we have technology and innovation and system design, board layout packaging and we have worked with many of the customers and I’ll show you a list of all the licensees we have. They are pretty well-known companies and we work with them and have work with them in the semi-side for many, many years.

In December of last year, in 2011, we announced an agreement with Broadcom, so a patent license agreement with Broadcom. That was the key highlight. The other one, and I won’t go through each one of these, but what I do want to point to is, the last one where we hired Dr. David Stork who is a very well know name in the imaging side. So we are trying to build the business and develop new technology in imaging because we believe that longer term competition in imaging is going to play a bigger role in how we use many of the consumer devices, consumer products we have. So we have started early on in developing technology and working with Dr. Stork on this.

Just one development I want to talk about is, in the paper we presented last year and typically what we do is we develop the technology. We present the paper and let the world know what we are working on and then we also then take this further into creating a test chip and then we show the parameters and make sure that the architecture works as the way we expect it to be.

So what this really is; it’s actually a graph. When I looked at it, it looked like a spring or a solenoid, but does not really a graph; like say what it is. So typically, in a server memory you have many DIMMS you have many modules and many banks of memory that DRAMs that are used, but the process only access one a time. And what one has to do is the idle banks have to be kept on a standby mode because you can’t turn them off because in DRAMs turning them off and on takes a lot of time and takes a lot of power.

So what happens is you have a bank of DRAM memories and you may be the process actually goes in one of the banks and all the others are on standby and in many cases the standby mode power sometimes is even higher than what the active mode power is. So what we have developed is we have a technology that is developed in house is we have been able to go from on-off stage in the DRAMs to less than five nanoseconds and this something which you know we have been talking about last year and shown some papers and you know we except that this will be something which our customers can use and differentiate from other technology that could be used for in the server area.

Moving on to lighting and display side; here too as you can see we have a broad range of expertise. The technologies we have here is the application of LED, so placing LEDs at an edge, how you place them, what the spacing is, what the optical coupling is going to be as well as the creation of the micro lens on a film that allows you to control the ray angle of the light, so these are technologies again that you know the inventor now works for us, Jeff Parker. He have these technologies and we signed General Electric Lighting as one of our first licensee in June of 2010 and we have been working with them and we show-cased some of our technology in last year at the Light Show in Philadelphia where we had quite a few of our products shown at a customer’s booth, but typically what these are doing is they are using LEDs at an edge and being able to change, to reflect, to replace troffers or reduce pendant lights by using very high efficiency films and by reducing number of LEDs which means low power, low cost and better quality of life for the customers.

We went ahead and branded the technology we have with the products we would create with our customers, we call it Pentelic and you know we have been able to show that we get about anywhere from the 92% to 95% optical efficiency measured as light in, light out from most of these films and given that, you can see a couple of different designs over here, but if you think about having light spread over a flat surface which is flexible, the design that you can do and the way you can manage light, it opens up just a whole new realm of lighting design.

Here too we have been pretty active, we have been quite busy here because this is an operation that is growing and ramping up the prototyping facility in Brecksville, Ohio. So we have been hiring over there and we were very happy to welcome congressman, LaTourette over there to come and look at our site and you know see how we were hiring the people in Ohio and in Cleveland. We got some very good positive comments from him. On the Crypto side, this is an acquisition we did in June of last year. The 30 person company and here too we hired the team of inventors who have the patents to their name, the primary inventor is Paul Kocher.

Paul Kocher has been in this business for a long time and he discovered something called Differential Power Analysis and basically what that means is that when a device is being, using encryption, there are certain power signals that are emanated from the device. And if an individual can capture it, you can then predict what the key or code is and you can break into somebody’s device. So what he came up with was DPA counter measures.

And these counter measures are used in smartcards and credit cards with chips, but in addition to that you are taking a next step forward, you move away from this DPA patent licensing. We also have a technology called CryptoFirewall where we embed some circuitry in an SoC and that makes the device far more secure and we have applications of those in content security and set-top boxes as well as in counterfeiting, especially at this point in time we started with printer cartridges and this can be expanded to many other areas whether it is aircraft parts or automobile parts or anything, space parts and so on, anything that takes a lot of effort and requires a lot of effort and can be fairly expensive, but could be replicated by somebody and really compromising the safety or in other areas where it becomes a commodity product but somebody else is losing a revenue stream which they have helped generate like in terms of printers and printer cartridges, where the printer manufacturers are losing out when their printer cartridges that are counterfeit.

Won’t go through the details of how the semiconductor works here, but basically this can be used as a building block for many different applications whether it is for payments or counterfeiting, anti-piracy and so on. Many of the smartcard manufacturing companies are licensed to DPA licensing. We also have, we are working with content providers, some of the PAY TV companies also licensed. We have been making announcements in the last couple of months. You know, we announced it with Verimatrix which is a content provider, we announced with Trident, we announced with MStar, these are chip manufacturers.

So, we are working both with the chip manufacturers as well as the content manufacturers and a lot of this technology will go into set-top boxes and prevent piracy of content, which, you know, as we get into more streaming media, it becomes a big issue. And then also, when you start looking at mobile phones and you are making payments or you are putting more and more of your personal data onto a cell phone, you want it to be protected, so again CF as well as DPA will enable that protection.

Like I said, we recently have been signing with a couple of different companies, but I also want to point that we in the middle of the year, we also announced a patent license with a major smartphone OEM and their goal is to get more of the smartphone OEMs to sign up with patent licenses and/or with CryptoFirewall technology license.

This is sort of just a quick snapshot of few of our key licenses that we have as I told you, many of these are brand names, well known names. And in 2011 itself as an active year, we did renew Toshiba and we did sign Freescale and Broadcom, for new licenses for the Semi group and we signed a smartphone manufacturer for the CRI organization.

As I mentioned, our single biggest asset, our employees and then the ‘products’ probably we generate our patented technology. As you can see, we have been growing our patent position fairly fast and exponentially over the last couple of quarters and we have very broad [spectrum] of technology all the way from, in various areas, in semiconductors and to lighting and to security at this point in time and our goal is to secure technology in all of these areas for the next couple of generations because from a licensing company, we have to stay ahead of the market and typically our licenses are five-year term licenses.

So if at the end of 5 years, the customer feels that we don’t have technology that they are using, there would be no need for them to renew or if our patents have expired and we have not brought our new patents, here again would be no reason for them to license our technology. So that’s why we create lot of innovation, a lot of technology and that’s what most of our engineers are busy doing.

Let me very quickly read the financials. I will probably focus more on the quarterly financials because we will be releasing our annual in a couple of weeks. If you look at our numbers we have been growing in the last couple of quarters. This is a five quarter snapshot that you have. In Q3, we had revenue, our customer license income was about $92 million, revenue was $92 million.

From an expense perspective, our single largest expense was litigation. Again, of the OpEx you can see over here on an adjusted basis about $44 million of that was spent on litigation in the first three quarters and I will talk about a couple of cases that we had and this is not something which is set in stone. It varies with the level of litigation we have the year before. In the full year, we spent about $23 million in litigation, the year before $54 million, so it varies overtime; 2011 will definitely be a record year into the litigation because the first three quarters it’s been $44 million. But from you know controllable expense perspective, we are running at about $40 million to $45 million of expense on a quarterly basis after the acquisitions we are doing and we are generating cash.

Just a quick snapshot of our revenue, you know people ask, where the revenue come from, what are the various components of it? As I mentioned, we have patent licensing royalties, so that make up the bulk of our license, of our revenue stream. Then we also have solution licensing and then the contract revenue is when somebody engages us to do a project for them and they pay us overtime. So if you look at it you know generally the patent license royalty is a significant portion.

People have been asking us, what portion of your revenue is coming from semiconductors and how much is not from semiconductors. So for the first nine months I think about 93% of our revenue came from semiconductors and 7% was from CRI and LDT, but I want to remind you that we acquired CRI in June of last year, so they haven't had a full year of their contribution to our top-line yet.

We are in a good cash position. At the end of Q3 we had about $293 million in cash. For the first nine months we delivered about, despite the $44 million that we spent on litigation, we still generate about $51 million in cash from operations and we will generate cash in Q4 given the revenue guidance that we increased. We do have a -- and we do have a stock buyback program in place, but we haven't bought anything.

We didn’t buy any shares in 2011, so I will skip to the last slide over here which is really our intellectual property. So we have a couple of different cases going out. I think those of you, who follow the company, we had an anti-trust case that we had filed in 2004 against the DRAM companies, Samsung, Hynix and Micron. Samsung settled with us in 2010. So the two companies that we went to trial with were Hynix and Micron.

The trial started in June; deliberations continued all the way into November and when the verdict came out in November, the jury delivered the verdict they basically said that there was no price fixing. So our stock price dropped by over 50% that day. So the judge hasn’t come up with his final ruling at this point in time and we are reviewing our options for appeal at this point in time and once the judge come to the final decision, we have about 30 days from that time to file our appeal.

On the other cases on Hynix one and on the Micron case, in the Hynix patent case, Judge White had a hearing on December 16th. We are waiting a decision. Judge Robinson has a hearing on January 26th and then you know after the hearing there is some time with the decision.

On the ITC case, we had filed against LSI and MediaTek, NVIDIA, STMicro, Freescale and Broadcom. We have settled with Freescale and Broadcom and the others are still outstanding at this point in time.

And, so where are we today; as we are showing increasing licensing momentum. We signed new licenses last quarter; expectation is that, we need to continue with our momentum. We are building the company for longer term growth and not really focusing just on semiconductor, the diversifying in other areas using some of the innovations and the expertise that we have developed over the last couple of years and building and using that to build other businesses. You know we are in areas that are high growth areas of this mobile, lighting and display and security. We continue to attract world-class inventors and give the way to a strong balance sheet.

So with that, I will open up to questions.

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Satish Rishi

So the question was after the jury verdict in San Francisco would be some of the motions the judge has to go through, where do we stand on that? So, we have gone through some of the post trial – well, the judge has gone through some of the post trial motions but he has not come out with the final answer or final determination at this point on time. So, we are just waiting on the judge to come up with the final decision.

Unidentified Analyst

(Question Inaudible)

Satish Rishi


Unidentified Analyst

(Question Inaudible)

Satish Rishi

So the question was, we announced the Broadcom settlement in December and then we raised guidance in January, how is it related? So typically, when we have signed license in the past with somebody that we have been in a litigation with, there is some sort of one-time payment for the past use and then there is a typically a five year term license where we have paid some amounts on an ongoing basis.

So you know as we start looking at the end of the month, we start looking at books and seeing what the changes would be; if the changes from our guidance are more than 10% to 15% we typically come out with positive or negative you know we come out and pre-announce. So that is part of the rationale for us coming out and first get back when we’re in business because we were shutdown between Christmas and New Year as a company we were shutdown so first get back and we pre-announced on the positive side.

Unidentified Analyst

(Question Inaudible)

Satish Rishi

So the question was how do we think what the Broadcom settlement is? So the structure is not different than what we have in the past, well, there are some bad news; it’s a five year term license and there are quarterly payments over the term of license and during that time they have access to our patent portfolio for the field of use. Question?

Unidentified Analyst

(Question Inaudible)

Satish Rishi

The question is there was a lot of hope on the Micron case, what’s our analysis and why we lost? Well, from our perspective, you know we put our best foot forward; we had excellent lawyers, a great litigation team and we did our best. Obviously, the jury was not convinced and I don’t know what we could have done differently from that perspective, but jury trials are fairly unpredictable. Question?

Unidentified Analyst

(Question Inaudible).

Satish Rishi

No it was, so the question was CRI year-to-date accounted for 7% of the business. No, so the way we are organized is we have the semiconductor business group and then we have the new business group. The new business group includes lighting and display as well as CRI. So that combined group for the first nine months was about 7% of our nine months revenue. And this is the (inaudible) and I think you maybe filed for Q3, but what I was saying is that CRI was only with us for, is only, for like three months for the nine months period. So you know it’s not fair to analyze that, obviously you know we expect a larger contribution over time.

Unidentified Analyst

(Question Inaudible).

Satish Rishi

The question was if we were to analyze it now for 2012, how would we think about it? You know we will have more of that information on 10-K when we file them, so all the information that go out publicly driven at the same time.

Unidentified Analyst

Well again what you are saying is 7% for your nine month period even though you owned the business for three months that contributed you kind of (inaudible)

Satish Rishi

It was CRI as well as LDT. Yeah, so we have had LDT for nine months of the nine months of year.

Any other questions. Right, thank you very much.

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