Rambus' CEO Presents at JPMorgan TMT Conference (Transcript)

May.16.12 | About: Rambus, Inc. (RMBS)

Rambus Inc. (NASDAQ:RMBS)

JPMorgan TMT Conference Call

May 16, 2012 14:50 ET

Executives

Harold Hughes – Chief Executive Officer

Analysts

Paul Coster – JPMorgan

Paul Coster – JPMorgan

Thank you very much. Good afternoon. My name is Paul Coster. I’m the Senior Analyst covering applied and emerging technologies here at JPMorgan. And this is the 40th Annual TMT Conference, pretty impressive right. I'm very pleased to introduce Harold Hughes, the CEO of Rambus.

We recently upgraded Rambus to avoid advantage of the recent slide. And so we think this one is worth buying. Harold, can you explain, let's assume not everyone is familiar with the story, can you just explain what Rambus does and then we’ll get into some of the issues and questions and so on.

Harold Hughes

Certainly and thanks Paul, thanks for having us on your 40th Anniversary. Rambus was founded in 1990 specifically to focus on the need to improve significantly the performance of DRAM to match the requirements of the microprocessors. Since that time, we have continued to create great deal of technology in that area. We’ve been very successful in getting people to use that technology. We've been unfortunately somewhat less successful in getting everyone to pay for the use of that technology. We have roughly half of the DRAM industry licensed Samsung and Elpida, which by the way made their payment to us, their bankruptcy notwithstanding, they made the payment this quarter. And there has been a large body of litigation that has been ongoing.

The nature of the company is IP. IP is probably best looked at in two timeframes to the extent that you can show a potential licensee that the technology will have more immediate value in either reducing the cost of their product or increasing the value in some way. It's more of a five-year time period from the time that technology was actually created till the time you can monetize to the extent that it then goes to a patent licensing world. It tends to go out to the 10th year. So, it's a – it is per se a long-term approach to technology.

The attractive part of it is that you can give to an engineer relatively limited number of engineers, but the type of engineer who are interested in solving long-term problems often times the problem itself is clearly manifest or it's still fuzzy and that has allowed Rambus to continue to hire very, very capable engineers. And as I say, we have continued to rollout technology. Staying on that business, the semiconductor part of our business, we have under license right now, roughly $600 million to $700 million in licenses that were run between now to the expiration of those licenses, they tend to be five years, so between 2015 and a few years after. So, a significant amount of money embedded into the cash flow right now.

As I said earlier, the primary focus has been on DRAM licensing. DRAM for quite sometime was basically lowest common denominator as set by the Intel interface requirement, such that as many people, as many manufacturers as possible could get over that bar and by – by so doing keep the price extremely low and the availability very high. But in the last five plus years, the market has really started to segment as do almost all markets of the size of the DRAM industry, which barriers between $25 billion and $40 billion. In particular, the needs of the mobile devices were significantly different than what would be required in a PC. It tends to be just one DRAM. It has to have significant bandwidth to the extent it can manage video etcetera. It has to be extremely low power and it has to be available.

On the other end of the spectrum in the server market, a relatively low percentage of time is DRAM and the large server actually address written to or read from roughly about 15%, that notwithstanding it is powered in essence the entire time so as to keep latency down. On both ends of that spectrum, Intel has – excuse me, Rambus has created a great deal – a great deal of technology and as the market has segmented, people have a position to protect than they are most interested in working with someone. When the market was standardized, it was very difficult to get revenue.

And lastly, as you know the market has continued to produce fewer and fewer suppliers as a result I think DRAM prices are on their way north. I think it's far easier for Rambus to license someone who is making money and has a market that they want to protect. About five years ago, just to complete the story as we saw how difficult it was to be a relatively small IP licensing company and as we saw the things that we needed to be good at and obviously we set out to do that, we logically assumed that there will be other businesses that had roughly the same profile as Rambus relatively small, had groundbreaking technology, but it was having a great deal of difficulty licensing that technology.

And as a result, we undertook a diversification project or process. Diversification, I don't think is a very good description. Often times, diversification means diversification. It's a completely different business and to the extent that one does well it offsets any difficulty in the latter. Our concept was well we are a licensing company there are relatively limited number of large companies from which we would look for licensing income, what are the attributes of those companies. Samsung, for example, Samsung obviously needs semiconductors, but Samsung makes a great deal of television, cell phones, etc., all of which have backlit screens. So, one of acquisitions, we did we thought would be applicable and relicensing Samsung and that is our lighting business – our lighting business.

Same thing applies with our cryptography business. Everyone wants their device to be secured be it a cell phone, a television or anything in between. So, our concept of acquisitions and diversification was to first look at the extent to which it reduced the chance of – it increased the chance of re-licensing, so as to produce an even longer term annuity. And I think the market ultimately will value a long-term annuity. And lastly since we have spent hundreds of millions of dollars on litigation to the extent that we have technology broadly applicable to large companies, we think the chances of technology, excuse me, the chances of litigation will go down certainly to the extent that we price it rationally.

Paul Coster – JPMorgan

So, before we get into some of the bigger questions, I just want to focus on here now. And I am not suggesting that people would be buying this now, because of what's happening in the next quarter. It’s a bigger idea than that, but first quarter was good. Second quarter guidance was a little bit weaker than expected. And there were two reasons for that. One of them is sort of seasonal relates to Samsung unit volumes I believe and the other was the NVIDIA rollout that was the licensing rate was reduced somewhat. So, can you just talk us through those two items first sort of the short-term perspective?

Harold Hughes

Our relationship with Samsung like many other relationships has a variable element in the contract, which I think allows us to align well with our licensees. It's never good when you are doing well and your licensee is doing badly. And in that particular contract and it has many variables, but off the top of my head, there is a period of time where if they were to fall below a certain level of volume base – relative to the base case and that – if that level were greater than 10%, they would reduce the payment and we were in one of those periods. We signed the contract in 2010 when the DRAM market was pretty robust. I think the revenue may very well made at $40. It went down for a while. And as a result, we had lower revenue.

I think anyone who follows Samsung is well aware of the fact that they are gaining market share. And even to the extent that the market maybe not as robust as it was in 2010, I believe that their revenue was on an upper trend. And as a consequence I think the bulk of that will come back is differed, it's delayed by two quarters. So, we pretty much know what's going to happen. As it relates to NVIDIA, NVIDIA in a litigation that we won elected to take a license, which we had agreed. This gets fairly complicated with the EU as a result of a disagreement we had with the EU. That was an extremely higher rate. And to a certain extent, I was a bit surprised they took it, but ultimately as we came to a longer term license, it came down to a rate that aligned with our other customers. We've recently signed several contracts and it is always the case except to the extent that there are materials that we have to announce it that our customers don’t want us to announce what the licensing rate is.

But as I have said recently, the rates at which we have done these deals including NVIDIA were such that it did not key the enough in clauses with other similarly situated customers, which gives you an idea that these weren't exactly giveaway rates. There weren't as robust as we would have liked had one of a litigation, but they were pretty much in line with what other customers were paying.

Paul Coster – JPMorgan

Right, okay. So, let's get stuck into some of the larger items, on the positive note, first of all, can you talk about the size of these markets that you are pursuing and how big you think the opportunities for you?

Harold Hughes

Well, the semiconductor market that we pursued is hundreds of millions of dollars. Whenever you are talking about the size of the market, you have to decide at which level you talk about the value-add. The lighting business where we have made an acquisition about two years ago, the fixture businesses is about 100 billion a year as I recall. The backlight business is also a number of comparable size and then other related markets are the bulb market obviously is very big.

It has to be a big market to be of interest to us, because we simply if it's licensing company only get a royalty. The cryptography market is less calculable at this point. Easily calculable is the anxiety that manufacturers have to the extent that they are worried that their product could be broken and concomitant of that is the deliver of high-value content is also very concerned about the loss that the breaking of the system through they passed the content. Our approach to that market is multifold as opposed to a licensing directly the semiconductor in which the cryptography technology is embedded. We tend to partner with them and have a source of revenue coming from someone further upstream. In particular, our long-term goal – it's a long-term goal, it won't be realized in a short-term is to individually secure – individually secure every television, every cell phone, every tablet so that the owner of content regardless of the path through which it goes is confident that content can be delivered securely to that device, which gives the content owner, the maximum in security and the maximum in direct relationship with the customer as oppose to going through someone like a Comcast and Apple and Netflix etcetera. That is our long-term goal and we think that that can be a very, very attractive market.

Paul Coster – JPMorgan

Right. So, cryptography solution and you always done this unique ability to combat differentiated – differential power analysis, which is the analog way of interrupting how the decryption was taking place, right?

Harold Hughes

Yes.

Paul Coster – JPMorgan

So, quite unique place that you have in the market there. The segment – the new businesses are responsible for about 10% of revenues, is that right or?

Harold Hughes

Expected to be in the mid-teens by the end of the year.

Paul Coster – JPMorgan

Right, okay. In your overall business model, it was 90% gross margins and 20% EBITDA margin obviously scales very well. And its way down at the moment by legal expenses as well. So, if some of those extraordinary expenses go away eventually, we should see even better margin. So, a lot of good things here and as probably some more as – well, the other one which is you've already alluded to only half of the semi industry approximately is licensing your DRAM technology at the moment, who is not?

Harold Hughes

Hynix and Micron would be the biggest ones. Hynix is we've had suits with both are in the process of being reconsidered by the federal judge who issued their initial opinions. Hopefully, they will come out soon.

Paul Coster – JPMorgan

Our Texas Instruments and Qualcomm licensees should they be?

Harold Hughes

Should they be certainly are they? For certain things yes, for other things, no.

Paul Coster – JPMorgan

Alright. Okay, so let's go into some of this litigation from our own, the huge setback for some of the new stocks. So for me, it wasn't quite the emotional sort of event that it was so others. But the anti-trust trial against Micron and Hynix went to trial jury started against to a major setback. You have however appealed can you talk a little bit about the grounds for appeal and what the timeline might be for resolution of that?

Harold Hughes

The grounds for appeal were many, many – they are somewhat esoteric to the process. And obviously we will press that hard, but I don't want to mislead anyone. There is a timeframe here that's quite extended. It won't happen quickly and just getting the original trial to quite sometime, but we will prosecute it to our full abilities. As you've said, it's against Micron and Hynix, they are quite conceivably our other more important and more effective forcing functions that would come into play prior to that ever getting back to the second trial. Both of them as I said are under review by the federal judge that originally found in one case for us and another case against us. How those judges find will probably come up with a result that will get us closer to resolution.

Question-and-Answer Session

Unidentified Analyst

Right. So, let me just elaborate Paul now, I think I maybe made it a little bit of explanation. So, the antitrust trial went against you, you are appealing it. However, in the meantime, you won another daily related patent dispute against Hynix, against Hynix, and you lost almost identical case against Micron. And judges White and Robinson who probably very famous amongst your investors are now being asked to somehow harmonize these, you can’t be right and wrong?

Harold Hughes

Ironically no, that the Appeals Court said that it is a function of the facts as viewed by the respective judges and indeed they could have different opinions. Judge White as you said had found for us. He found for us on two bases, one, that we hadn’t done spoliation and secondly that he did not believe that Hynix had shown that they were prejudiced in a patent case to the extent that to be prejudiced you in essence had to show that Rambus had exclusively in its possession, someone else’s prior heart, which I think is sort of a patent be ridiculous to play on words. The Micron judge found otherwise. Both of those went to the Appeals Court, the Appeals Court said well no, this is the date we believe that Rambus should not have thrown away documents that notwithstanding both judges should consider that in reformulating their rulings.

Unidentified Analyst

Okay.

Harold Hughes

And made it pretty explicit that yes, they could indeed find it differently. Remember these cases were filed against us one in California, one in Delaware, literally one day after the other so as to make it difficult for us. So, whether or not the court is deciding that this is a practice they don’t like and by so doing allow for different outcomes, I don’t know. But both judges have had these cases back to them now for the better part of five months. There have been hearings. I don’t think there has been much in the way of supplemental documents done. So, we are looking forward to getting the results.

Unidentified Analyst

In one case the award was $700 million wasn’t that?

Harold Hughes

It was between $400 million and $500 million. That’s very, very important. The case was found for us in front of Judge White and it was looking backwards in time. And as I said it was that large amount of money. The appeal which would go back to the Appeals Court with basically be their last chance and where they to lose they would obviously pay us a very large amount of money without a forward going license. We think there is the basis of the rationale deal with Hynix.

Unidentified Analyst

So, the point here about the antitrust trial separate from everything we just described for the rest of your following this?

Harold Hughes

Don’t have lot of this.

Unidentified Analyst

The anti-trust the fact that you are appealing that can now get bound up into potential settlement negations for the other cases as well?

Harold Hughes

Certainly. I mean, we would – when we settled with Samsung we settled everything. So, that the chances of if we settle we will settle everything.

Unidentified Analyst

So, Mark and I cover a number of companies in patent licensing space (some of you) and we have made patent licensing a business model without any expertise in domains and they are not doing any R&D unlike your trend patent trolling business or new patent defense business. And they have said as well the problem with the company like Rambus is that they are really kind of going for goals. It's like – it's all of nothing. We much prefer the business model where we just kind of settle by leaving money on the table we make money. So, the implication is that you have taken a very high risk, high reward approach. In retrospect, of course, this is worth, like Monday night, (indiscernible). So, how do you nonetheless respond to that?

Harold Hughes

I think the essence of any business is the extent to which you can repeat it. If you don’t have your own source of patents, which we generate internally, I question whether or not you have a long-term business frankly. And then in the whole concept it's just buying patents and turning around and litigating has made like more difficult for us not less.

Unidentified Analyst

Sure.

Harold Hughes

One of the reasons why the amounts of money are so big here is the simple fact that we are talking about very, very large markets and even with low royalty rates. They have massed a large numbers. I don’t believe our royalty rates are in anyway not reflective of the value that we provide. As I said earlier, somewhat tongue and cheek. Farmwald-Horowitz patents were extremely valued. Their view is very, very widely. I don’t think anyone questions that. They haven’t really been found invalid because of their intrinsic value. They have been attacked because of side issues and there have been many one was our act – our code conduct (indiscernible). The other one has been the spoliation. I think the last issue, which hopefully will be the one that convinces people that it's better to work with us and it's really – it really goes to the difference in business models. Since Farmwald-Horowitz was developed and used broadly, there has been very little value add by the users of it.

Rambus has never stopped developing it. The Farmwald-Horowitz patents were excellent, but they have simply run out of gas and the requirements I talked about in the low power and server unmet by much of formal over test. We don’t developed patterns and hide out in the woods and spring on someone. We write papers, we go to conferences, we develop test chips, we did eight pieces of silicon last year. Just showing that the actual functioning of the silicon and obviously we need with us many customers as possible and potential customers as possible to show them what we have. The technology that if you have forward going technology and if you model is to license at a rate less than the value you believe you are giving the customer, how can that possible be in a non-sustainable or a bad business. And I think that’s where we are…

Unidentified Analyst

Right, well maybe it just been really, really unlucky in quick succession with two or three very important cases of course rather than realizing some of the value at the moment not been able to any of the value out of the anti-trust case in particular. Alright, so you've heard from – an issue here at the moment is maybe it's now done and that can you talk a little bit about the box pattern, which I think was really recently ruled against the patent office and that seems to have some varying upon, the existing licenses we have if we got the future one is based on new developments of the firm.

Harold Hughes

One of the issues that we've confronted in is that the – because the market was so unprofitable that the investment levels and rate of improvement of products of DRAM was pretty slow and how we haven't been able to bring to bear what we believe to be our valuable patents. But we are under lot of pressure to from people who already licensed to take action against others. So, we made the decision in retrospect, you could question whether it was the best one that before people got higher performance silicon, we would sort of taken intermediate step and we look for some patents and one of the most patent.

Some prior that was found and so far we – one quarters found that there was indeed a effective prior art, but subsequent to that loss we've actually signed a large number of licensees. So, why is that and goes it back to my earlier statement and we developed technology, we don’t keep it hit it and we show at the people. And they recognized that we continue to develop lot of valuable technology and they see a loss by Rambus ironically is a good time to license. But three months ago I had generally with a well known CEO of computer chip company and I ask him how much money they had invested in high performance memory interfaces and he said candidly zero and I said what we invested a lot and we continue to do that and I think the nature of the charter that we give people allow us to hire engineers that others frankly can't. So, now it's great to win, it's easier to win, but a victory we have found often comes with an appeal and doesn’t come with license relatively early when I started at Rambus, I think my second month, we lost badly in a case in Virginia and I was obviously a bit apprehensive about calling the CEO at the other side. When I called him, it was pretty evident right away that you wanted to deal that’s you saw that he had something to protect and wanted to get a good deal to protect this company going forward.

Unidentified Analyst

Alright.

Harold Hughes

So, we've done quite well licensing ironically after the loss.

Unidentified Analyst

Your point is well taken in meantime, you continue to invest and new indeed also acquired the company that’s its going to supplement your memory capabilities for many years to come perhaps not just in DRAM, but also sound like in the flash. Perhaps if you could talk a little bit about on acquisition, but also can you talk about your ability to attract some retain engineers to continue building out this patent portfolios it seems critical none.

Harold Hughes

We’ve so far not onward, not had a problem attracting and retaining the best and the brightest, I see (indiscernible) that coming from lot of product companies, many of which we all know simply because again it's the charter you give people and at the really great engineer once the challenging charter and it sounds simplistic, but I found it to be case.

One of the disappointments I've had in the job is that I had assumed that the capacity increase in flash would be such that ultimately that much capacity would require higher performance interface to get the benefit of the capacity. As it turned out the flash sales were so bad as they made – as they increase capacity that just the management of that process unfortunately, they never got to the point that they needed the formal level performance and those patents have now expired.

But going back to the problem is to why I was disappointed, the flash sell continues to have problems, although, they've obviously done a good job getting to a size of chips they have right now. But we thought for quite some time now that this particular approach called resistance change would be the likely replacement for flash. Now anybody who has been in technology business, anybody who buys this drives, the debt of this drives has been ejected for quite some time. The old technology always holds on longer. But that's somewhat irrelevant to Rambus because we don't build a product and a product company only gets revenue by selling a product.

For us, just developing technology that ultimately will have value in the market we believe we'll reduce the difficulty in relicensing and we've done enough litigation to know that litigation is just it's a three sigma gain frankly, you don't know how it's going to turnout and much of our strategy is to find ways to reduce the likelihood of litigation recognizing that it never goes away in the IT company.

Unidentified Analyst

Alright, I'd like to go back to Pentalic and the lighting applications from that so, that many people would know we're enjoying that. This is LED lighting and it's really unique application of LED lighting and you have general (indiscernible) what is that we are doing that, when do you think it's going to become material.

Harold Hughes

It could very well become material in 2013. We signed just few weeks ago Cooper Lighting, which is either the number one or number two fixture company. GE as you know was a great bulb company, they are just getting into the fixture business. So, that has been at a big longer of a gestation period. But the company we bought is headed by a (indiscernible) name of Jeff Parker who created the backlight concept and owns the bulk of what – now Rambus owns the bulk of the patents in that area. And the main technology is to take relatively inexpensive plastic pallets using very sophisticated computer systems, taking the dimensions of a particular light that you want to have developed, calculate where to put literally bumps on that piece of extruded plastic so that the light comes out in large proportion equal to the light generated by the LED coming in. And the large proportion would be in the mid 90s, not only that, but then with this sophisticated software technology, you have the ability to direct the light, you have many stores that once the light to come down, but basically then go on to a wall almost at a 45 degree angle.

So, we believe that we have significant patent protection for a market that is produces a product that has better characteristics and we believe we can produce that our partners obviously can produce at very, very low cost. We said out doing several things, number one, we started a licensing program for the backlight patents with all the people who obviously make backlights. But we also built a prototype facility so that we can literally build things and show them to our potential customers.

And then thirdly recognizing that this is just a prototype facility and by its very nature of these will be products, the bulk of which will be made in China. We've signed up several partners there to manufacturing licenses. So, the concept is that we develop a prototype, we show it to a partner, the partner then is designed – it's slightly different to the extent they want it, we would run some level of production on our prototype facility to get them started to hold that process and then run it to a manufacture in Japan. These two by two appear, those are everywhere very, very high volume so that would be a model that a GE or a Cooper has GE has that product in the market right now for selling. And what you can do with lighting its quite remarkable.

Unidentified Analyst

And so the product your analyst also impressed so, one question may be we might need one of the reasons I’ve upgraded is that if I just take the future contracted revenue has governed by your existing contracts, we feel that the stocks probably undervalued as it currently stands, do you have some sense of how much revenue you’ve got basically lot in for the next ex-years or so?

Harold Hughes

The $600 million to $700 million.

Unidentified Analyst

Yeah.

Harold Hughes

Of which, I would guess help me Satish 250 next year locked in. I have ever been at the product company. We don’t have the quarter after next even half booked generally.

Unidentified Analyst

Yeah.

Harold Hughes

So it’s a best of our world when you have an ongoing royalty.

Unidentified Analyst

Right and expectations among shareholders are pretty sort of bleak at the moment as far as future outcomes from this litigation on new licensees concerns or anything happens has to be in my view, potential upside surprise?

Harold Hughes

I agree, I mean, I surprises I don’t think reflective of the value I suspect every CEO says that.

Unidentified Analyst

Yeah.

Harold Hughes

So, I can bring a pretty good set of arguments to that fact.

Unidentified Analyst

On this occasion, we agree with you, are there any questions, please? Yes sir.

Unidentified Analyst

(Question Inaudible)

Unidentified Analyst

So, let me just repeat the question of the $600 million to $700 million how much of it was paid at the funds end and how much is to be paid in the future. In other words so revenue recognition rest is cash flow sort of much differences.

Harold Hughes

Not much difference. I would say the bulk of that would be forward going, I don’t know how much, I don’t think that would there be any (indiscernible) Satish, so in essence, all of it is future. Yeah.

Unidentified Analyst

(Question Inaudible)

Unidentified Analyst

Yes, governed by signed contracts.

Harold Hughes

That’s under current accounting who knows what the accounts are due to more of the…

Unidentified Analyst

I know some of my debt friends are in the audience so, let's just talk about the balance sheet for a second. I think that you have the net cash of above $150 million is that right, no, not that much 50?

Harold Hughes

Gross is closer to 200 net then would be 50ish.

Unidentified Analyst

Oh I’m sorry so 50 million net, but you’re a cash flow generating companies no obvious.

Harold Hughes

Last year, we generated $55 million and that was after $60 million in litigation I suspect the litigation to be a fraction of that.

Unidentified Analyst

So it would be a much low this year, but it's not going to be immaterial or litigation expense right?

Harold Hughes

No, no.

Unidentified Analyst

Right, when does the debt come due? June 2014. Any other questions? I have one. You’ve decided that it's time to move on to your next adventure. So, what’s the latest on CEOs search and how should we, I mean how you’re going better?

Harold Hughes

Well, we hired well known search firm and we have been interviewing external candidates. And as I said on every occasion, I believe we have strong internal candidates. It’s a difficult process in those small parts because of the issues that we’ve had recently. And it’s a diverse company I've always felt that we needed to have someone with a far better technology background than I’ve had. And I try to push the decision process in that direction. We would like to get closed to unanimity on the board at the end of the day and there is a hurting cash concept behind that. And we originally had hoped to have something done by June, I’m not sure we’ll make June we will continue to gross process.

Unidentified Analyst

Well, are there any questions I should evolved, Harold.

Harold Hughes

We always ask that.

Unidentified Analyst

You probably should have asked.

Harold Hughes

I think you got the bulk of them.

Unidentified Analyst

Alright, good. Thank you everyone. I appreciate your time. Thank you, Harold and Satish making trip out here. Thank you.

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