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Rambus Inc. (NASDAQ:RMBS)

Barclays Capital Global Technology, Media and Telecommunications Conference Call

May 23, 2012 11:15 am ET


Martin Scott - SVP and General Manager, New Business Group

Satish Rishi - CFO


C.J. Muse - Barclays Capital

C.J. Muse - Barclays Capital

Well good morning. My name is C.J. Muse, semiconductor analyst. I am very pleased to have the Rambus team with us today. We have Martin Scott who is the SVP and General Manager of New Business Group. He will be presenting. We have roughly 25 minutes. I think we have slides maybe 15-20 and then after that we will have Satish Rishi, CFO join in for Q&A. And after that we have a breakout in room Liberty 3 and with that let me turn it over to Martin.

Martin Scott

Thank you very much. It’s a pleasure to be here this morning. We can add the first slide. I would like to remind you that we will be making statements that are protected by the Safe Harbor provision. You can refer to the details on that slide. For those of you that are a little bit less familiar with Rambus, a brief introduction, I think is in order. We continue to be a premier technology licensing provider. And we've decided over the last couple of years to divide into the traditional semiconductor business focus that some of you may know from Rambus’ past and the groups that I manage, which is the New Business Group, which will be the primary focus of our conversation this morning. Our 2011 customer licensing income is $318 million and you can see the breakdown between recurring and non-recurring revenues and for further detail and questions about that, I would refer you to Satish at the end of this presentation.

We were founded in 1990 by Mike (inaudible) Mike Farmwald from Stanford. Our headquarter is in Sunnyvale and we have grown to about 510 people worldwide. So, I think a brief introduction on what's going on in our semiconductor technology group is an order before I spend the majority of the time this morning talking to you about our two new businesses.

We continue to focus on leadership and industry-standard solutions in the memory space. Certainly, our story past is relatively well known for our contributions to high speed interface technology. We continue to make fundamental innovations in the space of low power, not just from mobility solutions, but for service solutions as well. We continue to work with our licensees and potential customers at the system level in order to realize the benefit of our innovations and the semiconductor group is diversifying as well. We have initiated some research and new classes of imaging, particularly those classes of imaging solutions that require computationally intrinsic solutions, as well as new bit cell technology in NAND Flash, which some of you may have seen last quarter as indicative of our Unity Semiconductor acquisition.

So let me switch gears and spend the majority of time this morning giving you a little bit more detail that you may have heard before about market drivers and what we are doing in our new businesses. So there are two big ideas that have driven these acquisitions and solutions and they both have to do with capitalizing on major technology disruptions and opportunities to provide innovative solutions to drive those markets forward. The two primary businesses we’ll talk about, our solid state lighting and next generation display activity is indicated on the left.

And the one that is represented by our cryptography research group which is focused on hardware security and in particular securing the ever increasing need for securing transactions and data in a cloud-based computing world. Let me start and spend some time going into some more detail about our lighting and display company. We made a small acquisition of Jeff Parker and a dozen engineers about two years ago. We began rebuilding and building a licensing business around that patent portfolio and technology solution portfolio what you see as a result of that two years of investment is a wide variety of capability that ranges from custom software design all the way to optical substrate and polymer processing.

Most of this activity is centralized outside of Cleveland in Brecksville Ohio where we have built rapid turnaround and prototyping capability. Some of you may recognize this as being a departure from some of Rambus' past. We have the ability to both custom design and actually build full solutions for our customer base in order to speed adoption of our technology and take the barrier for getting these new technologies into the market down. The primary IP position that we have and the solution that we provide has to do with managing light from ever increasing right point sources of LEDs.

We instantiate optical, nano and micro structures through a variety of polymer-processing techniques, either on a film or an injection molded plates. This technology was originally vetted and adopted in backlight unit technology for large panel LCD TVs and display as well as mobile devices and we are taking much of that technology, customizing it, updating it and continuing to invent that technology and moving into solid state lighting. I will talk a little bit later about some of our recent licensees and our progress in actually bringing products to market.

This slide is interesting in that it gives you an idea or the range of interactions we have with the market place. It shows on the left a relatively small amount of adoption of this technology in LED lighting. It's just beginning, we think it's the beginning of several decades of a transition of incorporating the benefits of solid state light sources in a variety of architectural, commercial and residential settings all the way to the right hand side of the slide where, for any of you that hold up your smartphone or look at monitors and flat thin tablets or TVs in the wall you will note that much of this technology is more mature in its level of adoption. That informs us as well as to how we interact with our potential customers and licensees and how we go about monetizing our IP. Where is the market opportunity, certainly in lighting and display arena, both of these areas we believe have opportunities well in excess of $100 billion at the brand level. One thing that's quite interesting in terms of leveraging our revenue growth potential in this business is our ability to license the value of our technology at the luminaire level, or at the LCD panel level. And you can do the math, but we believe this represents a very exciting opportunity for us moving forward.

To get a little bit more real, the pictures you see in the top part of this slide actually show real prototypes that we've done in our Cleveland facility. We were very happy to announce a major licensing deal with Cooper Lighting several weeks ago. We worked closely with Cooper to showcase much of this innovation at the Annual LIGHTFAIR Show in Las Vegas. By all reports, that technology was extremely well received. Our teams have worked well together and we're excited to move forward with them as a new partner in bringing this technology to the marketplace.

Shown in the bottom are simply -- it's an example of the wide variety of backlight unit applications that our technology is applicable to. For those of you that have followed some of the challenges of getting ultra-thin formats in either a tablet or an ultrabook, you'll know that one of the big challenges for power reduction is not just in the semiconductors but is in the display technology itself. We think by improving the optical film stack efficiency that we can actually help drive those ultra-thin form factors and more efficient battery configurations.

That was a quick slide through a very large and growing business, and I'm happy at the end of this talk to answer more questions with Satish.

So let me switch gears completely and talk a little bit about our security business. It was almost a calendar year ago today that we closed the acquisition of Cryptography Research. CRI was a private company that was founded by Paul Kocher. Paul Kocher is an extremely well-known and young cryptographer that helped author the early SSL security standards and made some fundamental inventions, and patented those inventions that had to do with countermeasures that were able to mask differential power analysis attacks.

If you look at the three vertical columns in this slide, they represent various sources of revenue or businesses that we're growing with CRI. The one that I just referred to, DPA is primarily a patent licensing opportunity and a service opportunity for us. We have a lot of demand for describing to a variety of government, military, financial transaction and consumer electronics companies the vulnerability that those devices may have for side channel attacks.

The side channel attacks could be performed either in hardware, where they could be detected actually remotely. We've recently shown, both at Mobile World Congress and at the RSA Conference, the ability to remotely route keys from a mobile device by statistically analyzing the non-random components of processing a private key. We have countermeasures, both in design techniques and in patented solutions, which minimize and can reduce this threat. And this is being received very well and the demand for our awareness training is very high.

If we move to the central column, CRI has been deploying a CryptoFirewall core. For those of you with a semiconductor background, you'll note that this is a several hundred thousand gate semiconductor core that we work collaboratively with semiconductor partners like Broadcom and ST and MediaTech, in particular to deploy right now in set-top boxes. Probably the best example to-date has been the deployment over the last few years of this core into the pay-TV space, in order to lock down and prevent piracy of high value content.

By the end of this year, we expect the majority of new set-top boxes, as they churn into the ecosystem, to incorporate this CryptoFirewall core. It then is integrated with the software required from conditional access suppliers. We continue to have an extremely good relationship with Hollywood and content providers, in particular, in order to cost-effectively enable high value content to be deployed either through cable front-ends or broadcast situations.

A very similar instantiation of that CryptoFirewall technology, in combination with a consumable core, on something like a consumable device can actually act as an anti-counterfeiting solution as well. Shown pictorially in that particular picture is simply a set of inkjet cartridges. We're working with a major printer manufacturer to deploy an end-to-end anti-counterfeiting solution.

The best way to think about this is an ability to securely enforce whatever policy a customer would like to enforce to avoid anti-counterfeiting. You could imagine that there are maybe a dozen vertical markets where this kind of end-to-end solution could be deployed. And we are actively evaluating the next vertical markets to help take that anti-counterfeiting solution to.

And finally, I mentioned earlier, we actually provide a significant amount of security consulting. A number of tier one customers across the enterprise, across consumer electronics, game consoles, mobile phones and secured government operations come to CRI for education on -- and help analyzing hardware security threats, in particular. And this often leads to future licensing opportunity for us, either in a consulting engagement or hardware deployment engagements.

So, very synergistic awareness building and licensing (inaudible) that we're trying to create. I've already mentioned a bit about DPA. It is fundamental to CRI as any kind of regulatory tailwind or standards, as they contemplate the requirement of DPA being deployed, to the extent that happens, the one place to come for DPA countermeasures is CRI and Rambus. So we're very actively engaged in helping support the secure transactions.

What you see at the bottom is it's very difficult for us to quantitatively estimate really what the market opportunity is here. So if you look across the smart card industry, the mobile industry, and hardware chips that would be potentially suitable for DPA countermeasures. We've come up with several hundred billion brand level kind of [term]. So we think we have lots of opportunities in the future.

Indicated in the right-hand box in the bottom are some of the vertical markets that we would like to deploy this technology in. I think you know that the vast majority of all smart cards currently are under license. Paul likes to say CRI license is something on the order of $6 billion chips a year. And that's primarily indicative of the high volume smart card industry.

Mini communication systems, cell phones, the Defense Department, postage metering, protecting boot code and FPGAs, point-of-sale terminals, video decode, game consoles, any of these applications which have an increasing reliance on the authentication of private keys, can take advantage of our technology. I won't spend too much more time on this slide. I've already talked a little bit about our continued deployment of CryptoFirewall solutions in the pay-TV ecosystem.

Shown pictorially at the top, of course, is a model you may not be familiar within Rambus, where we collaboratively work in the value chain with semiconductor partners -- I named some of those companies earlier -- in order to put the solution into the SoC, while we occupy a small amount of real estate in those SoCs. The inclusion of that core is increasingly a requirement of the upstream consumer of the solutions. We certainly like that and we're working hard to expand our design capacity in order to deploy that across the world.

Finally, this is just again a more detailed picture of one generic example of an anti-counterfeiting solution. What's shown in the left, indicated with the CCF on the chip, is a small consumable core, which is instantiated in this particular case on a printer consumable. Could be an inkjet cartridge, could be a laser toner cartridge. It could be many other things in a different kind of vertical market but in this particular case it represents the consumable. On the other end of the wireless so to speak, is either our hardware core or our firmware that's running on an embedded CPU, in this particular case on a printer SoC which enforces the policy for authenticating the actual consumable that they use.

So again I think it's important to realize, we offer a solution that the end customer can use to customize and enforce a particular policy. We are not in the business of actually deciding what kind of any counterfeiting policy it would be, but this is certainly an opportunity for this particular market to realize significant savings, potentially improved quality by ensuring authentic consumables are used to in this particular case have high quality, our hard copy solutions but again you could imagine battery authentication and lots of different luxury goods authentication where the same technique of having a credit, debit secure authenticated transaction being absolutely deterministically enforced on a consistent basis.

So that was a very, very quick one through some very I think exciting and rapidly growing businesses. We would like to conclude before questions with just a representative [cross] section of some of our tier one licenses across all of our businesses, for those of you that have followed Rambus for many years in the past you will see lots of new names here which we are excited about at the company level, you will see many new semiconductor companies that are partners of our security operations, you will see Cooper Lighting and GE and Fern Howard as partners in our lighting operation and of course, Samsung and many Asian vertically integrated technology companies where we have a broad array of solutions both in our semiconductor group as well as our New Business Group, that should drive our business moving forward.

With that, I would like to conclude with our prepared talk and Satish Rishi is here with me as well and we’ll open the floor up for questions.

Question-and-Answer Session

Unidentified Analyst

Is there any way you can narrow the CryptoFirewall technology to a family of patents within Rambus or how do we, with the printer [slide], if you could just add up there, is there a way that?

Satish Rishi

Well, I think that’s actually rather difficult. As you know, when we acquired CRI, we acquired a substantial patent in [IP] portfolio that was owned by CRI which is certainly part of our corporate portfolio of [IP]. The CryptoFirewall core itself is a proprietary design that we retained ownership of and we work closely with our customers, there is both a combination of know-how trade secret and optimum implementation that CRI has a very strong capability for it as well as patents and backup. I hope that [answers] the question.

Unidentified Analyst

My question on the LED front, I think General Lighting was trying to be manufacturer and now you are moving more to a licensed type model and I guess two questions one are you looking to drive uninformative or late efficacy? And then secondly, can you talk about the willingness of parties in the industry particularly in China and in General Lighting and their willingness to pay royalty strength? Thank you.

Satish Rishi

Lots of questions, in a few minutes here. Let me start with the business model. I think you referenced GLT which was the company that Jeff and his team came out of when we acquired them.

They continue to manufacture like I think in Taiwan. We have remained true to the Rambus platform of licensing either our [full] technology reference design and the patterns that are required to enable that technology solution. But we are also finding great customer demand for short [run] prototyping of real fiscal product in order to accelerate adoption.

So we’ve remain true to our licensing business model and we continue to license at the luminary level for a royalty stream in the case of General Lighting, but we also have the physical capacity and capability in our Brecksville facility to do [four] turn key prototyping and in this we’ve found this to be extremely beneficial, it actually showcase our technology and also get it adopted more quickly.

I think the second question you asked was, I think what you are asking is what the value proposition really is? It's about you know uniformity and I would say no it's much more complicated the uniformity. The Solid-State Lighting value proposition is actually a great fit for our [IP] and that work attempting to create the semiconductor equivalent of a application specific luminary design at great energy savings and cost savings.

So with both luminous efficacy [play] so we can edge light our particular lighting solutions most efficiently from lumens per watt perspective. We can do that we think at the lowest [raw] materials. So we have the best most efficient solution at the lowest cost and by specifically having a unique distribution of our nano optics, we can create a very specific emission profile from a customer driven design.

So this creates really a whole new paradigm and an ability to change the sheet metal bending industry that puts reflectors around the lamp and moves to a really an electronic custom designed system. I think that’s a great fit for Rambus generation capability has been great fit for Jeff Parker's patent portfolio, and I think very well received by our licensees.

I think the third question, is really a good question. Willingness to pay a royalty in China, our licensing activities to-date have concentrated on manufacturing agreements in China as partners. Radiant is a good example of one of the largest backlight manufactures in the world.

We have brought customers to the contract manufacturing base in Taiwan and we continue to license at the brand level. So right now, the big licensees that are driving our lighting business forward right now in the US is GE, Cooper most recently Fern Howard in Europe and we will certainly continue to look at the Korean and Japanese and China brands as well. We have lots of ongoing conversations.

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