Ron Black - Chief Executive Officer
Satish Rishi - Chief Financial Officer
Rambus Inc. (RMBS) 2012 Citi Technology Conference Transcript September 4, 2012 3:45 PM ET
I’m part of Citi’s Semiconductor’s team. Today we have from Rambus, Ron Black, CEO; and Satish Rishi, CFO, will be doing a presentation for us today.
This is good. You can hear? Thank you for coming and there is no cross phones, I guess so, at least you’re listening to me. We can skip the, oh, it’s a little hard to see off the top of it. But these are the topics. I wanted to cover just a few things.
First the company, there is another organization that we put in place. I joined the company about two months ago and I’ve gone through the normal. Let’s do a deep dive on all of the businesses and make the requisite changes. But we also announced a restructuring which is really an eye towards reducing some of the G&A expenses and I’ll give you some background behind that.
And then, a little bit more about the strategy, which is largely the same as the company was embarking on before, but I have a bit of a spin on it as it’s contained within these slides and I think, it will be interesting.
I’ll touch on some of the differentiators in the three key businesses we have and then we’ll, couple on the financials, which I’ll breeze by because the historical and there is no new news but to make a few points.
So, in terms of the company, I’m always reluctant an investor presentations to show organization charts because they mean a lot to the company inside but often they mean very little to the outside. But I thought I’d make a few points which is at the top level.
The company before was really focused on what we’re calling new businesses and the historical semiconductor business or semiconductor business group, and after Satish and the team and I did a deep dive, we concluded that it would be better to really elevate the key businesses that we’re really at a business unit status and then to take some of the other more strategic initiatives and put them into a corporate R&D or lab function if you will and then to update the organization in this way.
It eliminated a layer of management and made, I think, our decision making much more robust and efficient in the process. If there is a word, I would say it or little bit more entrepreneur experience despite the fact that there was a lot tracking of big company historically.
With that change in the organizational construct, we also concluded that the company had really gotten out in front of itself a bit mostly on the G&A spending and so that’s a bit of benchmarking. We reduced largely the G&A to produce an annualized net saving based on second quarter.
So what we currently have on record as our expenses, between $30 million and $35 million, and we use the word net year simply because we actually are taking out more on the G&A front, but there is some of the core businesses, some of the new acquired business that I’ll talk about that we’re spending a bit more money on.
We’re reviewing other assets, I should say, specifically, Satish is the CFO, the business and other contractual obligations. So we may adjust and take more charges by the end of the year.
I think from an investor standpoint this was something that, some investors have told me they were looking for and important to lower cash burn, get to a point that on kind of steady state basis we should get to cash flow positive.
So in terms of the strategy, this is a new chart describing a strategy that really the company is being doing for long time. So I’m going spend a minute on this chart. It’s not meant to be complex but it is complete and I think important.
The company has a long history of partnering with companies but also ending up in litigating with them based on the technologies that we’ve develop over many years. Most of these technologies historically have been in the area of memory and links if I just go back to this organization chart.
The memory and links piece of it was really the historical Rambus piece that if you follow the company for any period of time, over the last 20 years this produced almost all of the revenue and even today produces much of it. So pieces culminate on some of the calls that the new businesses will represent about 15% by the end of the year.
These new businesses are in Cryptography, so CRI, Cryptography Research Incorporated and LDT is in Lighting Display Technology, which is really around LED, not LED chips or components themselves, but in light guides and optical guides that produced and change where the photons are, I’ll talk about that in some point.
What is very different is if you look at the value change in these businesses and you start in the bottom on the left hand side of this chart and you think about IP, so the creation of IP, all our businesses do that.
And in fact the core of what our legacy was, the bit memory and links business that was around the patents itself and there was some licensing of technology and the technology were often in the force of pieces of semiconductor componentry typical referred to as a cores. So IL core and the design know how to make very high speed devices.
So that’s where we have been historically, if you look at lighting and display business and again, you’ll see some proof points later on of what they, they really point the difference are, the cryptography business and potential combinations of these things as we introduce into the market.
We have ability to move up the value change and in fact what the acquired business is, LDT and CRI has done is engaged the marketplace with higher levels of expectation not that is forced on the customers per say but the customers are calling us with them to produce higher level sub assemblies.
So for instance in CRI we’ll be cores, but the cores are helped integrated into other customer’s chips which are put in subsystem, where we can actually help manage keys for them.
So there is a whole pathway by which the business itself as we look at it going forward, is trying to participate at the customer’s request, higher up the value chain, ideally what that’s going to do is put us in a position where our relationships with the customers and licensees is more positive.
So that doesn’t mean by the way, that we are not going to enforce our IP, as many of you have seen the big giants in the handset business, Samsung and Apple have engaged in an IP dispute, which is entitle to that stake, unnecessarily and unfortunately necessary part of our industry. But that's not going to be all we want to do.
In fact, what we want to do is expanding our relationship with these customers and creating a lot more stickiness and more demand call from them and ultimately bridge across these different businesses, which seem to be very different in lots of ways except two.
One is that there’s licensing in all of them and the second is that some but not all of the customers overlap. So there is a big synergy at the operational level in terms of the licensing and knowing how to do that effectively and efficiently, and also with the customers where you have multiple touch points, especially the larger customers.
So if you step back and try to summarize the strategy, I don’t particularly like this chart because it’s a little hard from a graphic. But it shows really what the company is trying to do, which is put together a broader engagement model, both on what we call solutions licensing or technology licensing, as well as a complimentary pattern licensing.
There are many companies that do this and do it very effectively, the likes of Qualcomm and Arm, and Imagination and they do that by having superior solutions in both areas and that’s what we think we have as well.
We have really high-value patent that allow customers to differentiate and they are often spec readable, and we have high-value solution, which really allow customers to jump start what they are doing and make things better.
So that’s fit the base strategy. We have many other areas of investment beside these three in semiconductors, lighting, display and security or memory and links mainly for semiconductor. But they are really in the incubator stage and we are waiting to move them out.
So the differentiators, why do we believe so much in these businesses and see them as long-term as being able to contribute enormous value? So, let me start with the semiconductors thought, which is the bulk of our revenue today, right.
What this company and I’ve been in the industry for about twenty years and I’ve always been enumerate by them. They have figured out how to have very high-speed excess to memory and do it generation after generation, after generation.
Often times, it was around patented technologies like VDR, double data rate or other expenses of that. But we also have a lot of research into things that are more applicable today, low-power for instance we think is going to be a huge market for us and on higher speed things or faster memory like on the server side of it.
The company is unique in the sense that it just doesn’t do let’s say a sturdy serialization or deserialization I/O block. But they really design it from the I/O through the package, through to the boards, they traces on the board, they model it, they model it in detail and they do unlike a lot of other, often is refer to as non-practicing entities, we develop our own solutions, we make chips out of them.
A lot of times we don’t sell the chips, we sell the blocks that result from it. But we really know that the models we create are in fact producing the results that we want and we are marching through that curve.
Something I think is well-known is that the company has partners like Sony and developing their PlayStation where they needed a very high power, a high frequency of memory interface to able to feed the processor function that was designed in partnership with them around this class of technology. So this company is unique in this case. It’s always going to be unique in this and we have a roadmap to continue that indefinitely.
Most of the revenue today comes from patent licensing. But as we embark on this broader relationship building, I think you’re going to find that more and more customers are going to look to us because of the IP blocks that we can provide them, not just the license to the patents.
On the lighting side, business complex was funny. In meetings with a lot of investors today, I think we've done not as good of a job as we could have, explaining this business because most people assumed that we’re in the LED semiconductor business itself, we are really not.
We are in the application of LED lighting and if you look at this second group over, this little optical microstructure design from light extraction. To oversimplify this, what we do is use LEDs in conjunction with some optical transport media, a piece of plastic.
So some simple cheap plastic and we edge in a very particular way, little optical lenses in those and the design of those lenses, use singularly or in combination with other lenses, actually scatter the light in a particular direction.
This sounds incredibly simple and it is. It’s the kind of thing that I strictly I wish I had docked that up because it is so obvious and it’s so cool. But the truth is I didn't, these guys did and it’s used in everything from keywords to TV backlights to lights like you would have in a building.
So what we’re banking on here is I think today a known transition that people are planning for and believe in, which is the evolution from traditional lighting to LED base lightening.
But more importantly, our engagement model is with lighting manufacturers, the two that we have quoted openly assigned as GE and Cooper Lighting here in the U.S. We also have Fern-Howard in Europe and we are expanding it to other partners.
And what we do that’s truly unique is not only do we have patents on this, but we have a lot of design now how we work with the optical engineers to say look, how do you want the light to flow?
If you look at it in a simple light like you have here on the site, do you want the light to go down, do you want it to go backwards, do you wanted it go forward, that can be an everything from the light haul to a light fixture, the common two by twos that you have in school to these can lights that are right here. So all of those lights, you can design precisely how you want the light to fall.
And this is important because if you look at LEDs, today, they’re rarely consumed by somebody going to the grocery store and picking them up because they’re pricey. But they are consumed a lot by commercial enterprises because they understand that the cost is more but the life time is longer. So having a differentiating capability at the system level right and being able to design like that chime and exactly the way you want them is a very, very big differentiator.
So today, this is the small business for us. Our customers are just about to ramp. But I think its one where we have a lot more stickiness and a lot more value in the solutions know-how than just the patents implied themselves.
And the same thing with Cryptography Research Incorporated, this was an acquired business. And what this team has figured out is something just as novel and interesting and almost simple or simplistic in its approach and one that you say wish I had tossed that up and that was called differential power analysis and in particular the countermeasures for this.
So, what this team did really about 10 years ago and co-defined in patents is that they figured out that every electronic device by the pure nature of it doing calculation has a power supply right as the semiconductor devices are moving that goes up and down. And in fact, because of that moving up and down you have radiation. Some of the radiation is blocked, some of that you can take the front part and look inside of it and by looking at the power going up and down, you can actually through a simple antenna or simple magnetic loop, you can actually see different transactions that are occurring.
Now for all sorts of cryptography, the algorithms are out. So there is a set of things that you do to publish and I’ll point to publish so that everybody can work on them as a standard. But while those standards exist that mean you can identify, if you're looking carefully just in a oscilloscope and antenna of magnetic loop.
You can look for changes that are occurring in a particular way to signify a particular mechanism for encryption or decryption. Now, once you identified that you can actually continue to monitor and look at the keys and the keys are the secret piece that allows something to be encrypted or decrypted.
And from this analysis you can actually take a cellphone, most of the cellphones today and crack it for whatever is occurring. So this company will be fully bogged down actually deployed this in almost all of the smart cards in the industry. Smart cards are the type of chip intent or EMV, if you are familiar with it. Its very -- it is often in Europe, in fact any credit card you get. I live in Europe most of the time for the last 12 years.
It’s a very, very important element to it. So those are licensees. But this business is going way beyond there. Its going into set top boxes to make sure people can’t break content. It’s going into printer cartridges for printers to make sure that people aren't faking it and selling almost counterfeit devices. And there is huge numbers of things like airplane parts, which believe or not, you see some indications that there as much as 40% of those are counterfeit.
So the number of applications is enormous not to mention the biggest one which I think the industry is looking at which is smartphones today. Everybody is looking at things NFC or biometric authentication with companies that Apple just bought. So just look at new industries or new applications especially in payment and the requirement for security have not been able to just bust any type of cellphone is incredibly important. So this business as a whole we see as extremely large and ability to grow and scale very, very significantly.
Last, on this list, we do measure patents. I’m always a little bit reluctant to show these type of charts because having more patents doesn’t necessarily mean they’re better patents. So you have to be able to go through those with the find you’ve come and know which patents are really, really good versus which are just expansions.
I think this company as a whole does that very, very well. You’ll see some companies that have 20,000 patents. We’re certainly adding to it but we have more like 1600. So we have a very good poor patents both issued and application.
So I think the companies continue to invest in the technology and know-how. And again as much as ready patents, its doing a lot of the hard engineering work to prove that are in extenuations when it comes to silicon or software or plastic is actually doing what you say its going to do.
And as proof point for this, we have an enormous number of licensees. You can look at these. They are all the ones that you would normally see on there. So that shows that the company is really valued by our partners.
Just touching on the financials briefly, these charts have mixed messages unfortunately. If you look on the last revenue, don’t be too scared by the decline. Some of that is our revenue is very lumpy and you can ask questions if you want from Satish. So the early phases the quarters is like at the end of 2011, we had a lot of one-time payments.
We have a large set of signed contracts which exceed over $0.5 billion in sales going forward in the future, right. So of course, they were up and you have to keep resigning these but they go through 2015, '16, and '17. So this company is actually in a fairly strong position from a base revenue. You can argue $50 million to $60 million per quarter, which is a good baseline. We have to continue to execute but of course we keep on investing in those things and its going well.
The right hand side, you see the expenses are coming down in fact because of the legal expense to red, but also as we took this reduction in force and some of the restructuring we are going to be lowering that about $8 million a quarter. So off of the blue comes another $8 million which is you can see will improve our EBITDA.
So in summary, just to bring it home and you can turn it over to a few questions, we organized the business to focus little bit more on execution and demand here is not just innovation as the companies have before innovation to market. I think we are doing well on that. We’ve reduced the cash burn with our compromising any of the investments, really, it’s really focused on the G&A side. It’s a little bit hard because we are working very, very hard and our stock has been pounded which may be from an investor conference is good because that’s an opportunity to buy.
We haven’t achieved the rating that we expect but we are working hard to do that. And as proof points, what I’ll encourage you to do is follow the company over the next several months and you’re going to see stuff from the three core businesses, memory and interfaces, writing and display and cryptography. But I’ll try to give you a snapshot of some of the key differentiators and why we think going forward in the future, this is a good stock to invest in. Thank you.
Hey Ron. Thanks very much. Just on, if any one has any questions, feel free to raise your hand and we’ll bring a microphone to you start it off and kick it off with just a few questions talking about some of the legal issues. I don’t know if you can provide some of the backdrops, those that are familiar with Micron and Hynix, what’s going on there?
Satish is here for a long time before. I can give you my opinion but I’m new. So I’ll let Satish.
I’ve been trying to provide a backdrop. It will probably take…
Two and a half hour.
Greater part of presentation but we have a lot of detail in our 10-K and 10-Qs but just in very -- in terms of more recent events that have occurred and where we are today, I think what I would say is that we are waiting for ruling from Judge White in the case Rambus versus Micron and we’re also waiting for Judge Robinson in the Micron versus Rambus case. Sorry, the first one was Hynix versus Rambus.
And then the antitrust case, we are planning and planning an appeal. This was a case that we got a verdict last November and both parties have gotten varying extension to file the appeal and we should be filing our appeal by the end of this month. Then both parties will have chances to respond to each party’s briefs.
And by Q1 of next year, we expect the courts will set up some sort of an oral hearing timeline and given the congestion or timing of the court system in California, we expect that may be three months or six months or may be in the fall of 2013, there will be an oral hearing and then soon after that maybe another three months or six months. There might be a decision whether or not there will be a retrial or rehearing of the trial. So that I think in nutshell is where we are in some of the legal fronts.
So the next milestone would be somewhere in the calendar first quarter next year.
Got you. And then moving onto Elpida, has Elpida paid you for this quarter and can you tell what the nature of this payment?
Sure. We have had license of Elpida five-year license back in 2015. Elpida filed for declared bankruptcy couple of quarters ago and they have been a very good partner and they have been paying us along during the bankruptcy.
When we gave a guidance for the last quarter back in July timeframe, we were not sure whether or not they would pay us in this current quarter because they were in the process of filing a plan of reorganization that is going to go to the bankruptcy court in Tokyo sometime in the August timeframe.
So we were conservative in the guidance and basically when we gave the guidance, we excluded Elpida not seeing whether it would pay us or not but they have paid us. And we provide further details in our conference call sometime in a month or so.
Great. Any questions from the audience at this time.
I think Ron you’re talking about legal expenses, others have tapered off recently. Where is that going, going forward?
So as I reflected on in the presentation, our desire is not to litigate with customers. It’s a necessary fact some time but we’re really trying to avoid that simply because we think today as we look at -- this was a pleasant surprise to me as a CEO, the incredible capabilities of the technical team, I think it’s better to partner with the customers and provide them this technology through an extension of the patent licensing to the solution or technology licensing.
So it’s been ramping down from the high amounts when you have all sorts of discovery and the litigation itself to roughly $4 million a quarter. And it’s been just staying at that level as we go out in time as we are filing these briefs for the appeal.
Ideally, it stays like that but we’ll have to see if we can close some of these new deals.
Got it. And then with rest of your expenses, how should we think about those going forward as well especially…
Kind of as I reflected, the total expense level, we’ve now estimated that from Q2 of this year, so what you just saw going forward, there is about $8 million a quarter that will be reduced. Satish, if you want to give a little bit more on the charges or…
Yeah. So the severance charges about $6 million will estimate extra charges as we go through some restructuring. But once we are done with these charges, on a run rate basis, we expect to be saving between $40 million and $45 million a year, both from headcount reductions and also reductions in SG&A related programs but we’re also investing on your businesses or net savings would be between $30 million and $35 million in 2013 from a run rate of Q2 of this year.
As you said, $40 million and $45 million in annual savings sometimes next year.
For next year.
For the next year and then would you divert -- so what are you investing in terms of new areas. I think you mentioned that, how much of that -- how much of the savings be directed into this new area.
That’s the $10 million, the difference between $30 million to $35 million and most of it is in the new acquired businesses, which we think are poised for very significant growth.
And there is a lots of new customer engagements.
Are there any question at all at this time? Okay. Is there anything else you guys would like to address at this point.
Okay. Thank you.
Thank you again for coming. Appreciate it.