Q3 2012 Earnings Call
October 18, 2012 05:00 PM ET
Satish Rishi - CFO
Ron Black - President and CEO
Tom Lavelle - General Counsel
Hamed Khorsand - BWS Financial
Mike Crawford - B. Riley & Company
Good day ladies and gentlemen and welcome to your Rambus Incorporated Q3, 2012 conference call. At this time, all participants will be in a listen-only mode. Though later we will conduct a question and answer session which instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference maybe recorded. And now I would like to introduce your host for today, Satish Rishi. Please go ahead sir.
Thank you John and welcome to the Rambus third quarter 2012 conference call. I am Satish Rishi, CFO and on the call today with me are Ron Black, our President and CEO, Tom Lavelle our General Counsel.
The press release for the results that will be discussed here today have been filed with the SEC on Form 8-K. A replay of this call will be available for the next week at 855-859-2056. You can hear the replay by dialing the toll-free number and then entering ID number 38404730 when you hear the prompt. In addition, we are simultaneously webcasting this call, along with the audio we'll be webcasting slides. So even if you're joining us via conference call, you may want to access the webcast for the slide presentation. A replay of this call can be accessed on our website beginning today at 5:00 p.m. Pacific Time.
In an effort to provide greater clarity in our financials, we are using both GAAP and non-GAAP pro forma format in our press release. I also need to advise you that the discussion today will contain forward-looking statements regarding our financial prospects, pending and current litigation, and demand for our technologies, among other things. These statements are subject to risks and uncertainties that are discussed during this call, and may be more fully described in the documents we filed with the SEC, including our 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may differ materially from our actual results and we are under no obligation to update these statements.
Further, as mentioned, we will discuss non-GAAP financial results today and have posted on our website reconciliations of these non-GAAP financials to the most directly comparable GAAP measures. You can find a copy of our earnings release and the recon on our website at www.rambus.com on the Investor Relations page in the financial releases.
Now, I'll turn the call over to Ron.
Thanks Satish and good afternoon everyone. I'll let Satish provide the details of our financials later in the call, but I wanted to say how pleased we are to have achieved customer licensing income of $62.4 million as well as pro forma profit of $0.08 per share both of which are higher than the guidance we provided. During the course of this quarter, we initiated a restructuring to help reduce some of our expenses. We expect this restructuring will result in an overall net savings of $30 to $35 million annually as compared to a run rate in Q2 of this year. Additionally we have altered the business strategy within our lightening and display technology division to focus less on display technology and more on general lightening. This increased focus on general lightening necessitated a revision of our future forecast which causes us to revisit the goodwill and long-lived assets on our books. Satish will have more on that later. Ultimately, we believe these restructuring efforts allow us to operate in a more entrepreneurial fashion and properly position us for future successes. As our strategy within LDT evolves, we continue to be pleased with the progress within the division as well as the engagements we have with the key customers such as Cooper and GOOD EVENING.
We've had a number of highlights during the quarter that not only showcased the technical acumen of our team but also our ability to reach beneficial agreements with customers. In September, we announced that we signed a new license agreement with Fujitsu that covers the use of our patented innovations in a broad range of their IC products. Also during the quarter we received payment from Elpida which as you may recall, we were unsure of when we reported last quarter given their ongoing bankruptcy proceedings. We also entered into a patent purchase agreement with Elpida. These patent supplied memory technology and are not cross-licensed to all of the players within the memory industry. We believe this patent acquisition will provide additional opportunities to our already strong portfolio.
As an IT company, the normal course of our business is to manage our patent portfolio which includes buying and selling patents when it makes sense. Usually this happens through acquisitions of companies, people and intellectual property. Historically we have focused mostly on the buy side of this equation given that we license extensively. Based on recent review of our total patent portfolio however, we have found that there are some individual patents and small portfolios that may be more valuable to others and have consequently decided to institute a more formal sell side activity. To be clear, this is in no way indicative of a change in strategy. It’s just good fiscal practice. For instance, this quarter we sold two semi-conductor test patents for approximately $1 million.
On the technology development front, we are continuing our efforts to create the most advanced memory solutions. At the recent Intel developer forum in San Francisco, we demonstrated some of these new innovations in what we are calling the future of main memories. These demonstrations received excellent praise among the technical community. In fact, one of the industry’s most respected news outlets stated that our demonstration of transmitting data at high speeds with very low power, and I am quoting here, previously not possible and the fact that we can get it to work correctly and reliably is proverbial magic. It is not easy. With testaments such as this, we are encouraged and excited to share our vision of the next generation memory technology through these demonstrations.
Also this quarter we announced the successful tape out of novel, mobile memory test chips with our foundry partner Global Foundries. These ultralow power devices provide substantial reductions in memory power and therefore an increase in battery life for smartphones and tablets and possibly also for compute main memory applications. Using Global Foundries 28 nanometer super low process, these test chips have surpassed all power and performance expectations, so we’re very pleased indeed with these results.
In our cryptography research business, we are continuing to see great traction on several fronts. First, we are delighted to have the opportunity to work with the secure content storage association or SCSA to provide our security expertise to their efforts. The SCSA is a consortium of companies in the entertainment and storage space founded by San Disk, 20th Century Of, Warner Brothers and WD, a Western Digital company. The goal of the SCSA is to provide consumers with new ways to build digital home libraries. The SCSA initiative will give consumers an easier and faster way to organize, store and move their high definition digital movies and TV shows across multiple devices. Our security expertise will be deployed across this platform and we look forward to our engagements with this consortium. In addition to the SCSA, we continue to make progress in our DPA countermeasures business. Our customer Microsemi is the first to introduce FPGA including DPA countermeasures. The recently unveiled SmartFusion 2 FPGA is we believe, the first of many FPGA devices that will need to include the added protection and security offered by DPA countermeasures. We have already garnered traction in the smartcard market, and with FPGA customers, we expect to see more revenue in coming years as we expand our reach through other verticals such as military and government opportunities.
We've also gained significant traction in our broader set top box strategy with our CryptoFirewall core. One of the key markets where this security core is in beneficial is Pay TV. Our CryptoFirewall core helps to lockdown and prevent privacy of high value content, something that is extremely important for Pay TV. We work collaboratively with semiconductor partners like Broadcom and ST to deploy the security core in set top boxes. The core is integrated directly into the video decoding SOCs, so as new products roll out, we should see an increasing share of this market. With our ground downstream revenue model, we anticipate revenue ramping in 2013.
Also this quarter, we announced an agreement with Logiways, which specializes in video on demand, security and embedded software integration. Logiways joins our growing list of set top box customers that rely on our CryptoFirewall core to build their advanced solutions and protect their video delivery revenue streams. We’re also pleased with our collaboration with Sigma Designs, our CryptoFirewall core, helps this leading provider of SOC solutions for home entertainment to deliver a robust hardware security solution for digital entertainment.
Finally, I’d like to provide a quick update on the legal front. As we discussed in our special conference call on September 24th, we received the decision from the honorable Judge Whyte in the northern district of California in the SK Hynix matter. Tin this decision, Judge Whyte affirmed the validity and infringement of our patents and determined that we are entitled to reasonable and non-discriminatory royalty rates from Hynix. The amount of royalty payments we are entitled to receive will be determined by the court. The court is granted additional time for the briefings to be filed and now both sides will be submitting their briefings on this matter sometime within this quarter.
With that, I'll turn the call back over to Satish to review the financials. Satish?
Thanks Ron. As a reminder, we use non-GAAP or pro forma numbers, which we believe are indicative of company performance as they include a certain events and excludes our non-cash and discreet events such as impairment charges and restructuring charges which are not indicative of a long-term performance. Customer licensing income is a non-GAAP measure that includes cash payments having received under a signed patent license agreement. It is how we measure the top line of our business and it may be different from revenue within a particular period when the amount of cash received from our customer is different than the revenue recognized.
Let me hit the high points first and I'll go into some more details. Customer licensing income for the quarter was $62.4 million, above our guidance of 55 to 61 million. Revenue for the quarter was 57.5 million within our guidance of 54 to 60. Pro forma expenses came in at $45 million well below our guidance of 58 to 63 million. Pro forma net income was a gain of 9 million as compared to our guidance of losses between 7 million and $1 million.
Customer licensing for the quarter was 62.4 million. As Ron mentioned, during the quarter, we signed Fujitsu to a patent license agreement. In addition, we also signed a patent purchase agreement with Elpida and we agreed to buy patents from them over the next four quarters. Because the patent license agreement and the patent purchase agreement are considered to be linked, we only recognize a net amount as revenue which explains most of the difference in customer licensing income and revenue for this quarter.
Customer licensing income was an increase of 9% from the previous quarter and a decrease of 32% from the quarter a year ago. The year-over-year decline was primarily due to one-time payments we received from a couple of licensees both of whom were signed in Q2 and Q3 of last year.
During the quarter, consistent with the restructuring announcement we made in August, we booked a restructuring charge of 6.6 million. During the course of our business reviews with Ron, we also determined that the lightening industry division go to market strategy as well as the longer term forecast had changed. As a result of the change, we assessed our goodwill and long lived assets for impairment and are taking a non–cash impairment charge of 35.5 million to write-down $15.7 million of goodwill and 21.8 million for impairment of long lived assets. In the past, we had expected to generate more revenue from dissolution royalties but our focus has evolved over time where we are pursuing a variety of different lightening solutions and expect to be introducing a dissolutions into a marketplace with several key partners and industry leaders. As Ron mentioned, we are very pleased with the progress being made with an LET, and are excited about the engagements we have with key customers (inaudible) GE.
Pro forma operating expenses which excludes a restructuring and impairment charges, stock based compensation, amortization of intangible assets and retention bonuses of 45 million, 20% lower than the previous quarter. These pro forma expenses include litigation, expenses of 2.6 million which are down 43% quarter over quarter.
Compared with the prior quarter, pro forma engineering expenses were lower by 15% and MG&A expenses for the same periods were lower by 25%. Expenses were lower primarily due to lower expenses related to our recent restructuring which reduced both headcount in program spending, along with the reversal of accruals relating to a variable compensation which was a one-time event of approximately $3.5 million.
As compared to a year ago, pro forma engineering expenses were 5% higher and MG&A expenses were lower by 54%. The decrease was driven primarily because of reduction and litigation expenses which went down from 23.5% to 2.6 million. Excluding litigation, MG&A expenses were lower by 11% as compared to a year ago.
Quarter-over-quarter we have reduced our operating expenses as reduced headcount and also reduced spending in MG&A programs. With the recent restructuring, we expect to reduce net expenses by 30 to 35 million annually as compared to the annualized run rate that we had in Q2 of 2012.
Pro forma, interest and the expense of 3.3 million up 14% from the quarter year ago. Our pro forma tax expenses were using a flat rate of 36% on pro forma pretax income. Pro forma net income this quarter was a gain of 9 million as compared to a loss of 1 million last quarter and again, a 14% a year ago.
Overall cash defined as cash, cash equivalents and marketable securities was at 207 million, an increase of 4 million from the previous quarter and a decrease of 86 million year-over-year. Cash flow from operations was an increase $11 million as compared to a use of cash of $20 million in the prior quarter.
Now, I'll give you some thoughts regarding the fourth quarter. This guidance reflects our reasonable estimate and actual results could differ materially from what I am about to review. For the fourth quarter, we expect customer likely income to be between 60 and 66 million and revenue to be between 57 and 63 million. We expect pro forma operating expenses which exclude restructuring charges, stock based comp, amortization of intangible assets and retention bonuses to be between 52 and 57 million. These amounts include an estimate for litigation expenses of $5 million. Pro forma net income is expected to be between 2 million and 9 million.
I would like to close by saying we had a solid quarter and are well positioned going forward. We exceeded our guidance for the period while moving aggressively to restructure the business to improve our profitability and our cash burn going forward. We also remain focused on execution, investing in areas which drive future revenue growth and profitability for the company. We remain committed to delivering an operating leverage and to the 30 to 35 reduction spending we communicated at the time, we announced our restructuring activities. It’s an exciting time for the company as we are well positioned to deliver value across all of our investment areas. We are now ready to open the lines for Q&A. operator can you please open the lines?
Sure thing. (Operator Instructions). So we’ll take our first question from Hamed Khorsand from BWS Financial. Please go ahead sir.
Hamed Khorsand - BWS Financial
First one is, can you elaborate on the restricting process as to the timing when you would see the savings?
So we announced the restructuring in August and because of the warn notice period, we have our employees get to the end of October. So we’ll start seeing the full impact of that in Q1 of next year, but we’ve already seen some of the impact in Q3 and in Q4. As far as the programs are concerned, we have sold many of the programs that we felt we could reduce our spending on and we have some lead time before we can cancel the programs, others we have already canceled. So I believe we can get to the full run rate sometime in Q1 of next year.
Hamed Khorsand - BWS Financial
And I would imagine why all the savings is coming from the R&D side of business. What's going to be the focus going forward as to what kind of patents and innovations you’re going to be developing?
That's an incorrect assumption. Most of the savings are not coming from the R&D side. When we did announcement, we talked a little bit more detail about it when we have the call on restructuring. Most of the savings are coming from programs that we have cut in MG&A and then also in some headcount reductions, primarily in MG&A. there is a small impact to R&D. I think we mentioned we took our reduced our design team by one because we felt we were over capacity by one design team, so that is the only impact we have to R&D. so we are still an engineering company and the focus will continue to be engineering.
Thank you and we’ll take our next question coming from Paul Coster from JPMorgan. Paul, please go ahead.
Hi, this is actually Paul (inaudible) stepping in for Paul Coster. Going back to restructuring, in terms of R&D, you’re saying the cuts are coming mostly out of SG&A. should we expect that the R&D cuts to be somewhat….
You tapered out at the end, can you repeat the question please?
So R&D come down about 20% this quarter. Do you expect it to be in that range moving forward in the next quarters?
It will be slightly higher than that. As I mentioned, part of the impact to the expenses we have is because of the reversal of a variable comp that we have been accruing based on certain expectations for the end of the year. So we had a reversal of that and some of that savings are one time savings coming both from R&D and MG&A.
And for the quarterly Elpida payment, in net amount of revenue, do you expect that to be similar in what you saw this quarter?
We expect to be slightly higher. We are paid two quarters in arrears based on what Elpida’s revenue was in Q2 of this year. So their revenue went up from Q1 to Q2. So we expect slightly higher payment from Elpida in Q4.
And then finally, can you provide any guidance on timing of payments for SK Hynix if you know that? Any more magnitude?
Could you repeat the question? Timing of payments you said?
Yes, if you could give us a general idea of the timing of payments and then more magnitude from the SK Hynix?
There are no payments that are due. Well, I see what you’re saying. So we had mentioned a couple of quarters ago that we had accrued about $8 million for payments to Hynix. That is still not being finalized by the judge. So we have built it into our forecast for Q4 but if it is yet paid in Q4 pushed out Q1, so that is something which we are not in control of. Our expectation or desire is to make the payment a lot lower than what SK Hynix has asked for and this relates to their past cost of the bond that they had placed back in 2010 timeframe.
(Operator Instructions). So we’ll take our next question from Mike Crawford from B. Riley & Company. Mike, please go ahead.
Mike Crawford - B. Riley & Company
Just to continue that train of thought, so that bond that kind of explains that was after jury award that was knocked down to close to $400 million based I thought on Rand royalties at the time. So now you and Hynix both need to argue Rand royalties should be in this case and can you remind us when those briefs are due and then comment on when we might expect a decision for Judge Whyte and given that there might be some hearing schedule as well in that court. Could you just comment more on the Hynix situation?
The briefings for that case on how much Hynix will owe us on the Rand situation or Rand rates will now be filed in, it looks like November has been pushed up by Judge Whyte based on a request from Hynix. There will be an oral argument scheduled after the briefings are submitted but they haven't been submitted yet and then subsequent to the oral argument of course would be when we would expect to get a ruling from Judge Whyte and I really would rather not try to speculate on when Judge Whyte will make a ruling. We've been not particularly good at making those estimates in the past and I rather not start trying to do it now.
Mike Crawford - B. Riley & Company
Can you comment on any progress or upcoming milestones in any of the other litigations be it in Delaware or (inaudible) CISC?
Well with respect to Delaware that's Judge Robinson who as you remember was sent back for remand by Judge Robinson. We had oral arguments early this year 2012 and she has not yet ruled on the remand and the arguments that have been made. Again, I won’t speculate as to when Judge Robinson will rule but you may recall that it was about 14 months after the trial that she ruled on the bench trial involving the claims spoliation. I don't say that's a prediction when she will rule this time. I just don't know. With respect to, you asked about the fab circuit, I presume you’re talking about the re-exam cases. And no, we don't have, we’re discussing how to move forward in a fab circuit on in the re-exam cases. Now, San Francisco appeal in the price fixing case, we filed our brief and late September, I think it was September 20th. Our oral arguments have not yet been set in the California Court of Appeals on that case and we’ll let you know when there will be an oral argument on that, when that set.
Mike Crawford - B. Riley & Company
Then different line of questions relates to the businesses, I was hoping that Ron could provide some sort of assessment with what Rambus has regarding that's the two main branches of technology that really that the held and used, they brought in one the Cryptography business and the other the lightening business. So in one hand you’re pulling away from display lightening now and focusing on general lightening. There’s been a bunch of investment in both areas. I am just wondering what the comments are on the value created are not there and when these businesses are expected to start generating cash flow.
Yes that's a very broad question. So if there is some refinements as I speak, feel free to ask them. The businesses are rather small but I think they are both poised for very significant growth. CRI has done a lot with extending the DPA countermeasures to opening up new segments of it. We spoke about one with the FPGA. I feel the programmable gate arrays are a very interesting business with high average selling prices and for a lot of industrial and military applications, they are their preferred technology and certainly you want those technologies to be very secure for industrial and military applications. There’s a lot of other segments that they are working on and we’re seeing a lot of traction in them as well. We have plans and we think there will be significant growth year-on-year for that business as well as the lightening business. So the lightening business is poised for a couple of announcements that are going to be rolling out early next year or possibly earlier depending on the market in some of our work with customers. We've been focused manically as we've licensed our technology and we’re providing some manufacturing support to these major customers as they ramp their businesses. So everything is kind of in the pipe and we expect significant growth in 2013. I can tell you that I am happy and excited with both of them. I wish I could give you more specific information but I am just not consistent with the policies of the company to give that far a forward-looking guidance. Is there anything else in particular that you’re interested in?
Mike Crawford - B. Riley & Company
One final question would just be on the chip interface business so that the focus now appears to be in addition to getting compensated for prior innovations to really focus on the mobility market and so is this new chip that you taped out, is that where you’re placing your highest expectations now or is there still some hope that some kind of XDR memory could gain some greater traction in the market. Thank you.
Okay, that's a very broad statement, question and the answer is yes to all of them. I think in all honesty that we could have put more investment previously in some of the technology and technology licensing aspects of the business and here I mean certainly granting patent licenses but also providing core technology to customers, almost in the form of a product. In fact that's what CRI or cryptography business does. They provide these security cores to customers who integrate them into devices. We have become ramping up that initiative and we’re gaining tremendous traction in the marketplace and its really in the area of memories really two fold, very high performance and low power and combinations thereof and also in high speed interfaces. We have some of the most advanced sureties, this is serialization, deserialization technology that I have seen. So the team is working on all of these aspects and we’re engaging customers very aggressively something that we haven't done for years. So we’re going to patent and continue to patent and we’re going to continue to license our patents very aggressively with partners but we found this time we can close these deals and we’re going to continue to do them, but I think there is a lot more technology that this company can bring to bear as we engage in the marketplace and I think that memory and interfaces is going to maintain a very large portion of this business for a long period of time because I see a lot of growth there as well.
Okay thank you. I am showing no further questions in the queue. So I’d like to turn the program back to your host for any concluding remarks.
Thank you all for your continued interest and support. We look forward to speaking with you again soon. Good day.
Okay ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!