Rambus' CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Rambus, Inc. (RMBS)

Rambus, Inc. (NASDAQ:RMBS)

Q3 2013 Earnings Call

October 17, 2013, 5:00 PM ET

Executives

Satish Rishi - Senior Vice President and Chief Financial Officer

Ronald Black - President and Chief Executive Officer

Jae Kim - Senior Vice President and General Counsel

Analysts

Suji De Silva - Topeka Capital

Mike Crawford - B. Riley & Company

Hamed Khorsand - BWS Financial

Matthew Galinko - Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to the Rambus Inc. Third Quarter 2013 Conference Call. (Operator Instructions) I would now like to introduce your host for today's conference, Satish Rishi, Chief Financial Officer. You may begin.

Satish Rishi

Thank you, operator, and welcome to Rambus' third quarter 2013 conference call. I'm Satish Rishi, CFO. On the call today with me are Dr. Ron Black, our President and CEO. Also joining us today for Q&A is General Counsel, Jae Kim.

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 75199907 when you hear the prompt.

In addition, we are simultaneously webcasting this call, and along with the audio, will be webcasting slides. So even if you're joining us via conference call, you may want to access the website for the slide presentation. A replay of this call can be accessed on our website beginning today at 5:00 PM Pacific Time.

In an effort to provide clarity to financials, we are using both GAAP and non-GAAP pro forma format in the press release and also on this call.

I need to advise you that the discussion today will contain forward-looking statements regarding our financial prospects pending current litigation and demand for 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 file with the SEC including 8-K's, 10-Q's and 10-K's. 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 reconciliation on our website at rambus.com on the Investor Relations page, under Financial Releases.

Now, I'll turn the call over to Ron.

Ronald Black

Thank you, Satish, and good afternoon, everyone. Let me start by saying that Q3 was another very good quarter for Rambus. As Satish will review in more detail later, we ended Q3 with customer licensing income of $74.3 million, slightly ahead of our guidance. Pro forma operating income was $43 million, also ahead of our guidance. And while we don't typically discuss GAAP financials, I am pleased to report that we were GAAP pre-tax profitable for the first time in seven quarters.

As a part of the normal course of business, we continually look for ways to increase efficiencies and control expenses, including taking action when initiatives do not meet our targets for shareholder value creation. As part of our normal planning process, in Q3 we completed a set of internal assessments and concluded that our initiative in immersive multimedia software would not generate sufficient shareholder value and consequently concluded to curtail spending, redirecting some of the team in the core technology to other strategic programs.

As a result, we have taken a charge of $8 million in Q3 associated with goodwill impairment, which Satish will describe in more detail later. While we are disappointed in this action as the product is way cool and the technology outstanding, it was simply not sufficiently core to our company to justify further investment compared to our other strategic programs. We believe such reallocation of assets is important to ensure we deliver optimum value creation for shareholders. We also remain open to broadly license the technology and continue to have discussions with selected interested third parties.

For the quarter, we came in significantly under-anticipated operating expenses due to a set of circumstances that Satish will explain. Notably, however, was the lack of major litigation spend. While we endeavor to maintain a low litigation spend going forward and do not anticipate significant increases next quarter, we will enforce our rights as necessary, as we have mentioned several times in the past.

This brings us naturally to our primary outstanding legal matter with Micron. While we cannot set any expectation as to when or if a potential deal will be completed I can assure you that we remain committed to an open dialogue and have the goal to resolve the matter completely.

Moving now to a quick recap of our business. In Q3 our Memory and Interfaces division saw a great progress collaborating with the industry. Of particular note, we received our first payment from SK Hynix following our settlement last quarter. This settlement has paved the way for a more open and collaborative dialogue with Hynix and we look forward to working with them to collectively grow our business.

Also in Q3 we signed an expanded agreement with Freescale Semiconductor. This new agreement provides our companies with the ability to collaborate on Rambus' resistive memory technology for embedded applications or eRRAM. Our eRRAM technology while rather nascent has unique capabilities that bring SRAM-like speeds to non-volatile memory and is attractive for a variety of applications ranging from consumer to automotive.

On the security front, we signed agreements during the quarter with both ALi for content protection in set-top box solutions and MicroSemi for secured semiconductor IP for certain government applications. We also achieved a design-win with another printer company to include our CryptoFirewall anti-counterfeiting technology for verification of printer cartridges.

In lighting, we remain focused on supporting our fixture engagement with Cooper Lighting and continue to support their ramp by shipping light guides with our proprietary MicroLens technology, which are integrated into their LED products.

Our A19 bulb is now available on Amazon under the Enviro bulb brand and has obtained very positive reviews. We also have bulbs on shelves at select Costco Canada stores under the Sunbeam brand, with a Hydro-Québec utility backed rebate program.

On the management side, I have to announce that Jeff Parker who has led the Lighting team has taken position at another company. We wish Jeff all the best in his new endeavor, which will hopefully be positive for both companies, as Jeff and I have already had discussions regarding collaboration. As our lighting team is operating well and focused on growth, we do not anticipate any adverse impact to the business.

In closing, we continue our focus on execution, cost management and prioritization. We believe Rambus has never been more relevant to the industry we serve. Having achieved a more stable business environment, we're now fully focused on profitable growth.

That's a quick recap on the business side of the quarter. I will now turn the call back over to Satish to review the financials in some detail.

Satish Rishi

Thanks, Ron. As a reminder, we use non-GAAP pro forma numbers, which we believe are indicative of complete performance as it includes certain cash events and excludes certain non-cash and discrete events such as impairment charges and restructuring charges, which we believe are not indicative of long-term performance.

Customer licensing income is a non-GAAP measure that includes cash proceeds that we receive under a signed patent license agreement as well as cash proceeds from the sale of intellectual property or products. It is how we measure topline of our business, and it may be different than revenue within a particular period when the amount of cash received from a customer is different than the revenue recognized.

As Ron mentioned, during the quarter, we booked restructuring as well as goodwill impairment charges related primarily to our MTD division. The pro forma numbers that I will discuss will exclude these one-time charges.

Let me start by reviewing some highlights for the third quarter before going into additional detail. Customer licensing income for the third quarter was $74.3 million, slightly higher than the top-end of our guidance of $69 million to $74 million. Revenue for the quarter was $73.3 million.

Due to the reduction in both litigation expenses and payroll, pro forma expenses came in at $43 million, well below the guidance of $52 million to $48 million. Pro forma net income was a gain of $17.9 million as compared to our guidance of $9 million to $14 million. Our ending cash balance was $366 million and during the quarter we generated $26 million in cash from operations.

Let me provide some additional detail related to the quarter. Customer licensing income for the quarter was $74.3 million with the sequential growth driven primarily by the royalties from Hynix as well as higher royalties from other DRAM customers. For the quarter approximately 36% of our CLI was from DRAM-related royalties as compared to 46% last quarter.

New businesses accounted for 11% of CLI as compared to 14% last quarter. In absolute terms, CLI from new businesses was relatively flat, but lower as a percentage due to the increasing DRAM-related royalties, mainly Hynix. For the full year, we expect the new businesses to be closer to the 12% to 14% range over CLI. For the third quarter, our fixed royalties contributed to 48% of our CLI and also 92% of our CLI was from patent licensing with the remaining being solution and contract revenue.

On the pro forma operating expenses, which exclude restructuring and impairment charges, retention bonuses, stock-based compensation, amortization of intangibles, they came in at $43 million for the quarter, about 10% lower than the previous quarter. The decline was driven primarily by how we calculate a variable bonuses, where there is a higher accrual in the first half as compared to the second half as well as certain one-time events, such as credits for property taxes paid, lower consulting, lower facilities expenses, each one and insignificant individually, bur providing a reportable benefit when aggregated.

In addition, litigation expenses came in at $728,000 this quarter as compared to $2.3 million last quarter. Pro forma interest and other expenses were $3.4 million, relatively flat to previous quarter.

We issued $138 million of five-year convertible bonds during the quarter at a 1.125% coupon and we have an additional month-and-a-half of interest expense for the new bonds. For pro forma tax expenses, we're using a flat rate of 36% on pro forma pretax income. Pro forma net income this quarter was $17.9 million as compared to $6.6 million last quarter.

Overall cash defined as cash, cash equivalents and marketable securities was $366 million, an increase of $160 million from the previous quarter. Excluding the net proceeds of $134 million from the new offering, cash flow from operations was a positive $26 million reflecting the leverage of a business model. Not withstanding the positive news and expenses this quarter, we expect to be operating at a quarterly OpEx expense of between $45 million to $48 million going forward.

Now I'll give you some thoughts regarding the fourth quarter of 2013. This guidance reflects our reasonable estimate and our actual results could differ materially from what I'm about to review.

For the fourth quarter we expect customer licensing income and revenue to be between $70 million and $75 million. We expect pro forma operating expenses, which excludes restructuring charges, retention bonuses, stock-based comp, amortization of intangibles and gain from settlements to be between $45 million and $48 million. These amounts include an estimate for litigation of between $1 million to $2 million. Pro forma net income is expected to be between $12 million and $17 million.

I would like to close by saying that we had another good quarter and have been demonstrating growth and profitability as the year has progressed.

Let's open the call up for Q&A. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Suji De Silva of Topeka Capital.

Suji De Silva - Topeka Capital

Can we talk about the restructuring of the Imerz business? And Ron, was this review would you consider done at this juncture or should we expect the potential for additional restructuring activities over the next several quarters as an ongoing review effort?

Ronald Black

With respect to Imerz, it's done. We did the review, we are in discussions with a few third parties who are interested in the assets. So there could be some transactions in the future. But as I mentioned in the prepared remarks, we really needed to refocus on the other areas where we're seeing a lot more traction and is more fundamentally core.

We are completing our annual operating plan and while there is nothing to report at this point in time, I haven't seen all of the financials and projections of the team and neither has Satish, so there is always opportunities for adjustments, if they are not hitting our internal milestones.

Suji De Silva - Topeka Capital

And then, if I did my math correctly on the non-GAAP, you did in operating margins 40-plus. Satish do you have or Ron do you have a target operating model you'd like to run the business at or is that something that would fluctuate with various factors?

Satish Rishi

So Suji, we haven't been giving percentages. In terms of margins, we give the actual ranges. Not quite ready to provide an operating model, but definitely by, after we finish this year and when we do our AOP, our internal plan for next year, ask me the question maybe in the Q1 call, I'll provide you better answer at that time.

Suji De Silva - Topeka Capital

And last question. Can you just remind us with Micron buying Elpida, what's the status of the Elpida relationship is when that expires and how that potentially might be impacted as Micron may settle with you in terms of holding the two together, any thoughts there will be helpful?

Ronald Black

So we continue an open dialogue with Mark and team, so there is really nothing that I can comment on at this point in time.

Suji De Silva - Topeka Capital

Can you remind us what the Elpida agreement in place is, Ron, just so we understand that?

Ronald Black

I'm sorry. Could you repeat that question?

Suji De Silva - Topeka Capital

The Elpida agreement that's in place already with Rambus, can you just remind us the terms of that?

Ronald Black

We press released it, but actual terms and conditions of that agreement are confidential. So unless there is something specific that we can share with you, what's out there publicly is much as we can share at this point.

Operator

Our next question comes from Mike Crawford of B. Riley & Company.

Mike Crawford - B. Riley & Company

You said that 8% of CRI were solutions in contract revenue. Is that something we should expect to go up next year, now that you're working in a more collaborative fashion with some of your partners?

Satish Rishi

Mike, yes, so one of the reasons why it went up is because the $12 million from Hynix obviously take the percentage down from what we had in the previous couple of quarters. I think if you look at the first half of the year, we are probably closer to 85% to 87% was coming in from patent licensing. So with Hynix the denominator changed. But the expectation for the company is that over time, we want to increase that percentage as we get more NRE and with more contract revenue and also get more technology licensing revenue from our customers as we collaborate with them.

Mike Crawford - B. Riley & Company

And what about the fate of some of these new productizations of your IP like R - R+ and others. Is that something that is expected to have a significant contribution to revenue next year?

Satish Rishi

Yes, so Mike, we introduced R+ in Q1 of this year. So it takes a little while to get to the customers, show them what it does, get them engaged. And even from the time we get them engaged, we might see some revenue at the time we engage with them, but the tail of the revenue comes when we start shipping the product, which is still about 12 months to 18 months out from the time we sign. So we have the dialogue that is ongoing with the DRAM companies, but nothing to announce right now. But that is one of the areas we'd like to see growth coming from, as we engage with the customers on these collaborative products you mentioned.

Mike Crawford - B. Riley & Company

And then your LED products have received great reviews and you have some nice initial distribution online and in some Canadian Costcos. But is this an area where this business would be better off in the hands of someone with more retail distribution than what historically has been a IP development and licensing company?

Ronald Black

It certainly could be. I mean these are the type of things that we think about and look out all the time, to try to optimize a shareholder value. There is really two pieces to that business just to complete the thought. With respect to the light guides and the licensing that we do for the general lighting market, our focus is really on ramping the existing customers.

And we feel that that is intrinsically a much higher margin business, very controlled, very thoughtful and we're trying to expand it from the U.S. and our relationship with GE and Cooper to Europe and Asia. And we're intimately in negotiations with a variety of different companies.

On the bulb side, we're very, very cautious on this because it is a very aggressive pricing market. There is, rather low barriers to entry and there is a lot of big players. On the other hand, our technology is getting rave reviews. And our focus is not to try to ramp up a very large businesses. I've mentioned several times in different forums, we are not going to have 20,000 people in Wuxi making light bulbs. So the model that we've engaged with, and we're in again intimate discussions, is more on a broader technology licensing agreement.

Our color change that we've announced and we've shown where we can use some phosphor to actually get different color temperature through a simple mechanical means of adjusting a dial, and therefore you don't need to have all of the different LEDs. And it's better for the supply chain, because you don't have to have different SKUs. That appears to be very attractive. And I could imagine the possibility that we'd be licensing it to other third parties and we wouldn't necessarily be manufacturing the light bulbs ourselves, but using their scale and efficiency to do so.

Operator

Our next question comes from Hamed Khorsand of BWS Financial.

Hamed Khorsand - BWS Financial

Ron, where I was heading with my question was I was going to ask you about the competitive advantage on the bulb side, given pricing is so aggressive, especially with the Asian manufacturers entering the realm. Could you touch on that a little bit, just from pricing standpoint and how you guys would be able to maximize profit from that angle?

Ronald Black

Sure. So there is a few different things that we have with the proprietary technology, both in terms of connecting the LEDs themselves to the edges of the optical waveguide. It's very efficient, so we put more light in and therefore can extract more light out. That can give you theoretically less LEDs that you need than other suppliers. The color change gives you the ability to, as I just described, have one SKU that can cover an entire gamut of color temperature of the LEDs.

And because of the open nature of the design, we have both conductive and convection cooling, which allows you to run at much lower temperatures. So our bulb when we've measured it compared with competitors is 10 to 15 degree Celsius, as I recall cooler running, and that cooler running often translates into a lifetime. So we really have all of those elements of it. The design is inherently very low cost.

So it is an extremely low cost design, which is allowing us to compete on that level. But just being direct, we have a low cost design, but we cannot possibly have a low cost implementation, because we don't have the scale efficiencies of the people that are shipping a higher volume of it. So the obvious way to engage the industry is to just like we do in all of our other businesses is to focus on our innovation, not our supply chain and manufacturing capabilities. And that's exactly what we're doing and why we are engaged in the dialogue with licensing the technology to the larger players.

Hamed Khorsand - BWS Financial

My other question was that are you guys able to breakout or provide some sort of granularity as far as your DRAM revenue goes, as far as penetration into the mobile market?

Satish Rishi

Hamed, our DRAM royalties are based on the total revenue of our customers, for the ones that are scalable or variable. So we get royalty reports. It doesn't really breakout what particular product or what particular sector they are in as long as overall revenue is flat to up. We get paid royalties out of flat to higher. So really from our revenue perspective it doesn't matter what the composition is, obviously a longer term. It doesn't matter to us, because we have good technologies in the mobile space and also in the server areas. So we'd like to see more of that penetration or concentration occurring in those areas. But overall, it doesn't really change the dynamic for us.

Ronald Black

But in terms of licensing of the key suppliers Elpida, Hynix and Samsung, I think had the strongest position in mobile. And those are the three license group. So from a mobile supply chain the vast majority of it is licensed today.

Operator

Our next question comes from Matthew Galinko of Sidoti & Company.

Matthew Galinko - Sidoti & Company

I was just curious, if you had any I guess preliminary view into how Acacia would do with the patency transferred to them?

Satish Rishi

Well, we are not privy to what revenue they are getting. The way the agreement works with them is that whatever they get in the particular quarter, we will get the sharing that we've agreed with them into the subsequent quarter. So if its material enough we will announce it, otherwise we would just wrap it into the guidance we gave, but we are not cracking it on a pattern-by-pattern basis or a family-by-family basis.

Ronald Black

And it is more of a sort of passive back-end relationship. Acacia's activities with respect to their licensing and/or litigation, if they engage in it, it's really something that they control solely and exclusively.

Operator

Thank you. And at this time, I'm not showing any further questions. I'd like to turn the call back over to management for any closing comment.

Ronald Black

Thank you all for your continued interest and support. Have a very good day. We look forward to talking to you again the next quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful 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: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Semiconductor - Memory Chips,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.