Rambus's CEO Presents At Rambus And Micron Sign License Agreement Conference (Transcript)

| About: Rambus, Inc. (RMBS)

Rambus, Inc. (NASDAQ:RMBS)

Rambus and Micron Sign License Agreement Conference Call

December 10, 2013 8:30 AM 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 Markets

Michael Cohen – MDC Financial Research LLC

Dean Grumlose – Stifel, Nicolaus & Co., Inc.

Sundeep Bajikar – Jefferies LLC

Operator

Good day ladies and gentlemen and welcome to the Rambus Inc. Special Conference. At this time all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference Satish Rishi. You may begin your conference.

Satish Rishi

Thank you operator and thank you everyone for joining us on this conference call regarding the Micron settlement. I’m Satish Rishi, CFO. And with me today are Ron Black, our CEO; and our General Counsel, Jae Kim. A replay of this conference 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 23087430 when you hear the prompt. In addition, we are simultaneously webcasting this call and a replay can be accessed on our website beginning today at 5:00 PM Pacific Time.

I need to advise you the discussion today will contain forward-looking statements regarding our financial prospects, litigation and demand for technologies among other things. These statements are subject to risks and uncertainties, which are more fully described in the documents we file with the SEC including our 8K’s, 10Q’s and 10K’s. These forward-looking statements may differ materially from our actual results and we are under no obligation to update these statements. You can find more information on our website at rambus.com on the Investor Relations page.

Now, I’ll turn the call over to Ron. Ron?

Ronald Black

Thanks Satish and good morning everyone. We’re extremely pleased to announce that we have settled all outstanding legal disputes with Micron and have signed a license agreement with them that should net us roughly $280 million over the next seven years. For those of you who have been following the ins and outs of this matter for the past 13 years, you can appreciate us characterizing this as a landmark agreement, not just because we have settled with Micron, but also because it was our last major outstanding litigation. As such, we can clearly state that we have completed one of the key milestones we committed about a year ago.

Profitably resolving the litigation matters and settling – setting Rambus up to grow our business through collaboration. This agreement allows both companies to renew our focus on what great engineering companies do, collaborate with the industry to make outstanding products for our customers. The particulars of the deal are, we believe fair and reasonable and solidify a market rate for our innovations that is consistent across the industry. The agreement provides Micron with a seven-year license to our DRAM, resistive RAM memory, RAM flash, and serial-link innovations.

In return, we will receive quarterly payments of up to $10 million based on the running royalty rate of 0.6%. While the quarterly payments themselves could vary if Micron’s business decreases significantly, we expect regular quarterly payments of $10 million with the exception of the first and last period of approximately $5 million, totaling $280 million over the seven-year period. The quarterly cap and total payments may also increase if Micron acquires certain types of businesses. Also under this agreement, Micron has the option to extend the license with the same terms, while such an expansion is of course Micron’s choice.

We believe our fair and reasonable terms and our willingness to collaborate on strategic programs will make it very compelling for Micron to do so. It is important to note that this is the first time we have offered a duration longer than five years. The longer license, an option to extent further at the same rate is an important change to our strategy as it allows customers to be ensured of patent peace and not feel threatened when collaborating with us in strategic programs. From a shareholder’s standpoint, we believe such long-term contracts are attractive because they provide assurance and substantial revenue streams from licensing not to mention the ability to grow our business by providing additional designs to customers.

As we are coming to the end of the year, I believe it is worthwhile to put this deal in perspective with the larger set of objectives we’ve outlined at the beginning of the year. We started 2013 with a new strategy focused on doing what we really do best, delivering outstanding technology to our customers in the industry at large. To support the return to our technology roots, we clearly stated the desire to move beyond the past litigations and settle under fair and reasonable terms. I believe we have delivered on this strategy and greatly improved both the strategic and financial position of the company.

Just to remind you, here is a list of some of the key proof points besides today’s announcement of the Micron deal; signing of an agreement with SK Hynix, signing of an agreement with STMicroelectronics, expanding our agreement with Freescale Semiconductor, signing an agreement with LSI. Besides these contractual settlements and extensions, we also successfully completed an upsize bond offering at favorable terms further strengthening in our balance sheet, agreed on a broad design collaboration on memory and IO interfaces with GlobalFoundries, leveraging their advanced 14-nanometer FinFET process, license DPA technology to Tiempo SAS, Ali, and Broadcom, license CryptoFirewall DPA hard and cores to EchoStar to mitigate piracy for conditional access applications.

Looking to 2014, we believe this company is well positioned for profitable growth and significant cash generation. As a reminder, last quarter our revenues were $73 million and we generated $26 million in cash. As we’re nearing the end of the quarter, Satish would like to take this opportunity to update guidance to $73 million, plus or minus $0.5 million, which is at the top end of our previously stated guidance range of $69 million to $74 million.

With essentially the entire DRAM industry license, we view this substantial revenue and profit as an annuity base and look to further growth through licensing our design technologies more broadly to all segments of the market. We are confident that we have some very compelling new product and services that will make 2014 a very interesting year for Rambus, our customers, and our shareholders.

Now, I’d like to open up the lines for questions. Operator, please open the phone lines.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Suji De Silva from Topeka. Your line is open.

Suji De Silva – Topeka Capital Markets

Hi, Ron. Hi, Satish. Congratulations obviously on the deal and getting this done.

Satish Rishi

Thanks Suji.

Suji De Silva – Topeka Capital Markets

Sure. Can you talk about how the Elpida agreement that was kind of buried within Micron? How that’s going to be handled going forward? What the terms were there and if that gets folded in here?

Ronald Black

Overly simplified, it’s folded in. It’s part of it as the entire Micron deal, but Satish anymore fine points or Jae?

Jae Kim

Yes, this is Jae. The terms of the Elpida agreement were confidential. We had not disclosed really anything about that agreement other than the sort of the duration at the time we had entered into it. But as Ron pointed out, it is being subsumed in the agreement that we did just with Micron.

Suji De Silva – Topeka Capital Markets

Okay, fair enough. And then, what would be the timing of initial revenues from this deal and will you recognize these royalties two quarters in arrears, like the rest of your revenues?

Satish Rishi

Yes let me address that Suji. We’ll be getting $10 million a quarter, and we will be – it’s one quarter in arrears based on 0.6% of their revenue, the DRAM revenue in the prior quarter. So it would be one quarter in arrears. And the first quarter – Q4 will be recognizing about half of the amount that’s just the negotiated amount, but the actual calculation; calculated amount will be paid to us starting in Q1.

Suji De Silva – Topeka Capital Markets

Okay, that’s fair.

Satish Rishi

For modeling purposes you can assume that we’ll have $5 million in this quarter and $10 million in Q1 going forward.

Suji De Silva – Topeka Capital Markets

Terrific. The last question, Ron, again you covered this, this is a seven-year deal versus typical five year. Can you just talk about maybe just a little more detail about why it was longer? And more importantly does this kind of give us some more confidence that the rest of your licensees will more likely than not renew, is that one way to read the longer-terms here in the potential to extend. Is that fair?

Ronald Black

We think it’s particularly attractive, and we think it will be attractive to all of the licensees. As I mentioned in the prepared remarks, it effectively allows for a patent peace. And just being beyond, I think our focus on the five-year deals was a bit flawed. In the semiconductor industry, sometimes when you’re developing a new process technology then with new designs, five years sounds long, but it can get over pretty quickly, but I think seven and beyond is a good way to look at it, and I think it really allows us to collaborate more on the design side of the business.

Our R+ of designs, we find are particularly attractive. We’ve been talking to a lot of customers and they like them, but they also want assurance that we’re not going to end up in litigation quickly after they go into production. So I think it’s more likely to have other people sign. It is giving confidence and it’s going to allow us to grow the design side of the business fairly substantially.

Suji De Silva – Topeka Capital Markets

That makes perfect sense. Thanks Ron, I’m sorry, go ahead. I’ll get back in the queue.

Satish Rishi

Yes just to add to that with the longer-term deals, we are getting – we signed up for longer periods of time, so that should also reduce the risk profile a bit of the company because we have more longer-term visibility to our revenue stream. So that also should help in creating a better risk profile for the company.

Suji De Silva – Topeka Capital Markets

Okay, great. Thanks guys. I’ll get back in the queue.

Satish Rishi

Thanks.

Operator

Our next question comes from the line of Michael Cohen, MDC Financial Research. Your line is open.

Michael Cohen – MDC Financial Research LLC

Yes. Congratulations on the deal that seems to be a win-win for both parties. My question is – more questions about how this works with Elpida. So, the Elpida deal I believe was the five-year agreement announced roughly three years ago. Would the money that Elpida has paid to date be outside of the current agreement or is it sort of like a credit towards it?

Jae Kim

So as I – this is Jae. As I had mentioned, technically the Elpida agreement is being replaced by the Micron agreement, the Micron – consolidated Micron agreement which includes Elpida now, and Elpida signed in December 2010, four years ago, and they were pretty much on the eight – our typical five-year term. So, I think the short answer, hopefully I’m addressing your question is that the Elpida agreement terminates as of the date that we have entered into the Micron agreement. The Micron agreement replaces what was in place for Elpida.

Michael Cohen – MDC Financial Research LLC

Okay. And the money that Elpida has already paid to date is the money that you keep and it’s not a reduction of what Micron has to pay?

Jae Kim

That’s absolutely right.

Michael Cohen – MDC Financial Research LLC

Okay.

Jae Kim

Absolutely right. There is no callback or no credit or anything like that. Those are months – that is – the proceeds that are paid and then now we’re looking at a combined Micron Elpida going forward at a running royalty rate of 0.6% of certain Micron products, Micron and Elpida products combined.

Michael Cohen – MDC Financial Research LLC

Okay. So the Micron Elpida products combined works out to roughly 0.6%…

Jae Kim

It’s a rate based on a pool of products.

Michael Cohen – MDC Financial Research LLC

Got it, okay I appreciate that. Thank you.

Jae Kim

Okay.

Operator

(Operator Instructions) Our next question comes from the line of Kevin Cassidy of Stifel Nicolaus. Your line is open.

Dean Grumlose – Stifel, Nicolaus & Co., Inc.

Good morning. This is Dean Grumlose calling for Kevin. Thank you very much for taking my call. My question is, will these patents to be available to other memory OEMs for licensing or does this agreement essentially close licensing activity for this particular set of patents?

Ronald Black

Yes, this is Ron. Yes…

Satish Rishi

Okay, go ahead.

Ronald Black

Yes, this is Ron, yes. So as you see in – it’s Ron, and I’ll let you chime in here as well that our patent licensing is done all on a non-exclusive basis. So, other potential licensees that may have adopted or maybe thinking about adopting our technology, we would certainly welcome those discussions as well. So this is not an exclusive arrangement for Micron.

Satish Rishi

Thank you. Just adding onto that, I think for the purpose of clarity, I hope. We have licensed for all intents and purposes the entire DRAM industry, so the model mentally that I use is to think about is I think a very nice annuity, very profitable annuity and because of the way that we’re engaging with the industry, we have the opportunity to collaborate more directly on designs. So think model like ARM or imagination technologies as opposed to what we were doing before. So, it’s a broader collaboration. And you take a company like Micron, they’re very impressive.

On the Elpida acquisition, Elpida has fantastic mobile technologies. We’ve had a very long relationship with them. They’ve made components that were designed with some interfaces that we used for instance with Sony. They have excellent relationships with many OEMs that are focused on mobile products. The Micron, the former has really some thought leadership in some of the higher performance areas, take the hybrid memory cube for more than networking. Our investments have been thinking about the ways that the datacenter evolves over time, and I think we have a perfect opportunity to affect the entire industry from an architectural standpoint by really focusing on what they do and what we do in a collaborative way.

Having said that, we haven’t licensed the entire controller space, so the other end of the wire so to speak besides the DRAM, and on that side of the industry, we’re looking to have more – several more licensees in the course of the next year or so. So I think there’s significant growth on that side. And then beyond that, today most of our patents do not read on the interfaces for non-volatile memory because non-volatile memory is rather slow when we focus on really high performance. But over time, I think that’s going to change and we expect that some of the novel technologies in the non-volatile space as the – the speeds get higher will probably adopt the type of interfaces that the DRAM industry has used. So we have a lot of upside potential that’s not baked in. I don’t believe to the stock price and the total option of the company.

Dean Grumlose – Stifel, Nicolaus & Co., Inc.

As a follow-up slightly complex questions, but to the extent you can answer it, Micron has the option to extend this agreement after seven years, but to the degree you can answer this will be patents still be applicable or would any potential expired by that time and how should we think about the potential value of this agreement after a seven-year period has gone by as we look at renewal?

Jae Kim

That’s always they have – this is Jae Kim, under the agreement Micron has the option to renew obviously in any sort of situation where the paying party has the option to continue to pay, they’ll be looking at what value we would be adding or what our patent position would be at that time taking into account things that may expire in the interim, but I will assure you that the focus of our intellectual property development is going to continue and that not only will we have compelling patents to secure renewals, I think as Ron had alluded to as well, increasing collaboration on the technical side I think would also support continuing engagements.

Dean Grumlose – Stifel, Nicolaus & Co., Inc.

Okay, thank you very much.

Operator

Our next question comes from the line of Sundeep Bajikar from Jefferies. Your line is open.

Sundeep Bajikar – Jefferies LLC

Hi, guys. Thanks for taking the question and let me add my congratulations on the Micron agreement. How should we think of litigation expenses going forward, how much are they now and what level of reduction should we model in going forward?

Satish Rishi

Hi Sundeep, this is Satish. Well, firstly, thank you for initiating your coverage last night with timing. To answer your question on litigation, last quarter our litigation expenses were less than $1 million, now with all the settled – many of those were related to cases involved in Micron and then there maybe one or two others that we had. So anything that is Micron related will continue to decline. We don’t give guidance for a year, but you can definitely expect that it will probably be slightly lower than what we had last quarter. So we have been seeing a decline in our litigation expenses year-over-year-over-year and now with the last case that we have that is out there settled, this should be going down to very low numbers, decline more like a normal company.

Sundeep Bajikar – Jefferies LLC

Great, thanks for that. And then second question, is it fair to think that the near-term fluctuation or even increase in royalties on a variable basis would be driven primarily by Samsung. And if so, I guess is there any chance you think Samsung ultimately moves to a more of a fixed royalty model just like the other DRAM makers?

Satish Rishi

Yes, that’s entirely possible because when we enter negotiations, we have a certain model we like to get, our customers is a certain model they like to get, so it ends up being a compromise. And lately, as you’ve seen with Hynix and also with Micron, where we established a market rate and it seems like at least for the last two deals we’ve signed, that seems to have stuck. So there could be a possibility that we move more to a running royalty within our cap structure or maybe a fixed structure, which then helps everybody in terms of knowing exactly what the calls are.

Sundeep Bajikar – Jefferies LLC

Great, very helpful. And then last question for me, should we expect future renewals with these companies and other companies to be kind of more broad-based, like the broad cross license you just signed with Micron or was there anything unique to the Micron situation here?

Satish Rishi

So there’s nothing unique to the Micron situation here. I think we would expect to see broad-based licenses that would encompass our memory interface technology as well as our Cryptography Research technology patents. So typically, our agreements have been broad-based and they cover a pool of patents for a finite term. Jae you want to add something on that?

Jae Kim

Yes, and Satish is exactly right. I would say that if you were to look at the 2010 Samsung deal, look at the Hynix deal from earlier this year and Micron today in terms of the scope of the coverage of the patent rights and the usage by the customers, it is essentially the same. It is broad, brought broad coverage under all of our applicable claims, so this – I would not characterize Micron as an outliner in anyway.

Sundeep Bajikar – Jefferies LLC

Great. Thank you very much and congratulations once again.

Satish Rishi

Thanks.

Jae Kim

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Michael Cohen of MDC Financial Research. Your line is open.

Michael Cohen – MDC Financial Research LLC

Yes, thank you for taking my follow-up question. Jae, the current deal is described as cap at $10 million per quarter. Do you expect in the near-term to go near the cap or do you expect the near-term that will be a reduction from the $10 million?

Jae Kim

Sure, and I’ll let Satish chime in here as well. The structure of the quarterly payment is based as I said earlier on a 0.6 plus grade of sales of a pool of certain products up to a $10 million caps per quarter as you’ve correctly mentioned. In terms of how we feel about whether or not we are going to hit the cap, and Satish you want to chime in on it.

Satish Rishi

Yes, Michael looking at the current forecast, we expect to be hitting the cap and that’s why we are saying that this deal is probably totaling to an $80 million over the seven-year period. So we feel given – or unless there is a big downturn in the market or Micron versus market share which doesn’t seem to be the trend, we expect to be hitting the cap.

Michael Cohen – MDC Financial Research LLC

Okay, that’s great. Other question I have and I don’t know if you have these figures on the top of your head. Do you have any idea of the total litigation spend over the last 13 years?

Satish Rishi

No, I don’t, but last time I calculated, it was an excess of $300 million.

Michael Cohen – MDC Financial Research LLC

Okay. Thank you.

Operator

I’m showing no further questions in the queue at this time, I’d like to turn the call back to you Mr. Black for closing remarks.

Ronald Black

Thank you very much and thank you all for taking the time in short notice to speak with us today about this important event. We look forward to having more discussions and new news in the near future. Thank you. Have a good day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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