Rambus Inc. (RMBS) Q3 2012 Earnings Report, Transcript and Summary

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…

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…

Sure thing. (Operator Instructions). So we’ll take our first question from Hamed Khorsand from BWS Financial. Please go ahead sir.

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.

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.

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.