Rambus Inc. (RMBS) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Rambus, Inc. Q4 2014 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference Mr. Satish Rishi. Sir, you may begin.

Thank you, operator and welcome to the Rambus fourth quarter and full year 2014 results conference call. I'm Satish Rishi, CFO, and on the call with me today is Dr. Ronald Black, our President and CEO. 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 64238473 when you get the prompt. In addition, we are simultaneously webcasting this call, and along with the audio, we're 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 p.m. Pacific Time. In an effort to provide greater clarity in our financials, we're using both GAAP and non-GAAP pro forma numbers in our press release and on this call. I need to advise you that the discussion today will contain forward-looking statements regarding our financial prospects and demand for our technologies, among other things. These statements are subject to risks and uncertainties that are discussed during the call and may be more fully described in the documents we file 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 reconciliation on our website at rambus.com on the Investor Relations page under Financial Releases. Now, I'll turn the call over to Ron to provide an overview of the quarter and for the full year. Ron?

Thank you, Satish, and good afternoon, everyone. We were pleased with the fourth quarter achieving revenues of $72 million in line with our guidance and pro forma operating income of $27 million at the higher end of our guidance. For the full year, revenues were $297 million, in line with the guidance we set out in January of 2014 and pro forma operating income was $190 million, a significant increase over 2013, and of course we were GAAP profitable again in this quarter and therefore the full year, generating significant cash in the process. As important as our very good financial performance was, the success we've had in continuing to transform the business through collaboration with customers is equally notable. Our launch of CryptoManager with Qualcomm was probably the highlight of the year in this respect, showing that Rambus can attract marquee customers with our semiconductor IP solutions. If you attended in person or listened online to any of the investor conferences we presented at in 2014, you'll probably recall our theme of making our semiconductor IP more consumable. CryptoManager does just that as it includes the cryptographic process or core that is easily integrated into any chip, combined with secure servers or infrastructure as we often call it to inject cryptographic keys into the processor as well as enterprise-class software to manage the infrastructure remotely. CryptoManager is truly an end-to-end solution that delivers our semiconductor IP in the most consumable manner possible, and it shows that Rambus is a thought leader in security. On the memory side, we eluded to an architectural project and an MOU with a significant customer as well as interest in this project by a second major customer, which should make it clear to all that the project is not custom, but broadly applicable to the industry. While we are still in stealth mode on the project, I can tell you that we're again trying to make our semiconductor IP as consumable as possible and that we're trying to help the industry solve the enormous problems in the data center around latency and capacity for memory. This program is proceeding exceedingly well, and we look forward to launching it later this year and delivering significant revenue in 2016. Our investment in this area has spawned other new ideas that our team is extremely excited about, so I can also say that we've built a pipeline of new memory solutions, continuing to make us feel as I've said in the past that memory is again a sexy and great business. One of the areas that has been slow for us is our licensing of core such as CryptoFirewall where the R plus variance for DDR Memory PHYs and serial links. The slower than hope for engagement with customers was not unanticipated, however, as we had taken a hiatus from core licensing for several years, which is one of the reasons that the pipeline was not full to replace declining revenues from Sony Playstation that created somewhat of a growth headwind for us in 2014. With the hard work of the team over the last two years, however, we've created some very interesting cores, and in the fourth quarter of 2014, we signed four new contracts, one for CryptoFirewall and three for our serial links and have several more deals in progress in all of the various technologies. We believe that this trend will continue building a solid growing pipeline of core licensing and royalty revenue. For those of you who might be visiting DesignCon, we'll be showcasing both our memory and serial link technologies and providing a full day technical training workshop covering various aspects of future system design, in conjunction with our partners Mobiveil and Northwest Logic. We will also be presenting four papers at the conference. The viewer interested in semiconductor design, this is a must go-to conference. At CES, there was a lot of talk about emerging video formats and super high definition content delivery. With the industry shifting to UHD and 4K formats, the importance of content production continues to grow, particularly as the industry grapples with new distribution models and the new ways to interact with video libraries. We are embracing the shift in our security technologies, both with our IP core solutions as well as the fundamental countermeasure technologies that can enable an infrastructure that is more robust and more secure. In fact, as we work more with the Secure Content Storage Association or SCSA, we see a tremendous need for content protection and have written a security spec for this emerging format with the utmost security in mind. The SCSA just added 21 new members for the organization and is poised to define the future of content delivery and access. Coming up in early March in Barcelona Spain is the Mobile World Congress or MWC, which is the premier wireless conference. If you recall last year at the conference, we launched our Lensless Smart Sensor, the smallest, lowest power, lowest cost image sensor on the planet and won a Best of Show from Tom's Hardware, something that frankly surprised us and that we're exceedingly proud of. Last year's show sparked enormous interest, especially with press from prominent outlets such as the MIT Technology Review and Gizmondo, and we work inundated with interest from all segments of the industry from medical to automotive, to industrial, to consumer. Many of the parties requested us to provide a platform for the industry at large and especially the maker community in which to innovate. At the risk of leaking too much, we will be launching such a platform at this year's MWC and hope to generate even more interest and more importantly some commercial relationships for the Lensless Smart Sensor this year and next. While we've not discussed it much in the past, we have been quietly working on our Resistive RAM technology or RRAM, which is a higher speed, next generation technology to replace or complement conventional flash memory. We've made significant progress over the last two years and recently signed an architectural license with Tezzaron, where they will be utilizing our ReRAM system IP, specs, and validation suites to differentiate their chips, specifically for the government and aerospace markets. The functionality of ReRAM is ideally suited to improve the power and performance recurrence in these markets, but is also perfect for embedded storage memory devices where the low power, design integration, cost, and performance are all important factors. While it will take time for the industry to ramp ReRAM, it seems to be inevitable making our unique and rich technology and patent portfolio particularly interesting over this strategic period. Looking back, we view 2014 as a year of continued transition and positioning ourselves for profitable growth. 2015 will be similar. Satish will explain in more detail, we're anticipating modest revenue growth this year 2014. The growth in 2015 is more significant. Profitability and cash generation will continue to be extremely good. More importantly, as we continue to execute well and hopefully our customers do as well, we are building a very significant pipeline of solutions so that 2016 should be a much more significant growth year for us. Now we have mentioned at several investor conferences, being a semi-conductor IP provider means that we are an ingredient of an ingredient, and since semiconductors take a long time to develop and deliver to the market, it is not unusual to spend one to two years in IP development, then have our customers spend one to two years in SoC development for a total of a three to four year cycle. We started the transformation of Rambus in 2012, so mechanically 2016 should be kind of a magic year for us. As we hit full stride with CryptoManager, the new memory architecture initiative and Newcor licenses, not to mention more architecture and patent licenses for DPA and our memory solutions as well as various monetization options for our Binary Pixel and Lensless Smart Sensor solutions. Now, let me turn to something different. As the company has evolved and executed well on the new strategy, we've embarked on a search to expand the Board of Directors with an industry executive that really understands the data center. We were fortunate to find a long-time industry leader in Tom Fisher who has cordially accepted our invitation to the Board. Tom is currently SVP of Cloud computing at Oracle and has held executive positions at QualComm, SuccessFactors, EBay and IBM among other companies. Tom’s experience in technical and business insight has already been invaluable, especially in our memory architecture program. So we're thrilled to have him on Board. Finally before handing it off to Satish, I would like to touch on one additional topic which is our cash position and use of cash. Many investors have asked us what our plans are regarding our substantial cash position especially given our continued significant quarter-on-quarter cash generation. On previous earnings calls and at the investor conferences, we have repeatedly said that our clear first priority is acquisitions that are aligned with our core strategy and generate shareholder value. While this continues to be our preference, it is unfortunately true that we have yet to find opportunities that meet our criteria. Although we continue to investigate and have good deal flow, given this situation, the Board has authorized the buyback of up to 20 million shares of stock which we will tactically execute. To be clear, our preference is still for company building acquisitions but we admit that given our significant cash position, the best option for shareholder is maybe to return it in the form of stock buyback. In summary then, 2014 was another good year for Rambus. Our strategy of engaging and collaborating with the industry is working and we continue to set a solid foundation for future profitable growth. Our continued execution and that of our customers should make 2015 another good year and 2016 perhaps an extremely good with. With that, I will turn the call over to Satish to give a readout on the financial results. Satish?

Thanks Ron. I would like to remind everybody that for this call and for internal assessment, we use non-GAAP pro forma numbers to discuss our operating results as well as a forward looking projects, which we believe are indicative of complete performance as it includes certain cash events and excludes certain noncash and discrete events such as stock-based compensation, amortization, impairment and restructuring charges as we believe these are not indicative of long-term performance. As noted earlier, we will provide reconciliations on most comparable GAAP measures on our website. In the case of any forward looking projections or estimates containing non-GAAP information discussed on this call, reconciliation may not be available due to the unreasonable effort to make such a determination or provide such information as more fully described on the website. The company has made progress on our financial milestones and 2014 was the first year since 2010 when we were GAAP profitable for the full year. The team did a great job in managing expenses that allowed us profitable growth year-over-year. Let me review some of the financial highlights for the fourth quarter and the full year. Revenue for the fourth quarter was $72 million within our guidance of $70 million to $75 million, a 3.3% sequential increase and for the full year, revenue was $296.6 million, an increase of 9.2% year-over-year. Due to slower than expected headcount addition in the quarter and the gain of sale from patents, cost of revenue plus operating expenses or what I will refer to as total operating expenses for the quarter came in at $44.6 million slightly below our guidance of $46 million to $49 million and $0.5 million decrease from Q3. For the full year, total operating expenses were $177.4 million lower than the run rate we had forecast at the beginning of the year and a decrease of $2.6 million year-over-year. During the year, we increased our headcount by approximately 58 people, which close to half were in Cryptography. We also reduced our reliance on outside consultants as well as legal expenses year-over-year. For the prior year, OpEx was $43.8 million and $180 million for Q4 and 2013 respectively. Operating income for the quarter was $27.4 million as compared to our guidance of $21 million to $29 million. For the full year, operating income was $119.2 million as compared to $91.5 million for 2013. We're pleased to highlight that in the year, revenue grew 9.2% year-over-year, but our operating income grew 30.3% over the same period reflecting both the leverage in our model as well as a focus in delivering profitable growth. For the full year, the sequential increase in revenue of 9.2% was driven by customers such as QualComm, Micron, Hynix and Nanya. We expect to have more long-term predictable licensing royalties from these and other core licensing customers. For the full year, our memory and interface revenue was $226.4 million, cryptography research was $49.3 million and lighting and display technology revenue was $20.9 million. These numbers represent a year-over-year sequential decrease of 2.4% for mid and increases of 51.2% and 202.9% for cryptography research and lighting and display technology respectively. We made progress throughout the year and EBITDA margin for 2014 was 4.8% as compared to 39.4% in 2013. Interest and other expenses for the fourth quarter were $1.4 million and $9.7 million for 2014 respectively. For the same period in 2013, interest and other expenses were $3.9 million and $13.8 million respectively, the reduction being attributable to the memory, to the maturity of the 5% coupon convert that was fully paid off in June of 2014. Using a flat rate of 36% for pro forma taxes, net income for the quarter was $16.7 million and $70.1 million for the year. Overall cash defined as cash, cash equivalents and multiple securities was $300 million, an increase of $29 million from the previous quarter. Net cash at the end of the year was $162 million as compared to $77 million a year ago. During the year, we generated approximately $77 million cash from operations. Now I will provide pro forma guidance for the first quarter 2015 as well as for the full year. The guidance reflects our reasonable estimate and actual results could differ materially from what from what I am about to review. For the first quarter, we expect revenue to be between $70 million and $75 million relatively flat to the last quarter. We expect total operating expenses for the quarter to be between $46 million and $49 million. Q1 expenses are typically higher quarter over quarter due to payroll taxes and the accrual for variable compensation. Operating income for the quarter is expected to be between $21 million and $29 million. 2014 included approximately $20 million of royalties from one time payments and the guidance for 2015 does not include in new one-time royalty payments. We have some maturing contracts in 2015 and we are forecasting a best estimate for these renewals as revenue from new patent royalty agreements and new solution licensing. As Ron mentioned, we signed two new license agreements for the memory and interface division last quarter as well as the license and royalty agreement for anti-counterfeiting with a consumer electronics company. We expect to sign more of these agreements and we will share them with you in our quarterly calls. For the full year, we expect revenue to be between $300 million and $315 million. On the investments side during 2014, we’d continue to make investments to support CryptoManager as well as a new member initiatives primarily through headcount and in 2014, we are focused on execution of these and other initiatives and we plan to manage our expenses to be between $185 million to $190 million fairly close to the exit run rate of Q4 2014. We expect pro forma operating margins to be within the range of 38% plus or minus 2% and pro forma EBITDA margin of 42% plus or minus 2%. As we continue to scale our operations and leverage our business, we expect cash from operations to continue to increase and expect cash generation between $80 million and $90 million for the year. We are also at a point now where we are comfortable with the cash position and projected future cash generation. As Ron mentioned, our first priority has been and continues to be potential acquisitions that will supplement our growth but in the past year, we’d not found any that met our strategic needs and stringent valuation metrics. We’d continue to evaluate our acquisition options that provide us with more flexibility. Our board has authorized a buyback program that will allow us to buyback up to $20 million shares, our longest return of capital back to our shareholders. We are now ready to open the line for Q&A. Operator?

Thank you. [Operator Instructions] Our first question comes from Suji De Silva of Topeka. Your line is open.

Hi Ron and hi Satish. Congratulations on another strong year that you had. In terms of the linearity of '15, should it still be a frontend versus backend loaded revenue ramp here with the typical security seasonality?

We think second half would be more backend loaded. It will be -- the linearity might be reversed this quarter, because the last year, if you recall, we had more one-time payments in the first half. Without making any assumptions of one-time payments, we expect the second half to be higher than the first half in 2015.

Okay. And then can you talk about the gaming console business, whether there's still a headwind into the first quarter? And what the year-over-year compare 2015 versus 2014 might be like for that business?

Yeah, it’s just a -- it’s a much smaller number. It’s almost like we don’t even talk about it. So in 2015, the guidance we have given you, it does include our best estimate for 2015, but we expect the revenue stream from PS3 to be tapering down. It will probably be asymptotic as they are sold to at lower prices in other parts of the world, but I haven’t broken down what the impact from that is year-over-year, but it’s -- it’s let’s say low-single digit to -- let’s say between $10 million to $15 million what the impact is year-over-year. Q –Suji De Silva: Great. That helps, and the last one maybe for Ron. on DRAM and the R+ business…

Hi. Sorry Suji, just to correct on that, it's probably in the mid-to-high single digits.

Okay. Mid-to-high single digits.

Yeah.

Okay. And then maybe a last question for Ron, perhaps can you talk about the DRAM business, the R+ business, and maybe what has or hasn't happened to your expectations thus far and what the setup is like for that technology to track going forward?

Sure, it’s really hard to separate between the R+ from the Serial Link, so the [security is] [ph] class technology and the DDR, because a lot of the times, we're discussing with customers on both. As I reflected in the prepared remarks, we’ve been -- we were somewhat on a hiatus from that for a series of reasons several years into the company, disengaged from that marketplace, which quite candidly I think was a mistake, and when we started two-and-a-half years ago, we concluded that this was a very attractive market and that we should get our focus back on dealing with customers. It is a very natural evolution from the parts that we’ve designed to really build our semiconductor IP portfolio, and so it’s a great unit of commerce to license, but it took time. When you exit a market, oftentimes customers are a little bit concerned that you're going to do it again. So we had to earn their trust, and what happened over 2014 is we built that trust and as we said, there was four new designs, which I was very pleasantly surprised about at the end of the year and we have several more that are in the hopper that we are hoping to close in this quarter and the coming quarters. So I think it has just taken time for us to get over the natural trepidation that customers have when you exit a business and then try to re-enter it, and as I said that we've earned their trust and respect and that they are counting on us to deliver our great IP form.

Right. Thanks guys.

Thank you. And our next question comes from Gary Mobley of Benchmark. Your line is open.

Hi guys. Let me extend my congratulations as well to a strong finish to the year, and looking specifically at CRI, that was a great growth -- great growth numbers for the year. I think Ron, what 50% year-over-year. Do you expect CRI to continue to be the main growth engine for 2015?

Well, it will. We expect it to be growing in 2015 also. So, I don’t know what do you mean by the only -- it won’t be the only growth engine. We have other factors as we are look into the second half of the year where we expect growth to be coming, and CRI definitely would be a good contributor to the growth.

Okay. The second half growth in revenue, is that a function of maybe some millstone revenue recognition relating to CryptoManager, and can you give us an update on the development of CryptoManager. Are you ahead of schedule, behind schedule, or on target?

Everything continues on plan. We are always trying to make sure we keep up with the customers’ expectations, but the team is executing and delivering to the milestone, so that’s about on track. With respect to the actual sequencing of the revenue and revenue recognition, that’s probably a part of it, but I -- Satish, do you know specifically?

Well with some of the design wins that we’ve gotten, we have some backend revenue. We also have some expectations on signing newer contracts later in the year. So those are all of the items we built into second half growth compared to the first half. So we expect second half to be higher. As Ron mentioned, with the collaboration we have, we are seeing more traction, so we get more NRE. We can recognize more revenue in that period. So we have milestones internally, and we did sign two towards the end of Q4. So not significant to have any impact in Q4, but expectation is that our design teams and our sales team and engineers will win more designs as the year progresses and as those NREs layer up, we see a growth in the second half as compared to the first half of the year.

Okay. And I wanted to ask some additional questions about Resistive RRAM. Congratulations on the Tezzaron agreement. I'm wondering whether or not the specific product license by Tezzaron had anything to do with the collaboration you announced with Freescale, dating back to 2013. And do you view licensing opportunity for Resistive RRAM as being something substantial? Or is it more important as an underpin for future license agreements as those renewals come up with memory licensees?

Gary, its Ron, I think it’s really both. We have very modest expectations of it because it typically takes long time to roll it out flash technology with 2.5D or 3D continues to do rather well. On the other hand, the performance of resistance RRAM has been very good. We have a lot of customers that we are working with. We just haven’t announced anything. I don’t expect that this is going to be a significant revenue generator in the short term but the performance of it especially as you tune, it could be very interesting. Probably the biggest hurdle in terms of opening it up is getting the high temperature stability. So in consumer applications, I think the existing temperature ranges that we have are fine but they really hit industrial and automotive grade. We are going to have to continue to tweak or with -- our customer is going to have to continue to tweak with itself to really ensure that they are stable. So if we can get pass that, I can see it becoming mainstream rather quickly. I think it is something that will be attractive. It seems to me that that resistance RRAM is just gaining interest compared with face change and spin-torque transfer magnetic RAM but we will have to -- to wait and see how that goes.

Okay. That’s it for me. Thanks guys.

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

Hi guys. Thanks for taking my question. First, just to make sure I heard you correctly, that we should expect to see additional licensing activity for CryptoManager in the second half of 2015? If you could just confirm I heard that correctly? And related to that, how should we think of the Secure Content opportunity with the CryptoManager backdrop? Any parallels you can draw on potential opportunities with respect to the model you have of CryptoManager would be great. And also any comment with respect to potential timing of the Secure Content opportunity. Thanks.

Sure Sundeep. I'll take the first part of your question and Ron will talk about the Secure element portion of it. So just to clarify, we didn’t say that we see additional licensing opportunities in Crypto Manager. I said, we see additional licensing opportunities from different businesses -- it could be from Cryptography. Could be from MID, could be from other area. So it is not just limited only to CryptoManager per say. Ron, secure element.

Yeah with respect to CryptoManager, the applicability of the platform transcends almost everything. So we’ve had interest in it from customers that see it as a provisioning and key management system for the internet of things. It’s not particularly set up to do anything for the Secure Content Storage Association although key issuance centers are the type of thing that we can do. We’ve obviously defined the spec -- we've been opening the path for the Secure Content Storage Association. And I think it’s more about how they're going to choose to deliver the content and whether you need to have something like CryptoManager for doing it remotely or real time over the year as opposed to something that is done in a different mechanism. So CryptoManager can be used in almost an infinite number of configurations as we have said repeatedly, our focus is really supporting the semiconductor industry today and really trying to deliver an improved way to configure and document and secure the manufacturing supply chain but it can be used in downstream applications for almost anything. So it’s really -- it can be customized in any form that you want and we are talking to all sorts of customers but our primary interest today is in the mobile space and with the customers that define mobile chipset.

Okay. Great. Thanks Ron. Just one kind of broader question. So beyond CryptoManager, how would you kind of rank the other major growth drivers in 2015?

In 2015?

Yeah.

I don't break it down that way. Do you have -- is there something?

Well, we have like the last you mentioned, record design wins on MID and towards the end of Q4 and we also had anti-counterfeiting which is on the crypto -- on the cryptography research side. So we have opportunities in all of these areas and these are coming to fruition now that we’ve had about 12 to 18 months to have an open dialogue with our customers and sit down and collaborate with them and new ideas are coming out and we are getting design wins. Secondly, as we mentioned on various calls we have had with our new approach to our customers with the new sales team, new business team, we are able to have a dialogue with a much broader base of customers and the various sections within our customer base. So all that is moving -- we expect to get more design wins from those and those design wins would provide a combination of either NRE. So basically licensed revenue and also they may have a license revenue as royalties in the future. So they are the growth areas in multiple -- there is growth potential in multiple areas.

Okay, great. Thanks. That’s it for me.

[Operator’s instructions] At this time, I see no other questions in queue. I will turn it back to Mr. Black for any closing remarks.

Thank you very much. Thank you all for your continued interest and support. We look forward to speaking with you again soon. Thank you.