Rambus Inc. (RMBS) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Rambus First Quarter 2015 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, this conference is being recorded. I would like to introduce your host for today's conference Satish Rishi, Chief Financial Officer. Sir, you may begin.

Thank you, Amada and welcome to the Rambus first quarter 2015 results conference call. I'm Satish Rishi, CFO; and on the call with me today is Dr. Ron 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 23044511 when you hear 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 help provide greater clarity in our financials, we're using both GAAP and non-GAAP pro forma format 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 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 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. Ron?

Thank you, Satish, and good afternoon, everyone. We turned in another solid quarter with revenue for Q1 coming in at $73 million right in line with our guidance of $70 million to $75 million. Expenses were below the low end of what we had expected as some hiring was slower than hoped, so pro forma operating income was $28 million towards the top end of our guidance. We were of course GAAP profitable and cash generation was strong again in this quarter as we finished with net cash that is cash less our debt of $180 million, almost double of what it was a year ago. Last year our revenue profile was a bit confusing for investors as some deals that we expected to occur in the second half actually occurred in the first half. So our first half revenue exceeded that for the second half. For this year we expect the second half to show solid growth over the first half with a full year between $300 million and $350 million as we guided previously. Expenses will be moving around quarter on quarter as we staff for some programs and have onetime expenses for various tape-outs. Satish will cover guidance in more detail, but suffice it to say that we are on track. Customer momentum in our memory and serial links business continued this quarter with three more technology license design wins including one with IBM that involved our high performance memory interface technologies as well as a broad patent license for memory and serial link technologies. For the technology license we will develop and deliver IBM high performance memory interfaces that will enhance their system in semiconductor offerings. Increasing traction in our technology licensing for Memory PHYs, serial links as well as our Cryptography products that I'll discuss in a moment, is encouraging and exactly what we expected. We were also pleased that IBM decided to take a broad patent license that they had previously been unlicensed. Early this strategy we embarked upon a couple of years ago to set fair rates and engage the industry collaboratively is working even for companies that have enormous patent portfolios themselves. Of course we always have to say that we may have to be more aggressive in the enforcement of RFP if the company is using our technology are and willing to engage us fairly and collaboratively, but clearly this has not been the case so far. Switching now to our security business, in Q1 we license our DPA Countermeasures to MStar for their set top box chipsets. We also signed a reseller agreement with Microsemi that will help expand our reach within the government and military sector, a sector that is increasingly interested in security and one where we believe we can grow in both patent and technology licensing as well as possibly full product solutions such as CryptoManager speaking of which we're making excellent progress in our CryptoManager program. Less than a year from introducing this platform with Qualcomm as our lead customer, we continue to progress in features and functionally that can ultimately revolutionize chipset manufacturing. As we talk to more potential customers about this platform however, it is also clear that the downstream advantage is a key provisioning and feature management are needed. So we're enhancing this capability and will be rolling out new revisions of CryptoManager in the future that can be used by for instance, OEMs to securely provision services or secure transactions of any kind with their equipment. So we continue to be extremely excited about CryptoManager, both for what it can do for the semiconductor industry supply chain, but also the opportunities the platform has for OEMs. One of the other highlights in Q1 was our presence at Mobile World Congress in Barcelona. For those of you who are unaware, Mobile World Congress has become the go-to show for anyone interested in general mobile ecosystem. In addition to customer and partner meetings, we held discussions with key media where we showcased our latest updates on our Lensless Smart Sensor or LSS program. We've had an overwhelmingly positive response in this technology including renowned tech publication Tom's Hardware awarding it the best IOT innovation at MWC. This is in addition to the award we were given last year for best new innovation at MWC. With the ultra miniature form factor and low power design, with potential applications for our LSS technology are certainly vast. As a way to get the technology into the market and on a path to commercialization quickly, we've launched our Partners and Open Development or POD program with inaugural design firm of partners, frog and IXDS. The goal of this program is to help define in determining key applications that could benefit from LSS technology. Our partners in this program will have access to technology development kits, which we'll be shipping this quarter, built on a range of maker platforms including Arduino, Raspberry Pi, Intel Galileo boards. The kits include maker boards with our LSS test chip, apps firmware, the software development kit, tutorials and documentation. To kick this program off, we had a fun interactive workshop at the MWC where we had design thinkers assembled to ideas around possibilities that could change the world in various IOT applications. We're deep into this program now and are expecting good ideas to come through in the coming months. Last year in June when we announced CryptoManager, we alluded to a new strategic memory architecture program, but gave no details. Unfortunately, I am going to disappoint you again in not saying much about this program other than it is on track that we remain excited about the opportunity and that you will hear more about it in this summer. Oh! And there is one more thing. The initiative has actually morphed into two strategic programs, one based largely on hardware and the other a combination of hardware and software. Both programs are designed to improve memory capacity and performance at both the server and rack levels at the data center and the customers have -- we've been talking and their NDA are very supportive. So we look forward to giving you more details in this summer. I typically do not spend a lot of time talking about our LED lighting division as it’s a bit different from the other core business, but we had a fantastic milestone during the quarter and felt that we should share it. Our team at Brecksville, Ohio built and shipped their one millionth light guide. I’m really proud of the team as they are executing well, serving their primary customer cooper lighting and turning out many novel designs for cooper’s latest streamliner pictures as well as providing quick turn manufacturing of the most complicated of these designs. As Satish has mentioned previously, we are running the LED lighting business at cash breakeven allowing the team to reinvest as they grow. In summary, we again had a solid quarter. We’ve designed the momentum across the businesses and progress on our strategic programs. So we remain on track for 2015 and are well poised for a great 2016. With that, I’ll turn the call over to Satish to give a read on the financial results. Satish?

Thanks Ron. I would like to remind everyone that for this call and for internal assessment, we use non-GAAP or pro forma numbers to discuss our operating results as well as forward-looking projections, which we believe are indicative of complete performance as it includes certain cash events and exclude 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 the call, a reconciliation may not be available due to the unreasonable effort to make such a determination or provide such information as more fully described on our website. Let me first review some of the financial highlights for the first quarter. As Ron mentioned, revenue for the first quarter was $72.9 million within our guidance of $70 million to $75 million, a 1.3% sequential increase and a decrease of 6.9% year-over-year. Just a remainder that the revenue year ago included a one-time payment for an option exercise in our mid and cryptography research businesses. For the current quarter, our memory and interface revenue was $54.7 million, cryptography research was $12.8 million and our lighting and display technology revenue was $5.4 million. Quarter-over-quarter these number represent increase of 1.3% and 3.2% from mid and cryptography research respectively and a decrease of 3.6% for lighting and display technology. Year-over-year, revenue decreased by 10.6% and 0.8% from mid and cryptography research respectively, and increased by 28.6% for lighting and display technology. Due to slower than expected headcount addition in the quarter and the gain from sale of patents, cost of revenue plus operating expenses or what I’ll refer to as total operating expenses for the quarter came in at $44.9 million slightly below our guidance of $46 million to $49 million relatively flat to the previous quarter and an increase of $1 million from the quarter a year ago. Operating income for the quarter was $28 million as compared to our guidance of $21 million to $29 million. On a sequential basis, this is an increase of 2.2% and a decrease of 18.6% year-over-year. The decrease year-over-year was driven primarily by the one-time revenue in Q1 of 2014 since we kept our total OpEx relatively flat year-over-year. For the quarter, EBITDA at $31.2 million was 43% of revenue as compared to 43% in Q4 of 2014 and 48% in Q1 of 2014. Interest and other expenses for the first quarter were $1.4 million as compared to $1.4 million in Q4 of 2014 and $3.7 million in Q1 of 2014. As a remainder, the 5% coupon convert matured in June of 2014 causing the reduction in interest expense year-over-year. Using a flat rate of 36% of pro forma operating taxes, net income for the quarter was $17 million, or $0.14 a share as compared to $16.7 million last quarter and $19.6 million in the quarter year ago. On the balance sheet, cash defined as cash and cash equivalents and marketable securities was $318 million, an increase of $18 million from the previous quarter. Net cash at the end of the quarter was $180 million as compared to $93 million a year ago. During the quarter, we generated approximately $15 million cash from operations. Now I will provide pro forma guidance for the second quarter of 2015 as well as the full year. The guidance reflects our reasonable estimate and actual results could differ materially from what I am about to review. As we get into our design wins and get upfront payments from our customers, we recognize revenue over the life of the project. For our contract revenue, revenues recognized on percentage of completion method or a proportionate performance method, both methods relay on - how much work has been expanded deliver to our customers and accepted by them. For the second quarter, we anticipated higher revenue for the quarter, but due to a push-out of deliverables we may be unable to recognize revenue from a project in the second quarter even though we’ve already received the cash and we have booked deferred revenue. We still expect to recognize this revenue but in the second half of the year, so it is purely a timing issue. With that clarification, we expect revenue for the second quarter to be between $70 million and $74 million relatively flat to Q1 of this year. We expect total operating expenses for the quarter to be between $46 million and $49 million. We expect expenses in Q2 to be towards the high end of the guidance due to additional Prototyping expenses and lower gains from the sale of patents. Operating expenses expected to be between $21 million and $28 million. As Ron mentioned, for the full year we are keeping our guidance unchanged for revenue and operating expenses. This is a remainder for revenue our guidance is $300 million to $315 million and for total operating expenses is $185 million to $190 million. For the year, we have multiple patents and solution licensed deals in the funnel and while there is risk we feel that we have the ability and the momentum to manage to our plan. We are now ready to open the lines for Q&A. Operator?

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

Hi, Ron. Hi, Satish. Nice job on the quarter there. Can you talk about the visibility you have in the deferred revenue into the back half to help with the uplift you need to hit the full year guidance?

Sure, Suji. So if you look at our deferred revenue as of Q1 of 2014 it was like $400,000. In December of 2014, it was $4.1 million and in March of 2015 it’s $5.4 million. So we will book some more deferred revenue as we sign more contracts and we’ll recognize some of that as it comes through, but its $5.4 million I would expect would be recognized in the next 12 to 18 months.

Great. And as we look at the full year guidance which you’ve kept for revenue between $300 million and $315 million, would you say the two or three biggest swing factors that would you get through the high end of that versus the low end?

Well, we have couple of licensing deals that we’re working on. I think those will be some of the larger drivers. We have a couple of large companies we are talking too and some of these times sometime it takes longer than we expect. But I think those would be the largest ones and then we’re working on some additional projects which could have large upfront payment, but we’ll recognize them in revenue over time. I think accommodation of those should get us to our revenue guidance.

Okay. Maybe the last question for Ron. Ron, can you talk about the new CryptoManager product I guess it’s targeted toward OEMs versus semiconductor supply chain companies and how much of that might increase your adjustable market and whether will come on faster take longer to get those going? Some color there would be help. Thanks.

Sure. Maybe just by way of explanation to make sure everybody understands that because if you are not familiar with that in detailed sometimes confusing. So the system that we built around is a hardware rate that goes into a semiconductor device plus an infrastructure for essentially injecting keys to that devise and enterprise class software allows you to manage that remotely from wherever you want. So our initial target and still our primarily focus is semiconductor companies, because they have a very real need to secure their value chain and also more and more from looking at configuring their devices using cryptographic keys, which are reversible. You can change it whenever you want as opposed to blowing fuses, which is irreversible. Having said that when you have a harder rate of trust inside any semiconductor device, it allows you to secure transactions or provision it at any point in time. And as we’ve been working this in a variety of different ways we found not just the semiconductor companies, but their customers the OEMs are finding it attractive. So that ability to configure and do it securely and manage transactions is a really interesting market. So, it absolutely dramatically increases our TAM, no having said, that we’re also very focused on the mobile space in a few different things. So in terms of the overall TAM, I can’t give you a number now Suji, but it’s several times what we currently are focused on.

Okay, great. Thanks guys.

Thank you. Our next question comes from Atif Malik with Citi. Your line is now open.

Hi thanks for taking the question. This is Amanda Scarnati for Atif. Just a question on how the slowing PC demand and the slowing emerging market smartphone demand affect the trajectory of new license fees or growth in 2015 and 2016?

Yeah, this is Ron, Amanda. It really doesn’t affect us at all. One of the things that we like very much is we have a very balanced portfolio. A lot of our exposure if you want to call it that on the PC and the handset space is within the memory companies who sell look our DRAM. But our major contracts with them are fixed. So we believe we have very, very little if any exposure to those type of macroeconomic conditions. So the way it might affect us is if they have slowing projects on the technology licensing side that could slow it over time. But quite candidly we’ve seen just the opposite. We’re having tremendous support especially for our serial links and Kevin is effectively chasing lots of hiring to staff up in selected programs because we’re getting tremendous demand. So we’re not seeing any of those affects although Satish and I worry about everything but that’s just -- because that’s normal for us.

Okay, thanks and then the second question is on -- for the legacy -- the play station business, which if I’m remembering correctly is still a little bit weak and how should we understand this business and new opportunities license agreement kind of offset a decline in the legacy business?

Yeah so the PS3 we had signaled last year that it will be coming to tapering down methodically and we’re seeing the royalties from PS3 typically Q1 would be the highest royalty revenue for us but this time around Q4 was higher than Q1. So we have seen that business go away and we’re building the pipeline. We’re in the funnel end guidance that we provided you includes basically very little of PS3 and it being replaced by other businesses that we’re winning design wins from.

Great. Thanks and just one final question if I can. Is there a specific number of new agreements that we should expect to see or a ballpark range and wanted to hit that 300 to 315 number?

No, because not all agreements are same dollar value and not all, so I think looking at number of agreements our press release even a good indication.

Okay. Thank you.

Thanks Amanda.

Thank you. Our next question comes from Gary Mobley with Benchmark. Your line is now open.

Hi guys thanks for taking my question. I want to start with a question for Satish, could you run quickly through your OpEx guide non-GAAP for 2Q and just the year '15?

Yeah the guidance was $46 million to $49 million, which is basically flat and that we had for and guidance we had for last quarter. The only indication that I made was that we’re expecting Q2 to be towards a higher end of the guidance, because the last couple of quarters every time the given guidance would come below the low end of the guidance. So don’t want to start building the model based on that, because I know that this quarter, we do have some additional prototype expansions, which will be one time, but they will take my expenses up for the quarter, but for my full year my guidance remain unchanged.

Okay, did you buyback any stock in the quarter?

No we did not. We had announced that this is an opportunistic program and stock has been holding fairly well. So we didn’t feel the need to go and use up the cash and as I mentioned the first part is to thus for M&A activity and we’re seeing couple of good opportunities. And I want to make sure that my business partners have the dry powder in case we decide to pull the trigger on some of them. So we might buy back stock, but we’ll do it opportunistically.

Is it -- on that front is it typical to find good M&A targets with realistic valuation expectations?

Yes, it is hard, that’s why we haven’t enclosed any, because we’ve gotten close to a few of them and walked away because the pricing expectations were unrealistic and we’ve also mentioned that we won’t look for something that would enhance our current businesses and also be something that will be accretive in 12 to 24 months timeframe. So we’ve set a pretty tight box for ourselves. We do see opportunities, our teams are pretty active, but yeah good deals are few and far and between.

Okay, all right. You mentioned perhaps some patent license deals providing for nice second half improvement in revenue. Are those specifically with some unsigned SoC licensees, is it -- does it have to do with renewals of existing SoC licensees and then as well could you talk about your dual license range with IBM when was that deal specifically signed and perhaps get us a sense of the linearity if at all of that revenue recognition for that license deal and that’s it from me. Thank you.

Well lots of question there Gary. So yes, on the patent licensing it will be a combination of successful renewals as well as signing unsigned customers. So that we have programs ongoing and we’re in dialogue with quite a few of these customers. So we expect to closing on them in the Q3, Q4 timeframe. With IBM we signed a deal in Q1 and both the deals were signed simultaneously or within a short span of each other both within the quarter. We may expect to see more of those kind of combination deals where it won’t be pure patent licensing deal, because as we’ve seen our strategy. We want to be providing additional value to our customers who want to have combination of technology licensing but also be paid for our patents and you’ll see more of these combination. In terms of more details on IBM I can’t provide any more details within in terms of curve, linearity or revenue we’re bound by the confidential agreement and we had very little live in what we could say and press release all we could say. Q - Gary Mobley Okay, I understood thank you. A - Ron Black Gary, if I could just add something on, because it also couples to what Amanda was asking about. One of the thesis we’ve had for a while is as the cost to SoCs goes up dramatically both the teams the DDA tools, the mask sets, more and more companies are going to look at outsourcing IP. And not doing at all in-house and I think that’s in part what we’re seeing and so kind of coupling to Amanda’s question, the more people feel tightness on our customers on their expenses and they want to do and make buy analysis, obviously we’re doing a really good job on a variety of different technologies especially now that people like us and they want to work with us, they’re not afraid of us as they thought. And as they make those make buy decisions they can see that can see that we’re doing these various IP blocks and we can amortize it over many companies and of course what we’re doing we’re getting paid really well for it as well. So it’s a nice business for us and I think it’s good for customers. So I think there’s there we’re playing into a general trend on this aggregation of the design part of the semiconductor value chain not just what has happened over the last 20 years on manufacturing. So that’s kind of the backdrop there.

Very helpful. Thank you guys.

Thanks.

Thank you. Our next question comes from Paul Coster with JPMorgan. Your line is open.

Thanks. So, can you hear me okay Ron and Satish.

Yes we can Paul.

Yes, hi. So Ron 2015 is clearly a year of investment and some I think you’ve talked in the past about 2016 being something of a payback. I missed your opening remarks, but what -- and the good news is that some of the risk is mitigated by the fact you’re being played along the way. However, you’re also taking some risk here that you get paid back. Can you talk to us little bit about the way in which you evaluate all of the programs that are underway? How you make the sort of go, no-go decisions along the way? And at what point, you’ll know whether or not this strategy has really worked out?

Sure. So maybe you're just preempting it. I think it is working because what I’m going to tell you is what we actually practice as a company at least since I’ve been here. So during the processes we get the team together kind of twice here formally, informally every month is we go through what I would classify as a classical capital budgeting problem. So we sit down and it’s a kind of zero base budget and you say okay let’s go through each of the programs that you're going on and individually and collectively as a whole is it going to earn its cost of capital. So each of the major business units have to do evaluation. So we do some of the parts evaluation, they do what you would call an equivalent to enterprise value to sales, equivalent of a PE multiple and a BCF. So these are ways that we actually look at it and we just judge whether things are working. I think you and I in the past had some different opinions like on the LED side to just give you a real example, we looked at on the LED side and the enterprise value to sales and PE multiples that people were getting for some of the LED products that equivalent we were investing in was disconnected from the free cash flow that we saw was going to drive. So we sat down with the team and said look as this is a bubble. We are not investing into a bubble. We're going to back out of this. We’re going to go for what we can do and where we can make money with the selected customer. So we chose to disengage from the lamps part of the business and that’s exactly what we’ve done to the portfolio for the last three years. What Satish has said a couple of times and probably I have as well is from 2013 to '14 we spent the same amount of money roughly on R&D. However, when we -- what we spent on was very, very different. So there was a set of programs that we just divested from and then we invested into others. So the way we measure it is to milestones. Are we achieving the milestones that we would think? Are we doing the right things? And we are. We don’t call it out, but we're investing probably substantially. Now, we’re not investing alright all of our money. This is very profitable business, but we’re investing for growth. If we don’t and I think this I hope investors see this, we have the intestinal fortitude to discontinue that. In fact, the way that we sit down with the team as we start with, tell me why we should invest in this at all and I just drop it to the bottom line as retained earnings. Right, because this is the multiple, we get on to it. So it’s a pretty strict process. Satish loves it and that’s how it works. Does that make sense?

Yes, all make sense. And I think with all that said, do you still have confidence that you’re going to see growth in 2016-2017?

Yes, and I think we’re seeing it across the Board. We have these strategic programs that we’re trying to give you as much indication as we can which is feedback. Of course, you got to believe is that the customers really like it. We’re more excited now than we were a year ago. And on some of just the design win side of it, that was probably people were questioning whether we could do it on the technology licensing we are. In fact, as we said Kevin had a substantial pipeline and he has more and is chasing some selected resources. So that’s good. Same thing on CryptoFirewall, CryptoManager, we didn’t expect to get quite so much interest from OEMs downstream and we’re starting to see that as well. So everything is still about as we said.

I got it. And then, you must be a little bit -- sorry.

Okay. I'll just add to that. So as I mentioned in the past, some of the programs they take 12 to 18 to 24 months before it starts generating revenue so some of the programs that we are expecting to deliver in 2016 and 2017 we have gotten good indications from a customer that this is what they want and we are investing in those programs. But we’ll not see any revenue from that if we start shipping whether it’s a core, or an IT to our customers and that will be sometime in 2016 timeframe. So there is a bit of lag from our investment to the time our customer starts paying us.

There is no contractual obligation on that customer though.

We have an MOU with our customer and we're working towards signing a contract.

Okay. Got it. And then on the patent side last question, it always seems to take longer than expected, but it really does seem to be taking a long time to monetize some of this stuff through third parties outside of your control to a certain extent. Are you disappointed by that program?

I am not sure I understand it. Could you say that again? I think.

The product licensing, what you said in motion through a third party as well as through your own means, A, a strategy for monetizing some of the patents and it seems to be taking very long time.

Let me make sure I understand. The only third party program we have is with Acacia.

Right.

We transferred license, I am not sure of the technical term, but essentially sold them the patents and that some of the expense that comes in periodically I don't know what the total has been, but it's been fairly significant and it's not something that we planned on having, but it's going -- they continue to move down that path. We don't have any other third party contracts and maybe I am confused. The rest of the patent licensing that we're doing, we're making actually a lot of progress. It does take time. It takes time companies, it did take time for companies to be more comfortable with us that what we're doing is fair and equitable and that's what we're doing. They see everybody else doing it. So it's one of these classic conditional probability problems, the probability that you take a license goes up when your competitors or other companies like you take the license and that's where we're systematically going through. IBM is a little bit different because they're a semiconductor company, but kind of more of a system company. So it's a little bit longer and different, but in fact we we're successful and they had not been previously a patent licensee, but they were a technology partner. We license the technology that was used in the Sony Playstation before.

Okay. Thank you, then. Thank you.

Thank Paul.

Thank you. I am showing no further questions. I would like to turn the call back to Ron Black, Chief Executive Officer for closing remarks.

Thank you all for your continued interest and support. We'll be hosting our Annual Meetings of Shareholders, this Thursday, April 23, at 9 am Pacific time, with nearly a meeting will be held online like we did last year and look forward to sharing highlights with you and our shareholders and thank you.