Rambus Inc. (RMBS) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Rambus Inc. Third 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 now like to turn the conference over to your host Mr. Satish Rishi, Chief Financial Officer. Sir, you may begin.

Thank you, Amada and welcome to the Rambus third 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 has been furnished to 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 55741229 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 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're using both GAAP and non-GAAP pro forma format in our press release and also on this call. I need to advise you that the discussion today will contain forward-looking statements regarding our financial guidance prospects, our product strategies, demand for our technologies and restructuring and plan of termination among other things. These statements are subject to risks and uncertainties that are discussed during this call and may be more fully described in the documents we file with the SEC, including 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 Web site 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 Web site 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?

Thanks Satish, and good afternoon, everyone. We finished the quarter with revenue of $73.8 million which was within the guidance we provided. We continue to manage expenses carefully and have again ended the quarter with expenses at the low end of what we expected, so pro forma net income came in at $17 million which is closed to midpoint of our guidance. While we had another decent quarter, I'm disappointed to report that we have recently had two setbacks in our business. The first is that one of the larger more complexed licensing and broad partnership agreements we were negotiating in our security business has stalled and at this point we are unlikely to see it close. As well we had other smaller deals on the funnel throughout our business that didn’t come to fruition. Given the changes we are seeing in the broad macroeconomic environment in the semiconductor industry particularly with consolidation and restructuring it is taking longer than anticipated to close deals. While this larger deal or other deals could still materialize, we are taking a cautious and conservative approach as we work to set guidance expectations into next year which Satish will provide in a few moments. Given where we are today, however, with these deals we are revising our full-year guidance to $291 million to $297 million meaning that for the fourth quarter we are expected revenue in the range of $71 million to $77 million. The second setback we’ve experienced is in our memory business with our Server DIMM Chipset. As you know when new businesses are launched issues can arise and unfortunately we are working through a few technical issues that we’ve recently discovered with one of the chips which will cause us to miss a customer qualification window. We’re in the process of addressing the issues and are taking actions to rectify as expeditiously as possible. To be clear, we still believe in this product and the strategy and even more so in the roadmap, but as investors undoubtedly know, working through such technical issues may take time. As such, sales of this new product next year will be lower than previously planned, so we are taking this into consideration as we work to set guidance expectations into next year as well. As both the larger licensing deal and the chipset were significant parts of our expected revenue growth, 2016 is unlikely to be the banner year that we had expected. We will provide more guidance for 2016 in January, but we are currently expected our revenue for next year to be flat year-over-year with potential incremental growth. Of course, this estimate is preliminary and we're working hard to improve things, but we wanted to give you this update at this time. Given the outlook, we are taking actions to streamline our expenses through our restructuring program. These actions are designed to allow us to maintain approximately 38% pro forma operating margin for next year on flat revenue. The restructuring will be across the organization, and will involve expense reduction in headcount, contractors and investments that we had made in preparation for more aggressive growth in 2016. In some cases, we are cutting contractor spend programs where the work is complete, so we’re not renewing those contracts. Satish will cover the financial elements of this restructuring later on the call. On a more positive note, we're seeing momentum with our DPA Countermeasures. We recently announced that Windbond has taken the license to protect flash memory products against increasingly common side channel attacks. We also announced that the SCSA has officially chosen our cryptography research group to manage and run the key issuance setter for VDT enabled devices and services. The VDT solution allows consumers to easily and securely purchase, transfer and view content across multiple devices, and we are managing the secure key provisioning. We are also pushing forward with our CryptoManager program where we see significant opportunity as we scale beyond the current upstream opportunities with our lead customer Qualcomm to further downstream opportunities with infield provisioning and overall feature management. Certain segments of the IoT market are right for this platform as more and more connected devices become part of our daily lives. The overall vision for the CryptoManager platform is to create a shift in semiconductor design thinking where this platform can bring future decisions closer to the end user, which ultimately saves money by eliminating costly silicon spends at the manufacturing level. With any sort of ecosystem shift, it takes time but we are making progress and we look forward to sharing more on this program in the coming months. Before turning call over to Satish, I'd like to make a comment about M&A. We continue to opportunistically pursue complementary businesses at fair valuations, but given our current situation, we view M&A as less of a priority at this time. With our long-term commitment and belief in the success of our core business, in the short term, we will look to use our strong balance sheet and substantial cash generation to consider stock buybacks under our existing authority to repurchase up to 20 million shares. We view this as a potentially expeditious way to drive value for shareholders that remain committed to the Company. I’ll close my portion by saying that we remain fully committed to the strategy and are extremely focused on execution and hitting our milestones. With that, I’ll turn it over to Satish to review the particulars for the quarter. Satish?

Thanks Ron. I’d 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 they include certain cash events and exclude certain non-cash and discrete events, such as stock based comp, amortization, impairment and restructuring charges, as we believe these are not indicative of long-term performance. As noted, we will provide reconciliations of the 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 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 third quarter. As Ron mentioned, revenue for the third quarter was $73.8 million within our guidance of $73 million to $78 million, a 1% increase over the second quarter and an increase of 6% year-over-year. Operating income was $27.5 million, an increase of 5% quarter-over-quarter and an increase of 11% from a year ago. Cash and cash equivalents were $363 million as compared to $348 million last quarter and $271 million a year ago. Going into some more detail for the current quarter. Our memory and interface division revenue was $55.4 million, cryptography research division was $12.2 million, and our lighting and display technology revenue was $6.2 million. Quarter-over-quarter, these numbers represent an increase of $0.8 million and $0.4 million, for mid and CRD respectively, and a decrease of $0.2 million for lighting and display technology. Year-over-year, revenue increased by $2.9 million, $1 million and $0.2 million for mid, CRD and LTD respectively. The increases were nearly due to patent license agreement renewals and payment from a one-time audit. Cost of revenue plus operating expenses or what I will refer to as total operating expenses for the quarter came in at 46.3 million at the low end of the guidance of 46 to 49 million, relatively flat to the previous quarter and an increase of 1.2 million from the quarter ago. The increase was driven primarily by cost of goods sold and additional resources of engineering as well as increased spending on media tools. We ended the quarter with a headcount of 527 as compared to 513 in the previous quarter and 504 in the quarter a year ago. Operating income for the quarter was 27.5 million close to the midpoint guidance of 24 to 32 million. On a sequential basis this is an increase of 5% and an increase of 11% year-over-year. The increase quarter-over-quarter was driven primarily by the increase in patent revenue in Q3 of 2015, since we've kept our total operating expenses relatively flat over the year. The increase year-over-year too was driven primarily by higher revenue in Q3 of 2015. EBITDA margin which we believe is a good measure of our business model was 41% for the quarter as compared to 40% in Q2 of 2015 and 40% in Q3 of 2014. Interest and other expenses for the third quarter were 1 million as compared to 1.3 million in Q2 of 2015 and 1.5 million in Q4 of 2014. Using the flat rate of 36% for pro forma pre-tax net income for the quarter was 17 million or $0.14 a share as compared to 16 million last quarter and 14.8 million in the quarter a year ago. Overall cash, defined as cash, cash equivalents and multiple securities was 363 million an increase of 15 million from the previous quarter. Net cash at the end of the quarter was 225 million as compared to 210 million a quarter ago and 133 million a year ago. During the quarter we generated approximately 15 million in cash from operations. I also want to mention that during the quarter we released a valuation allowance against our deferred tax assets resulting in a tax benefit of 174 million which is reflected in the benefit from Income Taxes in the GAAP financials. It does not have an impact on our pro forma financials but it is meaningful since we are now profitable on a GAAP basis, on accumulative GAAP basis for last 12 quarters and expect future GAAP profitability. Now I would provide pro forma guidance for the fourth quarter 2015 as well as for the full-year. This guidance reflects a reasonable estimate and our actual results could differ materially from what I'm about to review. As Ron mentioned we did not close on the expected deals that we mentioned in the last earnings call. With that knowledge in hand we are guiding the full-year to 291 to 297 million implying a fourth quarter revenue range of 71 to 77 million. As a part of our annual capital allocation process we have reallocated spending and will embark on a slow restructuring to align our resources with our initiatives. For this we expect to take a charge of 3 to 4 million in Q4 which will be related primarily to a reduction in headcount and programs. With these actions we expect to save approximately 2 million in the current quarter and 10 million in 2016 as compared to the current run rate. Excluding this charge for Q4 and the pro forma basis we expect operating expenses less CODD to be lower of between 42 and 45 million for the quarter. Operating income is expected to be between $26 million and $35 million. As we look into 2016 it is premature to provide discreet guidance but as Ron mentioned both the partnership deal and the chipset were significant parts of our expected revenue growth. As such it is unlikely that 2016 will be the banner year that we expected. We expect revenue 2016 to be relatively flat as compared to 2015 with potential for some incremental growth. We will manage our expenses to meet our operating target of approximately 38% for the year and expect to keep expenses flat year-over-year. In 2016 we expect to continue to be cash flow positive similar to 2015 and believe that a share buyback is a potential expeditious way to drive value for shareholders and is a good use of our cash. We will provide you with additional guidance during our next earnings call after we have completed our annual planning process. With that we are ready to open the line for Q&A. Operator?

Thank you. [Operator Instructions] Our first question comes from Sujit de Silva with Topeka, your line is open.

Hi Ron, hi Satish. Couple of questions here. First of all on the memory chip product, how fundamental is the issue there, is there a priop respin and does it affect all the product classes you have or is it isolated to --

Sujit, thanks it's Ron, so it’s still preliminary, at this point we just found out about it, we're going through it in some detail. Typically these are fixed with respins, the issue as we discussed before at the Analyst Day in the previous earnings calls is we really need to hit the customer windows and when we look at this we just are concerned that we’re not going to hit that window. So as a result, we just can't project the revenue that we bought last year.

Okay, great thanks Ron. And then you've talked about some of the deals that you required it for the fourth quarter, can you talk about what areas those deals are in to get a sense of what you're looking for to meet the guidance?

Sure, they were really across the Board, there were a couple of very large deals on the security side, but one of them that we were close to moving in and it stalled. But they were really across the business. What we're seeing, we tried to reflect in the prepared remarks is, it's just slower than it was before. I know there's a lot of change in the semiconductor industry, there is lots of consolidations. People are all pulling on those orders to get deals done and we are just not seeing the cycles to be able to see them, get closed, which is why we wanted to communicate as soon as it was clear that this was indeed the case.

Okay and then lastly about the restructuring program you announced here, how much additional room is there in the OpEx or headcount from this point? And are there any particular programs that some of the newer opportunities that are not been going to be funded as much with this or those still all play? Thanks.

So let me answer that try to be rather precise as we go through it. So in the emerging solutions division, the more incubated size of that we had completed and launched the smart data acceleration platform. We did this a couple of weeks ago at the Analyst Day and we used it as a development platform. That was completed, that phase of it was completed when we launched it and that was one of the affected programs that we concluded that we really should hold at this point, that quite candidly was independent of the restructuring that was the decision we took previously to say that, let's hold it at where it’s at and see especially as people start to think about FPGA acceleration more. We are very pleased with the program. We are excited by it. We think it's a way cool thought leadership product. But it's not clear where we need to take that into the future. We have pared back somewhat on the binary pixel program as well where we are still excited about it. But it doesn't have a lot of customer traction, so that was a very modest investment candidly though. The rest of the reductions were across the business, it wasn't program specific, it was more where we had duplication of resource over the last year in anticipating us more significant growth. We just didn't think it was prudent in the best interest of shareholders to continue that investment waiting knowing that next year is likely to be more challenging or the growth is going to come in a manner that’s different than we had thought. So there is nothing of the strategic programs that have been terminated as we said we still believe in them, it's just very unfortunate where we ended up with the slower deals and this bug.

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

This issue that you discovered for the memory chipset business where the emergence of that business, has it caused you to reconsider whether or not makes sense to be a chip company and are we now looking for a window for that business to eventually ramp in the 2017 timeframe?

So, Gary. It's Ron. No, we haven't changed our opinion about it, we're more optimistic than ever that there is a lot of opportunity…

Ron, I think we've lost you.

So that means by definition that would be more into 2017. The roadmap we've been sharing with selected customers and they're very attracted by it and I think it's fantastic. So it's reassuring that we have something, it's just not in the timeframe that we had wanted.

Okay, you talk about a delay in the signing of significant deal on the security side of the business and assuming perhaps it might have to do with an traditional customer for CryptoManager, correct me if I am wrong there and did you say that the deal that was in the Q is no longer likely to close?

Yes that was precisely the word, we didn't describe where it was, it was a broader deal partnership certainly involved a lot of the security technology that it was confidential what we were negotiating. And it may comeback, but at this point we just don't see the likelihood that it will comeback. So and setting expectations for this quarter and for the fourth quarter and for next year, we just wanted to be more prudent.

What was the hesitation for that particular product with the customer?

I am not sure, I understand the question. What was their particular concern?

That's right.

I am not sure I can answer that precisely, it’s one answer that you should probably go on their side. They just preferred to wait and reconsider later on.

Okay.

So it's very hard and we're still in contact with all of these customers, it's not like it completely goes away. But if you don't see that it's within the reasonable forecast period and there is no driving force for them, again just to be prudent we have to assume that that's not going to be the case.

Yes, Gary we don’t disclose the customers we’re negotiating with, I think it won’t be prudent to talk about them.

I understand that -- the root of my questions just trying to understand whether or not CryptoManager has legs beyond QUALCOMM.

We still have a lot of interest that we believe it and those are the deals.

The delay or the deferred closure of some licensing deals outside of the security side of the business. I wondering if any of those were patent licenses and if there is some delay in closing some of those patent licenses, might we see another round of litigation as a result.

So there were some patent licenses, clearly we’ve said in the past that our preference is not to litigate, although that could always be a potential outcome. What we’ve tried to do is establish market rate, communicate very fairly and openly with all of the customers and a variety of these quite candidly it was much more of an internal focus where they just can't get things done quickly enough because they have their own problems and challenges on restructurings and M&A, so it's just more of cycles. But you know if somebody is recalcitrant we will obviously consider that.

Okay last question maybe just a housekeeping question, Satish what was your fourth quarter non-GAAP OpEx guidance?

Fourth quarter non-GAAP OpEx and COGS guidance was between 42 million and 45 million down from the previous quarter, down from Q3.

Thank you. Our next question comes from Mark Lipacis of Jeffries. Your line is open.

Thanks for taking my questions. In the press release you mentioned ST and Nvidia being lower, are those permanently lower or is there a chance for those guys to come back up to previous levels?

Hi Mark, in the near-term they will be lower, I think that’s how the deal was structured where the payments were not linear.

Okay fair enough. And how should we think about the cryptography revenues looking past to next quarter into 2016, is it -- should we think about that as being a growth business in 2016 or should we think about that being flattish to 2015?

Mark, we don’t disclose revenue by the different initiatives within CRD. So within CRD we have CryptoFirewall and we have DPA, patent licensing and we have CryptoManager, so we don’t break it down. But we believe overall the security business is something that we believe has growth potential and CryptoManager is something that we’re quite excited about and expect to see future signings from CryptoManager.

Fair enough and last question from me Satish is how should we think about the cash flow implications and restructuring going forward. I understand there is just $3 million to $4 million charge this quarter and then I think I heard you to say about $2 million lower of positive impact on OpEx from that in the December quarter and then you said, I think you said $10 million of savings next year. Does that just imply A: an additional $500,000 savings in the March quarter and then kind of were straight line from there and are there any other restructuring charges that you would expect to hit past the December quarter and that’s it from me? Thank you.

Mark, we expect all of the charges will be taken this quarter I think the cash charges will be between three and four and that sort of modelled us would be to model flat expenses to 2015. So the $10 million savings for 2016 is based on the current run rate we had in Q3 and the $2 million savings for Q4 is also based on the run rate that we had in Q3. Hence the reduction and the guidance on the OpEx, but for next quarter I think the best way to look at it would be to quarterizethe flat expenses 2015 to 2016.

Fair enough and then is there -- do you expect any more restructuring charges at just $3 million to $4 million in December quarter and that’s it?

That’s it.

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

Hi guys thanks for taking my question. Ron, when you say security deals are stalled I just want to understand is that because your customer itself is going through restructuring or there is no interest in your product?

So there is still be interest but again it's hard to tell from the customers on what their exact decision making processes, they certainly have their own actions and things that they're dealing with. So I can't really say. We see a tremendous interest across the board for the product, it's just we were hoping that this deal was going to close and be more significant and timely, to contribute to this quarter and more substantially next year, but it’s not.

And then a question on Cross Point technology, Micron-Intel has launched their product and you guys have tremendous IT on that side with Unity Semiconductors. So my question is, are the existing memory deals with Micron already factoring in the use of Cross Point IP from Rambus?

Yes, all of the deals that we have with the existing memory providers is a broad license to our patents. So that would include them. For non-DRAM, or new licensees, that would not be included.

Okay, and then one last one on restructuring. Are you guys considering getting out of the lighting business or anything like that? Or is it just kind of trends across the board?

No, the lighting business is not affected by this at all. They’ve made tremendous progress over the last couple of years growing rather significantly. We don't expect to have significant growth about it. But we’ve been rather transparent on these calls and also with the team. They know that this is not a core to the rest of it or synergistic, it's an adjacent business. And they know what that means at the right time it would be an excellent candidate for divestiture.

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

Yes, I am sorry to beat a dead horse there, but just on the, first of all on the contract side, on the security side of the problem. It doesn’t sound like this has been a competitive loss, can you confirm that nor a price based loss?

It was not.

And then on the memory chip side, I mean how far had you got to commercial volumes on this? And I guess it still feels like it’s been pretty late in the day to discover the problem. What in retrospect do you think you might have done wrong at Rambus?

We’re in the middle of the analysis on lessons learned right now. But when you have these type of problems, there is obviously something in our verification process or modelling early on. So that’s where we’re looking and we’re going to dig deeply. It’s really unfortunate but these happens, as I said I am after being in the semiconductor industry for 20 years, this is just what happens. We had a press schedule, the team executed really well, it booted Windows right away, everything was looking very good and we got caught on something very recently where it wasn't operating correctly. So we just have to go back and fix it.

And then to what extent did you invest in volume capacity already?

We really, we have a foundry of course that’s running it, but there is no prepaid money associated with this, so there is really no capacity commitments on at any point.

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 look forward to sharing more details on our business at the next update. Thank you.