Rambus Inc. (RMBS) Q1 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and thank you for standing by. Welcome to the Rambus First Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] We will have a question-and-answer session later and then instructions will follow at that time. And as a reminder, this conference is being recorded. Now, I would like to turn the call to Mr. Satish Rishi, Chief Financial Officer. Please go ahead.

Thank you, Carmen, and welcome to the Rambus first quarter 2016 results conference call. I’m Satish Rishi, CFO, and on the call with me today is Dr. Ron Black, our President and CEO; as well as Dr. Martin Scott, GM of Security Division, he is also available for Q&A. The press release for the results that will be discussed to you today have 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 either replay by dialing the toll-free number or and then by entering ID number 89975569 when you hear the prompt. In addition, we are simultaneously webcasting this call and along with the audio, we are webcasting slides. So even if you are 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 PM 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 and also on this call. I need to advice you that the discussion today will contain forward-looking statements regarding our financial guidance prospects, product strategies, timing of expected product launches, demand for existing and newly acquired technologies, the potential benefits of acquisitions and the growth opportunities of the various markets we serve 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 are posted on our website reconciliations of these non-GAAP financials to the most directly comparable GAAP measures you can find a copy of our earning release and the reconciliation on our website at rambus.com on the Investor Relations page under the 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 $72.7 million, close to the midpoint of the guidance we provided of $71 million, $75 million. From an operating income perspective, we ended the quarter with $23.7 million and net income of $14.6 million, which was at the high end of what we guided $10 million to $15 million. We continue to generate cash and have a healthy cash balance of $226 million. The first quarter was an important one in our ongoing strategy of extending semiconductor IP to the products and services they enable. On our last call, we announced, we hadjust acquired Smart Card Software Ltd., which was comprised of two divisions; Bell ID and Ecebs. We believe these companies will bolster our presence in the security services arena. The omni-accretive nature of these acquisitions, both Bell ID and Ecebs reinforce our direction and the opportunity to provide infield services with a secure foundation. We see our security division, which includes Cryptography Research and now Bell ID and Ecebs, as the cornerstone to providing security to enable and improve identity services throughout the ecosystem. Bell ID is a recognized leader in mobile payments. The technologies they created include a full suite of mobile payment solutions that support cloud-based services using host card emulation, EMVCo tokenization, trusted service management for SIM-based projects, and embedded secure element solutions. With Bell ID, we can provide banks, governments, and enterprises with the ability to issue and manage credentials on numerous connected devices. We see these mobile payment platforms as having opportunity for worldwide deployment in a secure manner. In fact, shortly after the acquisition, we announced that Bell ID will support international issuing banks, payment schemes, and processors to integrate with Android Pay, along with other OEM mobile payment platforms. On the smart ticketing side, Ecebs is a leader of supplying smart ticketing systems to the UK transport markets and has developed software to meet the growing demand for cloud-based secure ticketing schemes. This platform too can open up the lower cost and future enhanced smart ticketing to a wider market. Both the Bell ID and Ecebs platforms enhance our security division with a portfolio of products and services to provide a broad range of secure provisioning and management solutions. At the core of what we’re working to do is provide chip to cloud to client devices solutions with the ultimate security and configuration ability. To that end, at Mobile World Congress in February, we outlined our strategy for enabling downstream or infield provisioning capabilities based on our CryptoManager platform. This platform allows OEMs and device manufacturers to securely provision features after the consumer point-of-sale opening up great downstream revenue opportunities. We’re enabling what we refer to as features as a service or FaaS for mobile and IoT applications, which provides a possible new revenue stream with new customers in the value chain, as well as better insight into what end consumers, OEMs and service providers are really looking for. To make a finer point, we recently collaborated with the Global Semiconductor Association to explore the current state of the semiconductor industry through a white paper that outlines different approaches to driving growth in the overall industry. We all acknowledge that the semiconductor industry is facing changes and some challenges, including rising development costs, shrinking margins, slowing growth, and rapid consolidation. Consolidation is a natural and logical step for maturing markets, so the industry overall is doing the right thing to improve profitability, at least, in the short term. The key question is, whether consolidation can also spur growth. Frankly, the excitement or possibly hype about IoT is yet to produce a semiconductor growth that we have experienced in past stages of the industry, which may simply, because the part of the value chain that is benefiting is closer to the data and services that such data provide. We believe that more substantial growth may be achieved through collaborative engagements and innovative or even disruptive business models that allow the industry to cap into those parts of the value chain, where there may be better monetization options, specifically, turning data into information and providing services based on this information. With the semiconductor market clearly at the center of multiple industries, the medical to automotive, to industrial, to consumer, innovative or disruptive business models may allow companies to more directly benefit from the inherent value of the products that semiconductor enable and not just what they are sold for in the current customer model. Frankly speaking, that is exactly what we are trying to do with CryptoManager as a platform for services provided by applications, such as mobile payment, smart ticketing, and content protection, improved consumer experience in security with revenue sharing back to our customers and partners. Continuing on the security side, we signed a couple of new deals during the quarter, including an interesting new engagement with the Athena Group, a leading provider of security, cryptography, anti-tamper and signal processing IP cores to many of the world’s largest semiconductor companies, defense contractors, and OEMs. The Athena Group now has the ability to license our DPA countermeasures innovations, essentially becoming a reseller for our technologies. We’ve also just released our latest DPA Workstation Version 8. This is the next-generation of our side-channel analysis platform that tests and analyzes cryptographic chips to determine vulnerability. Through this tool, our customers have a quick and easy way to identify potential security flaws in SoC, making it a value tool for leaving security chip vendors, product companies, testing labs, and government organizations to evaluate and certify their secure semiconductors. Moving now to our Memory and Interfaces Division, we are making good progress on our server DIMM chipset, where we are working through the various final phases of qualifications for both Broadwell and Skylake platforms. We are moving into the production phase for this product and are continuing to test and evaluate the parts to be fully ready to ship to customers in the coming months. For a technology licensing part of the business, we are seeing good traction with both our SerDes and memory PHY solution to meet the demands of the data heavy, enterprise, and server markets. These markets are in constant need for bandwidth managed huge amounts of data while being cognizant of the associated power. We have several design projects underway, and we expect to be delivering our designs and solutions to our Tier 1 customer shortly. Within our Emerging Solutions division, we are excited about the reaction we are receiving from our Smart Data Acceleration or SDA research program. You recall, we introduced this development platform last year and have been working with the Los Alamos National Lab on an evaluation of the platform. We are happy to report that we now have additional customer partner evaluations underway that while we can’t specifically disclose yet, that suffice it to say that we are very encouraged by the reaction we’re receiving to our NDA discussion. Another exciting innovation area we showcased at Mobile World Congress was our lensless smart sensor technology. We’ve spoken at length about LSF and the ability to capture images without the bulk or expense of a lens and reconstruct those images using algorithms. What we demonstrated at this year’s MWC was a bit different, however. Our thermal imaging capabilities using this technology, as the technology works in both the optical and infrared spectrum, of course, with different diffraction gratings in image capture technologies. Taking the LSF technology to the infrared regime allows us to dramatically broaden applicability even more IoT applications, including automotive passenger detection and smart home or start building presence detection. In addition to the optical applications of virtual and augmented eye reality tracking, we’re making progress on the path moving this technology closer to commercialization. To reiterate, we see all of our businesses to have an opportunity to grow and expand with enhanced engagement models. By adding an accretive businesses and continue to innovate in our core areas, we believe we are well positioned to connect the value of our products and solutions to the services they enable, which in turn provide further opportunities for growth. With that, I’ll turn the call over to Satish to give more detail on the quarter.

Thanks, Ron. I’d like to remind everyone that for this call and for internal assessment, we use non-GAAP pro forma numbers to discuss our operating results as well as forward-looking projections. We believe these numbers are indicative of complete performance since they exclude certain 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 to the most comparable GAAP measures on our website. In the case of any forward looking projection or estimates containing non-GAAP information discussed on this call, a reconciliation may not be available due to unreasonable effort to make such a determination or provide such information as more fully described in our website. Let me first review some of the financial highlights for the quarter. As Ron mentioned, revenue for the first quarter was $72.7 million, close to the midpoint of our guidance of $71 million to $75 million, a 5% decrease over the fourth quarter and flat from a year ago. Operating income for the quarter was $23.7 million at the high end of our guidance of $16 million to $24 million, a decrease of 29% quarter-over-quarter and a decrease of 15% from a year ago. Cash and cash equivalents were $226 million, as compared to $288 million at the end of the last quarter and €318 million a year ago. Going into some more detail for the first quarter, our memory and interface revenue was $53.6 million, security was $14.1 million, and the lighting and display technology revenue was $5 million. Quarter-over-quarter, these numbers represent a decrease of 7% and 15% for MID and LDT, and an increase of 4% for a security division. Year-over-year, MID revenue decreased by 2%, our security division increased by 10%, and the lighting business was down by 7%. In our lighting division, a major customers is seeing increased competition and a market shift to less differentiated solutions, along with a market adjustment of inventory level thus impacting our revenue for the time being. As Ron mentioned, during the quarter, we completed the acquisition of Smart Card Software, which encompasses two business units; Bell ID and Ecebs. Since both of these are software customization companies, upon acquisition not all of their existing revenue is reflected in our consolidated revenue number. Under U.S. accounting rules, we have to determine, which signed contracts require minimal or no further effort. For these contracts, we can calculate a fair value of the future cash flows and record them as an intangible asset on our balance sheet as favorable contracts. When the customers pay us, we are able to recognize the cash, but no revenue and reduce the intangible asset by the corresponding amount of cash received. As we completed our purchase accounting, we have recorded approximately $8 million as favorable contracts, which implies that we will not be recognizing this $8 million as revenue, but still collect and recognize the cash. The businesses we acquired contract on multiple elements with the customers, that is they sell licenses to the custom software that provides professional services for the customization and that provides service and maintenance contracts. Once you sign a contract, we provide the enduring services deliver and receive acceptance from the customer before we can recognize the license revenue. The time between signing a customer contract and delivery is typically six months. So the new contracts we signed post-acquisition will generate license revenue along that timeline. Cost of revenue plus operating expenses or what I would refer to as total operating expenses for the quarter came in at $49 million below our guidance of $51 million to $55 million, a 13% increase over the previous quarter and an increase of 9% from the same quarter a year ago. The quarterly increase was primarily due to the addition of 126 employees for the acquisitions of Smart Card Software, as well as an increase in payroll and social security taxes are a typical for the first quarter of the year. Year-over-year, the increase was due to the additional headcount that resulted from the acquisition. In terms of headcount, we ended the quarter with a headcount of 626 employees as compared to 494 in the previous quarter and 500 a year ago. Operating income for the quarter was $23.7 million, close to the high end of our guidance of $16 million to $24 million. On a sequential basis, this is a decrease of 29% and a decrease of 15% year-over-year. The decrease quarter-over-quarter was driven by lower revenue and a combination of higher headcount expenses for the acquisition as well as higher payroll and social security taxes, which as I mentioned are typical of the first quarter. The decrease year-over-year was driven primarily by higher headcount related expenses. Interest and other expenses for the first quarter were $1.2 million, as compared to $1.1 million in Q4 of 2015 – Q4 of 2016 and $1.4 million in Q1 of 2015, using a flat rate of 35% of pro forma pre-tax income. Net income for the quarter was $14.6 million, or $0.13 a share, as compared to $20.7 million last quarter and $17 million of the quarter a year ago. Overall, cash defined as cash, cash equivalents and marketable securities was $226 million, a decrease of $62 million from the previous quarter. We made an initial payment of $93 million for the acquisition and expect to pay an additional $12 million for working capital adjustments plus the cash we acquired from the entities in the current quarter in Q2. So during the quarter, we generated approximately $16 million in cash from operations. Before I turn to guidance, just a couple of points on the acquisition that we announced. The final purchase price for the acquisition will be $105 million, and it will be reflected on the balance sheet as follows. Cash and cash equivalent acquired $12 million, intangibles $60 million, and goodwill $47 million, deferred tax liability negative $15 million, other assets and liability $1 million. Now, I will provide pro forma guidance for the second quarter of 2016. This guidance reflects our reasonable estimates and our actual results could differ materially from what I’m about to review. For the second quarter, we expect revenue to be between $72 million and $77 million, and total operating expenses, including COGS to be between $49 million and $52 million. We expect operating income to be between $20 million and $28 million. It is too early to make any change to our initial revenue guidance for the year of $310 million to $325 million. Once we get to mid-year, we can evaluate and provide any changes to the guidance. I do want to reiterate that our guidance is not without risk and thus take into account the signing of new customers across the various businesses. We’re now ready to open the lines for Q&A. Operator, can you please open the line.

Thank you. [Operator Instructions] And we have a question from the line of Gary Mobley with Benchmark. Please go ahead.

Hi, guys, thanks for taking my question and good afternoon. So looking at your fiscal year 2016 revenue guide and taking into considerations on the comments that you made on your last earnings call with respect to the valuation multiples you paid for SCS. We can assume and correct me if I’m wrong that what is built into that fiscal year 2016 revenue guide is the assumption about what $20 million of revenue from SCS?

Well, it’s a little more than that, but yes, approximately, it would be $20 million, $25 million is what we built in.

Okay. And you’re saying that you’re – because of the accounting rules, you’re taking roughly an $8 million revenue haircut in fiscal year 2016. So just in showing up the accounting issues you should see roughly that delta increase in 2017 revenue for SCS?

Well, the $8 million is not just for the fiscal year, because some of these contracts they go out for a couple of years in terms of say, the service and maintenance contracts, as well as for the licensing arrangement, some of them are three years, some of them are five years. So the $8 million is really a present value of future contracts, but the overall value is much higher, but because it spends out couple of years that’s why we have a fair value – the present value of those cash flows was about $8 million.

Okay. Maybe can I ask in a different way?

Yes.

Looking at your second quarter revenue guide, how much would you have been able to recognize from SCS, or how much more perhaps differently than what you’re assuming if you didn’t have to take this accounting haircut on the revenue recognition?

Well, firstly, Gary, I know we’ve been asked this question multiple times. So we will not be breaking out the revenue for SCS. So I think at initial stages, we did talk about it, but because it’s not a different division, we don’t want to get into a situation where we start disclosing this as a separate reporting unit, because it is part of the security division that Martin runs and there will be collaboration between the CRI team, as well as the Bell ID team to provide combined products over time. It will become very, very difficult to say what’s coming from where? So we don’t want to start off by providing guidance.

Okay.

What I can tell you is the amount of cash we will collect is much part in the revenue we will book in 2016 and in 2017 just by nature of how the accounting works. And I think you’ve probably seen similar acquisitions on software and that because one of the issues in how do you recognize revenue for licenses, where a lot of the work has already been performed. So you do lose revenue unfortunately, but that’s just the nature of how the accounting works.

Gary, it’s Ron. Maybe just add a little bit more to round this out, because it will be discussed quite frequently. So the favorable contract is just the one piece as Satish is describing over the series of year – years. But also as Martin and team closed new deals on our side of – with U.S. GAAP, some of those will be recognized revenue in the future as well. So I think this is going to be hard to piece together other than just looking at in the totality whether the business is growing. And quite candidly, we’re already working on joint things between, for instance, CryptoManager and payment platforms with real subsidence customers. So it will be an absolutely impossible to peal this out. It’s really one business unit, one team and what I think is good as we have a significant demand for the products. So this is a very interesting part compared with the historical semiconductor industry, which as we now will discuss as a lot of growth challenges. This is a lot of upside opportunity. But bridging [ph] to each one of these things every time will just be problematic.

Okay. Well, I appreciate all the color. All right. And I appreciate the fact that you have to generate some turns business in the quarter to hit your Q2 revenue guide. Would you say the trench requirement is higher than normal, or lower than normal, if I recall in the past you don’t typically give such a statement?

Yes, I think it’s probably similar to what’s been over the past. I wouldn’t say it’s more or less one way or another. The way we provide on guidance is we have internal forecast that rolls up and then we look at where some of the risks are with the potentials downside might be and also with opportunity that with potential upside would be, and then that’s how we set up our range we would to give and we want to provide a range that we don’t miss.

Okay, last question for me and then I’ll jump to the queue. As it relates to your server Dual Inline Memory Modules chipset, you mentioned that you expect to ship product in a couple of months. But should we really still view this product set in the revenue potential really more of a 2017 event, or as a timeframe moved up?

The answer is yes, Gary. As we tried to moderate expectations given the pickup that we had last year, but yes, we’re running real production volume now anticipating the close of the final parts of the qualification. So it’s one of those upside potentials, as we’re moving from design to production and really as well selling them. We have multiple speeds towards obviously as these multiple speed grades and we’re working through it and we have the next roadmap item in design as well now. So we continue to be very excited about this from a strategic positioning standpoint. And we’re looking forward to hopefully and so it looks team driving some upside this year.

All right. Great. Thanks, guys.

And our next question is from the line of Suji De Silva with Topeka. Please go ahead.

This is a follow-up on cash question. When did you start to recognize revenue from SCS when deal close, just to understand when that started?

Yes, we still – we closed the deal on January 25. So we have some revenues recognized starting January 26 timeframe. So we have about – we had about two months of the non-favorable contract revenue that we can recognize.

Okay, and then as you look at the mix of a contract revenue that’s been in 13% to 15% range, is that something that would stay in that range or is there other project that would help that grow in the mix with the anticipation there?

Well, as we book – are you talking about with SCS or without SCS?

I guess pro forma with SCS that bump it up?

Yes, but we expected to grow. As we move into more of the IP core business and then with the 30s and also with the fives. I expect that to grow as a percentage as well as with SCS coming from the contract revenue for the professional services we provide that will also be product contract revenue. So I expect that to grow as a percent of total revenue.

Okay, that’s going to help us. I was trying – the other question somewhat similar security did 10% year-over-year growth here and obviously now you’re layering in SCS. Is there a long-term growth rate you would and also think about for that segment pro forma, I guess the new business organically or how should we think about it?

No let’s say I think when we provide guidance for growth purposes, we provided numbers for the whole company, not individually segment-by-segment. And we did that over the last time Analyst Day and we’ll provide that as we go forward on annual basis, but it won’t be segment-by-segment.

Okay, fair enough. I’ll jump back in the queue. Thanks guys.

Thanks Suji.

[Operator Instructions] And we have a questions from the line of Atif Malik with Citigroup. Please go ahead.

Hi, thanks for taking my question. Firstly, Satish, do you still expect SCS acquisition to be accretive this year?

On a pro forma basis, yes it will be accretive. They are in a standalone basis. There will be breakeven of pretax basis. So I expect them to be pretax pro forma accretive. On a GAAP basis because of the amortization, they probably would not be, but I think the guidance we had given was on a pro forma basis we expect them to be accretive.

Okay, and then I understand it’s too early to change the full-year revenue guide of $3.10 and $3.25 between that’s – but if I remember correctly last – in January you guys were thinking the revenue that when we more first-half loaded versus second-half and is that still the expectation or if you can talk about the revenue loading for the year?

No, I don’t recall saying that the revenue was loaded one way or another. But I think what we had said was with the acquisition, we expect more of it in the second-half, because the way the licensing contracts work under US GAAP is once we sign the license agreement because of the customization required. We have to provide professional services, which takes – to say on average six months, sometimes three, sometimes nine. So an average it’s about six months afterwards then the customer has to accept the license or the software we provide them, it’s only then can you recognize the revenues. So we may receive the cash up front, but we can’t recognize the revenue till we provided the service and the customer accepts. So by virtue of that there’s no way it could be front end loaded, how should be back end loaded from the acquisition.

Okay, and then Ron a question on China, China expanding a bit in memory market where we’d seen couple of announcements on the DRAM side, Hi-Fi and UMC for specialty DRAM, I’m just curious if – what’s your take is in terms of your licensing opportunity for raise thing DRAM IP to China and if you had any discussions with any of these entities?

What we certainly are very, very focused on watching this space, I think we’ve reported a while ago that we’ve been running in one of the Chinese manufacturers, a resistive RAM test chip that’s come back and performing really well. This is done with Tsinghua University and a joint collaboration. We just hired a new Vice President of Sales and the region, Gary Wang. So he is going to be doing a lot of business development for us. Gary is a long-term industry veteran in the semiconductor space with a lot of experience in memory. We have our team regularly spending time there. So I think it’s a very attractive space for us. Obviously, we don’t have anything forecasted in this, as we’re just in the business development phase, but it’s attractive. I think on multiple levels, everything from the patent licensing to technology licensing, to the buffer chip, to SDA the platform, each of these, I think is a very attractive elements in something that we think could generate a substantial opportunity for us probably starting next year.

Great. Thank you.

And I’m not showing any further questions in the queue. I would like to turn the call back to Dr. Ron Black for any final remarks.

Thank you all for your continued interest and support. We look forward to continuing the dialogue with you in the future. See you again.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day.