Rambus Inc. (RMBS) Q1 2013 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Rambus First Quarter 2013 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 call is being recorded. I would now like to turn the conference over to your host, Mr. Satish Rishi. You may begin.

Thank you operator and welcome to Rambus first quarter 2013 conference call. I am Satish Rishi, CFO and on the call with me today is Ron Black, our President and CEO. Also joining us today for Q&A is our newly appointed General Counsel, Jae Kim. The press release for the results that will be discussed here today has 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 32237211 when you hear the prompt. In addition, we are simultaneously webcasting this call and along with the audio we’ll be webcasting slides. So even if you’re joining us via conference call, you may want to access the webcast for the slide presentation. A replay of this call can be accessed on our website beginning today at 5:00 PM Pacific Time. In an effort to help provide greater clarity on the financials, we also use both GAAP and non-GAAP proforma format in the press release and also on this call. The discussion today will contain forward-looking statements regarding our financial prospects, pending and current litigation and demand for our technologies, among other things. These statements are subject to risks and uncertainties that are discussed during this call and maybe more fully described in the documents we filed with the SEC, including our 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may differ materially from our actual results and we are under no obligation to update these statements. Further, as mentioned, we will discuss non-GAAP financial results today and have posted on our website reconciliations of these non-GAAP financials to the most directly comparable GAAP measures. You can find a copy of our earnings release and the recon on our website at rambus.com on the Investor Relations page under Financial Releases. Now, I’ll turn the call over to Ron.

Thank you Satish and good afternoon everyone. Q1 was a very good quarter for Rambus, as Satish will review in more detail later we ended the first quarter with revenue of $66.9 million well within our upwardly revised guidance and proforma net income of $13.4 million which exceeded our guidance. For Q2, which is typically down primarily because of lower running royalty payments that are based on prior quarterly sales along with certain customers who pay us annually in Q1, we are expecting revenues in the range of $53 million to $58 million. This range does not include several deals that we are currently negotiating, so it is possible that we could have significant upside in this quarter as well. But we prefer to be conservative when setting guidance. In previous earnings calls, I explained that Rambus has adopted a strategy of increasing collaboration with the industry to better deploy our outstanding technologies in the marketplace and then ultimately deliver value to our shareholders. This strategy is summarized by the evolution of our tagline which used to read, a company of inventors and now reads bringing invention to market. Based on this philosophy that we decided to transfer certain display patent assets to a subsidiary of Acacia Research, allowing us to ultimately deliver value to our shareholders while focusing our resources in other areas. As part of this transaction, we received an initial upfront payment in Q1 and expect to receive subsequent payments as Acacia rolls out its licensing program. The transferred patents read on certain display technologies using backlights for smartphones, tablets, computers and high-definition TVs, all very high volume markets. So these payments maybe significant. However, we are not including them in our guidance until there is an established run rate. We do believe however that we could…

Thanks Ron. As a reminder we use non-GAAP pro forma numbers which we believe are indicative of complete performance as it includes certain cash events and exclude certain non-cash and discreet events such as impairment charges and restructuring charges which are not indicative of long term performance. Customer licensing income as a non-GAAP measure that includes cash payments that are received under a signed agreement. It is how we measure the top line of a business and it maybe different than revenue within a particular period when the amount of cash received from a customer is different than the revenue recognized. Let me start by reviewing some highlights for the first quarter before going into additional details. Customer license income for the first quarter was $72.1 million and revenue for the quarter was $66.9 million within our revised guidance of $65 million to $69 million. Pro forma expenses came in at $48 million for the quarter also within our guidance of $51 million to $46 million and we are continuing to manage expenses tightly and drive towards higher operating leverage. Pro forma net income was again up $13.4 million as compared to a guidance of $4 million to $10 million. Now I would like to provide a little more detail related to the first quarter. As stated customer licensing income for the quarter was $72.1 million. During the quarter, we signed an agreement with LSI and recognized a one time settlement payment. In addition as Ron mentioned, we sold a portion of a display patent portfolio and expect to receive future royalty payments from engagement with Acacia. We also received clearance from the courts to consummate the Elpida patent purchase. From an economy perspective the patent license agreement and the patent purchase agreement with Elpida are considered to be linked…

(Operator Instructions) Our first question comes from Matthew Galinko with Sidoti. Your line is open. Matthew Galinko - Sidoti & Company: Hey, thanks for taking my question. I was just hoping if you could share a little bit more detail on that initial order you mentioned on the LED bulb?

Sure. Unfortunately, we can't name the particular buyer. It's through the collaboration we announced early in the quarter with the Elite Group. They have a large lighting business and they are connected with pretty much all of the do it yourself type stores. So you can imagine where we would likely be targeting first. It is to set expectation just in initial order, but we really feel like we are gaining traction. The bulb is a very unique design. Because of the way that we architect it, it runs much cooler than others. So we see it as being very interested not in just the retail space, where these orders came from but also the commercial space. Matthew Galinko - Sidoti & Company: Okay, thanks. And then, do you expect to go to market with it through, are you exclusive to the Elite Group, or do you have other plans that help to bring that to market?

We have a unique relationship with the Elite Group for some selected segments and we have a small internal sales force and we are building a rep network that is focused more on the commercial side here in Europe and Asia. Matthew Galinko - Sidoti & Company: Great, thanks.

Thank you. Our next question comes with Hamed Khorsand of BWS Financial. Your line is open.

Hi, I just want to ask you, where are you seeing any weakness from your revenue streams and royalties? Is there any particular product category?

We see some seasonality quarter-over-quarter typically because we get paid in arrears from our customers sometimes some one quarter arrears, some two quarters in arrears. So in Q1 and also in Q2 as one of the shipments from the holiday season tapers off, royalties are slightly weaker. On the DRAM side with the PC shipments with the recent reports that came out, the Q1 PC shipments are fairly low. As we look at the DRAM market, many of the analysts are still projecting about a $34 billion DRAM market which is up from $28 billion last year. Many of them haven't quite revised their forecast yet, so I think there might be some revisions, but what’s happening in the market is that even though the PC in shipments maybe going down, many of the united patches are moving to low power memory and there is actually now a shortage of commodity products. It’s actually more on, but the prices for DDR3s that going into the PCs are probably stable to even going up at this point in time. Secondly another reason why we think the analysts are not reducing the number for the full year for DRAM is because Intel expects Ultrabooks to kick in Q3, Q4. And so from a total revenue perspective in the DRAM market we will increase year-over-year, those go to $34 billion or not time will tell. And in our case we saw a weak year in DRAM, you know $28 billion last year and we in our second half, when we look at second half from DRAM revenue we expect it to be higher than what we have in the first half of the year.

Okay. And then just a quick question on the image sensor, the Binary Pixel technology, what's the next milestone that we could expect from you guys on that front?

Well, we continue to tune the architecture and we are fully engaged with a set of partners to take the evolution of what we've done and the test chip that we’ve produced and actually implement this in a high volume product in silicon. So it will take a little bit of time that's why I was managing expectations so that you will see it coming in 2014, but the demand and interest in the marketplace has been incredible. At Mobile World Congress I attended some of the meetings and we've subsequently had many more, the fidelity, the image improvement and quality under low light conditions and the dynamic range, so you don't have the classical problem I have of fading out my family when I take the pictures of the sunset at the beach is incredible. So we really think we've gotten something and I'm cautiously optimistic that we are going to have somebody come in as a partner and want to take this to market. We are also working very closely with the end consumers not just the technology providers because I think it’s completing that loop.

Okay, great. Thank you.

(Operator Instructions) Our next question comes from Mike Crawford of B. Riley & Co. Your line is open. Mike Crawford - B. Riley & Co: Thank you. Could you just briefly walk through some of the litigation front including any thoughts on when we might see something from Judge Whyte and DCA?

Yeah, sure. Hi, Mike, it's Jae Kim. So the case in front of Judge Whyte has been fully briefed and we had oral argument and so we are still waiting for a decision. Obviously we won't be able to speculate as to when we might receive that or what the outcome would be. So we are still sort of just waiting for an opinion on that. With respect to Micron and the Delaware case, we did file our Notice of Appeal to the Fed Circuit and our opening appeal brief will be due in May. With respect to the price fixing case in San Francisco, the initial briefing has been done or the next milestone in terms of briefing will be in May for our reply. And then I would say some time in mid-to-late 2014 before there's any decision on that. The ST matter and the sole defendants remaining in the SSC litigation, the ITC had ruled and we are appealing that decision. And then with respect to the parallel case in the northern district there have been trial dates set with respect to unclean hands for August and then the patent trial to begin in April. Mike Crawford - B. Riley & Co: Thank you, Jae. And then just turning back to the business, the cryptography business, it’s been I think a year and a half or couple of years since you bought this business for I think $342 million. What are your thoughts on the value of that business? Is that -- looking back, does that seem like a steal or maybe a stretch or how would you comment on what you think you have with that business today versus what you paid for it?

This is Ron. I mean, obviously, I will answer this not having been part of the team looking back at it. Clearly, $342 million is a lot of money, $1 million is a lot of money, a $100,000 is a lot of money. As you say, we've been pretty parsimony as we've gone through and continue to look at cost reductions. One of the things that Satish and I have done since I came on board is we work very closely with the businesses unit heads and we drive valuation models for them and we believe that all of the businesses and investments we make are going to pay out handsomely for shareholders. You haven't seen all of the flow through obviously. And we believe that the cryptography business for the plants that we have in place and the customers, of course you don’t have the benefit of seeing the customer engagements that we have going forward that it will be significantly higher than that value. Mike Crawford - B. Riley & Co: Okay, thank you very much.

(Operator Instructions) I am showing no further questions in the queue at this time. I will hand the call back to Ron Black for closing remarks.

Thank you for all for your continued interest and support. As a reminder, we will be holding our annual meeting of shareholders next week, but this time it's a virtual meeting. We look forward to addressing some of the questions that have already commenced through the shareholder forum and expect to continue sharing updates in the coming weeks. Have a nice day.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.