Rambus Inc. (RMBS) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Rambus Inc. Q2 2013 Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Satish Rishi. Sir, you may begin.

Thank you, operator, and welcome to Rambus' second quarter 2013 conference call. I'm Satish Rishi, CFO. On the call with me today is Dr. Ron Black, our President and CEO. Also joining us today for Q&A is Jae Kim, our General Counsel. The press release with 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 18188767 when you hear the prompt. In addition, we are simultaneously webcasting this call, and along with the audio, will be webcasting slides. So even if you're joining us via conference call, you may want to access the website for the slide presentation. A replay of this call can be accessed on our website beginning today at 5:00 p.m. Pacific Time. In an effort to provide clarity in the financials, we are using both GAAP and non-GAAP pro forma format in the press release and on this call. I need to advise you that the discussion today will contain forward-looking statements regarding our financial prospects pending current litigation and demand for technologies 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 filed with the SEC including 8-K's, 10-Q's and 10-K's. 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 earnings release under Reconciliation on our website at rambus.com on the Investor Relations page and the financial releases. Now I'll turn the call over to Ron.

Thank you, Satish, and good afternoon everyone. Let me start by saying that we were pleased with our second quarter of 2013 results. As Satish will review in more detail later, we ended with revenue of $57.9 million which is at the top end of our upwardly revised guidance, and customer licensing income of $61.3 million which was above what we guided. For Q3 we are expecting considerable growth with customer licensing income to be in the range of $69 million to $74 million. Our strategy of bringing invention to market and broadly collaborating with the industry was demonstrated again last quarter by our signing of the patent license agreements with SK Hynix and STMicroelectronics. The agreement with Hynix ends a nearly 13-year legal dispute and provides them a license to our patented innovations for all of their semiconductor products in exchange for $240 million over the next five years as well as forgiveness of some fines and fees that we previously owed Hynix. As we mentioned during the call when we announced the deal, this agreement is the second largest in Rambus' history and we think it's very good for shareholders. With the SK Hynix agreement, we have now licensed 80% of the DRAM market, leaving Micron as the only substantial DRAM producer not licensed to Rambus technology. We believe that the settlement with Hynix has reaffirmed the market rate that we have established with Samsung and Elpida and we are hopeful in reaching a settlement with Micron now that they can be confident about the fair market value of our technology. Turning to the STMicroelectronics deal, this accomplished three goals for Rambus. The first was to increase our revenues through the patent license, the second to resolve past legal matters, and the third to provide a framework for…

Thanks, Ron. As a reminder, we use non-GAAP pro forma numbers, which we believe are indicative of our complete performance as it includes certain cash events and excludes certain non-cash and discrete events such as impairment charges and restructuring charges, which we believe are not indicative of long-term performance. Customer license income is a non-GAAP measure that includes cash proceeds that we receive under a signed patent license agreement as well as cash proceeds from the sale of intellectual property. It is how we measure the top line of our business, and it may be 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 second quarter before going into additional detail. Customer license income for the quarter was $61.3 million and revenue for the quarter was $57.9 million, at the top end of our revised guidance of $56 million to $58 million. As Ron mentioned, one of the highlights in Q2 was the agreement we signed with SK Hynix, but due to the fact that all releases were effective in July, and we received the first payment in July, there was no CLI or revenue recognized from the Hynix agreement in Q2. Pro forma expenses came in at $48 million for the quarter, at the lower end of our guidance of $53 million to $48 million. Pro forma net income was a gain of $6.6 million as compared to our guidance of breakeven to $6 million. Let me provide a little more detail on the quarter. As I mentioned, customer licensing for the quarter was $61.3 million. During the quarter we signed agreements with STMicroelectronics, resolving a litigation and entering into comprehensive multi-division license, settled with Hynix, and…

Thank you. [Operator Instructions]. Our first question comes from Paul Coster of JPMorgan. Your line is now open. Mark Strouse – JPMorgan: Yeah, hi. It's Mark Strouse on for Paul. Thanks for taking our questions. I guess can you just give an update on the visibility from the Acacia partnership? Do you have -- I think last time you talked about it was it still early days, so you weren't baking anything in the guidance. Is it at that point now or do you have some of that revenue baked into 3Q CLI?

We do not, Mark. They are very proactively engaged in negotiating deals, but there is nothing that we have baked into Q3, nor do I believe that there would be anything even if they closed deals in Q3 as the terms of our contract, I think, have it paid one quarter in arrears. Mark Strouse – JPMorgan: Got it. Okay. That makes sense. And then just on the lighting side, the initial orders that you have with the Elite Group channel that will be shipping next month, I believe I heard, is that recognized on a sell-in basis or a sell-through basis? And can you just talk about, you know, other opportunities that you guys are exploring as far as channel expansion? Thanks.

Sure, Mark. The revenue recognized when we sell to the channel partners, so typically the deal is done (inaudible), so we end up recognizing revenue when we sell to them, not when they sell to the channel, so, from that perspective, we are recognizing, you know, we don't have any risk once they take title. We are looking at other channels and, you know, we're looking at the professional channels as well as the retail channel. There's a lot of interest and demand as a market for LEDs as you can tell, and we believe we have a unique product, and as Ron mentioned, with the color-change bulb that we introduced this quarter, which should be shipping sometime later in the year, you know, the technical progress we bring to being able to delight the customer is probably unsurpassed. Mark Strouse – JPMorgan: Okay, got it. I will hop back in the queue. Thank you very much.

Thank you. Our next question comes from Suji De Silva of Topeka. Your line is now open. Suji De Silva – Topeka Capital: Hi, Ron; hi, Satish. Nice job on the quarter. The STMicro, as you said, all that -- how much was the contribution in 2Q and does that recur or is that sort of a one-time, much like the 1Q for LSI?

This is a recurring payment. This is a longer-term contract, and unlike LSI which is one-time, this will have recurring payments both for our semi -- well, both for our memory division and also for CLI. Suji De Silva – Topeka Capital: Okay. And then with STMicro you have this agreement to work up with their manufacturing. It sounds like that's an important element of being able to collaborate better, Ron, if you could clarify with the memory guide. Is that something you have similar arrangements with, to be able to work on roadmap technologies, or is this something specific by STMicro that made the manufacturing [which] (ph) will make sense there?

Yeah. STMicro has some very interesting technology that works particularly well at high speeds. And of course when we were in litigation, it was very, very difficult for us to collaborate and jointly work with customers. So, by having this particular issue removed, we're very proactively working together, especially with mutual customers. So, it's one of the reasons that from the very beginning on the strategy, we really wanted to settle these litigations as long as people were willing to pay fair market value for the technologies that we did develop and provide. Suji De Silva – Topeka Capital: Do you require similar arrangements with the memory guys to be able to work on roadmaps and be more collaborative over time?

Yeah, it's always much easier to collaborate when you don't have those issues, which is nice as I said in the prepared script. Really it's just Micron at this moment as the only substantial memory manufacturer who has not taken a license. Suji De Silva – Topeka Capital: Right.

So we're proactively working with Elpida and Samsung and now Hynix as well. Suji De Silva – Topeka Capital: Okay. So, that was just unclear at this point, I got that then. Okay, the last question, I think a follow-up to the prior question, I think the question was you have lighting, you have a footprint in retail that I think you said relatively limited initially. Is that something we should expect to expand as a footprint in retail relatively quickly or would it be a slow expansion of the footprint in retail? Just I guess that was kind of the answer to the question I think to the prior caller.

Yeah. You know, I wish I could tell you precisely. We really have to see how the sell-through goes both for us and the DIY store. We're cautiously optimistic, so -- but we have to wait and see how it goes. Suji De Silva – Topeka Capital: It'll be success-based I guess.

Yes. Suji De Silva – Topeka Capital: Okay, great. Thanks a lot.

Thank you. Our next question comes from Vahid Khorsand of BWS Financial. Your line is now open. Vahid Khorsand – BWS Financial: Hi guys. A couple of questions. First question, will a slowdown being widely reported in the smartphones sales in the US have an impact on your photography business or internal growth timeline?

No. It really doesn’t have a direct influence. There is one handset vendor that is licensed, but we don't see it affecting our business at all at this point. Vahid Khorsand – BWS Financial: Okay. And during your last call, it sounded as though you were focused on LED and cryptography, but isn't the ramp for mobile a highly growing field and wouldn't that benefit Rambus?

Yeah. So, the way our contracts work, and Satish can follow up with some more details on a case-by-case basis, we tend to get paid either fixed payments or variable payments based on revenue. And we like the mobile parts very much, both because it was growing in volume but also because the ASPs are higher. So, it's really a very dynamic forecasting issue. In most of the cases, we're pretty accurate because we get paid two quarters in arrears. But we definitely like memory and the high-performance server as well. Vahid Khorsand – BWS Financial: Okay. Thank you.

Thank you. [Operator Instructions]. Our next question comes from Matthew Galinko of Sidoti. Your line is now open. Matthew Galinko – Sidoti & Co.: Hi, thanks. Question is, you know, if the initial run of the bulb is successful, how quickly can you ramp production or do you have some flexibility there?

The cycle time through the manufacturing partner is about eight weeks. We compress that by doing some strategic procurement of the long lead parts. So, we can respond fairly quickly, but we are also very cautious that we do not build inventory on this. Coming -- both Satish and I came from manufacturing companies, so we have a lot of discipline to avoid that type of use of cash.

Yeah, hi, Matt. This model currently is a build-to-order model, so as Ron mentioned, we don't want to have an inventory on our books, number one. Number two, in terms of capacity, the contract manufacturer we're using, they have ample capacity to meet our near-term needs, so ramping up should not be an issue if there's demand. Matthew Galinko – Sidoti & Co.: Okay. Thanks.

Welcome.

Thank you. Our next question is a follow from Suji De Silva of Topeka. Your line is now open. Suji De Silva – Topeka Capital: Hi, Ron, Satish. One follow-up here. Can you talk about -- you gave us a metric on how much the new business would be as a percent of revenue that you track forward. Can you rank-order within that group which ones you're the most optimistic on near term?

How near term are you looking, Suji? Suji De Silva – Topeka Capital: Well, to make sure, the next 12, maybe 12 to 18 months.

If I -- you like asking us to choose between our children, they're all equally good. Suji De Silva – Topeka Capital: Okay. So all the segments have good near-term growth potentially --

Right. Suji De Silva – Topeka Capital: -- some being longer term, that was the essence of the question.

Okay. Suji De Silva – Topeka Capital: All right, great. All right. Thanks guys.

Thanks, Suji.

Thank you. And at this time, I'm not showing any further questions. I'd like to turn the call back to Ron Black for any further remarks.

Thank you all for your continued interest and support. Q2 was certainly busy with lots of big developments. We look forward to continuing this momentum and to speaking with you again soon. Have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.