Rambus Inc. (RMBS) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Rambus Inc. Third Quarter 2013 Conference Call. (Operator Instructions) I would now like to introduce your host for today's conference, Satish Rishi, Chief Financial Officer. You may begin.

Thank you, operator, and welcome to Rambus' third quarter 2013 conference call. I'm Satish Rishi, CFO. On the call today with me are Dr. Ron Black, our President and CEO. Also joining us today for Q&A is General Counsel, Jae Kim. 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 75199907 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 PM Pacific Time. In an effort to provide clarity to financials, we are using both GAAP and non-GAAP pro forma format in the press release and also 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 file 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 our earnings release and the reconciliation 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. Let me start by saying that Q3 was another very good quarter for Rambus. As Satish will review in more detail later, we ended Q3 with customer licensing income of $74.3 million, slightly ahead of our guidance. Pro forma operating income was $43 million, also ahead of our guidance. And while we don't typically discuss GAAP financials, I am pleased to report that we were GAAP pre-tax profitable for the first time in seven quarters. As a part of the normal course of business, we continually look for ways to increase efficiencies and control expenses, including taking action when initiatives do not meet our targets for shareholder value creation. As part of our normal planning process, in Q3 we completed a set of internal assessments and concluded that our initiative in immersive multimedia software would not generate sufficient shareholder value and consequently concluded to curtail spending, redirecting some of the team in the core technology to other strategic programs. As a result, we have taken a charge of $8 million in Q3 associated with goodwill impairment, which Satish will describe in more detail later. While we are disappointed in this action as the product is way cool and the technology outstanding, it was simply not sufficiently core to our company to justify further investment compared to our other strategic programs. We believe such reallocation of assets is important to ensure we deliver optimum value creation for shareholders. We also remain open to broadly license the technology and continue to have discussions with selected interested third parties. For the quarter, we came in significantly under-anticipated operating expenses due to a set of circumstances that Satish will explain. Notably, however, was the lack of major litigation spend. While we endeavor to maintain a low litigation…

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 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 licensing 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 or products. It is how we measure topline 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. As Ron mentioned, during the quarter, we booked restructuring as well as goodwill impairment charges related primarily to our MTD division. The pro forma numbers that I will discuss will exclude these one-time charges. Let me start by reviewing some highlights for the third quarter before going into additional detail. Customer licensing income for the third quarter was $74.3 million, slightly higher than the top-end of our guidance of $69 million to $74 million. Revenue for the quarter was $73.3 million. Due to the reduction in both litigation expenses and payroll, pro forma expenses came in at $43 million, well below the guidance of $52 million to $48 million. Pro forma net income was a gain of $17.9 million as compared to our guidance of $9 million to $14 million. Our ending cash balance was $366 million and during the quarter we generated $26 million in cash from operations. Let me provide some additional detail related to the quarter. Customer licensing income for the quarter was $74.3 million with the sequential growth driven primarily by the royalties from Hynix as well as higher royalties…

(Operator Instructions) Our first question comes from Suji De Silva of Topeka Capital.

Can we talk about the restructuring of the Imerz business? And Ron, was this review would you consider done at this juncture or should we expect the potential for additional restructuring activities over the next several quarters as an ongoing review effort?

With respect to Imerz, it's done. We did the review, we are in discussions with a few third parties who are interested in the assets. So there could be some transactions in the future. But as I mentioned in the prepared remarks, we really needed to refocus on the other areas where we're seeing a lot more traction and is more fundamentally core. We are completing our annual operating plan and while there is nothing to report at this point in time, I haven't seen all of the financials and projections of the team and neither has Satish, so there is always opportunities for adjustments, if they are not hitting our internal milestones.

And then, if I did my math correctly on the non-GAAP, you did in operating margins 40-plus. Satish do you have or Ron do you have a target operating model you'd like to run the business at or is that something that would fluctuate with various factors?

So Suji, we haven't been giving percentages. In terms of margins, we give the actual ranges. Not quite ready to provide an operating model, but definitely by, after we finish this year and when we do our AOP, our internal plan for next year, ask me the question maybe in the Q1 call, I'll provide you better answer at that time.

And last question. Can you just remind us with Micron buying Elpida, what's the status of the Elpida relationship is when that expires and how that potentially might be impacted as Micron may settle with you in terms of holding the two together, any thoughts there will be helpful?

So we continue an open dialogue with Mark and team, so there is really nothing that I can comment on at this point in time.

Can you remind us what the Elpida agreement in place is, Ron, just so we understand that?

I'm sorry. Could you repeat that question?

The Elpida agreement that's in place already with Rambus, can you just remind us the terms of that?

We press released it, but actual terms and conditions of that agreement are confidential. So unless there is something specific that we can share with you, what's out there publicly is much as we can share at this point.

Our next question comes from Mike Crawford of B. Riley & Company. Mike Crawford - B. Riley & Company: You said that 8% of CRI were solutions in contract revenue. Is that something we should expect to go up next year, now that you're working in a more collaborative fashion with some of your partners?

Mike, yes, so one of the reasons why it went up is because the $12 million from Hynix obviously take the percentage down from what we had in the previous couple of quarters. I think if you look at the first half of the year, we are probably closer to 85% to 87% was coming in from patent licensing. So with Hynix the denominator changed. But the expectation for the company is that over time, we want to increase that percentage as we get more NRE and with more contract revenue and also get more technology licensing revenue from our customers as we collaborate with them. Mike Crawford - B. Riley & Company: And what about the fate of some of these new productizations of your IP like R - R+ and others. Is that something that is expected to have a significant contribution to revenue next year?

Yes, so Mike, we introduced R+ in Q1 of this year. So it takes a little while to get to the customers, show them what it does, get them engaged. And even from the time we get them engaged, we might see some revenue at the time we engage with them, but the tail of the revenue comes when we start shipping the product, which is still about 12 months to 18 months out from the time we sign. So we have the dialogue that is ongoing with the DRAM companies, but nothing to announce right now. But that is one of the areas we'd like to see growth coming from, as we engage with the customers on these collaborative products you mentioned. Mike Crawford - B. Riley & Company: And then your LED products have received great reviews and you have some nice initial distribution online and in some Canadian Costcos. But is this an area where this business would be better off in the hands of someone with more retail distribution than what historically has been a IP development and licensing company?

It certainly could be. I mean these are the type of things that we think about and look out all the time, to try to optimize a shareholder value. There is really two pieces to that business just to complete the thought. With respect to the light guides and the licensing that we do for the general lighting market, our focus is really on ramping the existing customers. And we feel that that is intrinsically a much higher margin business, very controlled, very thoughtful and we're trying to expand it from the U.S. and our relationship with GE and Cooper to Europe and Asia. And we're intimately in negotiations with a variety of different companies. On the bulb side, we're very, very cautious on this because it is a very aggressive pricing market. There is, rather low barriers to entry and there is a lot of big players. On the other hand, our technology is getting rave reviews. And our focus is not to try to ramp up a very large businesses. I've mentioned several times in different forums, we are not going to have 20,000 people in Wuxi making light bulbs. So the model that we've engaged with, and we're in again intimate discussions, is more on a broader technology licensing agreement. Our color change that we've announced and we've shown where we can use some phosphor to actually get different color temperature through a simple mechanical means of adjusting a dial, and therefore you don't need to have all of the different LEDs. And it's better for the supply chain, because you don't have to have different SKUs. That appears to be very attractive. And I could imagine the possibility that we'd be licensing it to other third parties and we wouldn't necessarily be manufacturing the light bulbs ourselves, but using their scale and efficiency to do so.

Our next question comes from Hamed Khorsand of BWS Financial.

Ron, where I was heading with my question was I was going to ask you about the competitive advantage on the bulb side, given pricing is so aggressive, especially with the Asian manufacturers entering the realm. Could you touch on that a little bit, just from pricing standpoint and how you guys would be able to maximize profit from that angle?

Sure. So there is a few different things that we have with the proprietary technology, both in terms of connecting the LEDs themselves to the edges of the optical waveguide. It's very efficient, so we put more light in and therefore can extract more light out. That can give you theoretically less LEDs that you need than other suppliers. The color change gives you the ability to, as I just described, have one SKU that can cover an entire gamut of color temperature of the LEDs. And because of the open nature of the design, we have both conductive and convection cooling, which allows you to run at much lower temperatures. So our bulb when we've measured it compared with competitors is 10 to 15 degree Celsius, as I recall cooler running, and that cooler running often translates into a lifetime. So we really have all of those elements of it. The design is inherently very low cost. So it is an extremely low cost design, which is allowing us to compete on that level. But just being direct, we have a low cost design, but we cannot possibly have a low cost implementation, because we don't have the scale efficiencies of the people that are shipping a higher volume of it. So the obvious way to engage the industry is to just like we do in all of our other businesses is to focus on our innovation, not our supply chain and manufacturing capabilities. And that's exactly what we're doing and why we are engaged in the dialogue with licensing the technology to the larger players.

My other question was that are you guys able to breakout or provide some sort of granularity as far as your DRAM revenue goes, as far as penetration into the mobile market?

Hamed, our DRAM royalties are based on the total revenue of our customers, for the ones that are scalable or variable. So we get royalty reports. It doesn't really breakout what particular product or what particular sector they are in as long as overall revenue is flat to up. We get paid royalties out of flat to higher. So really from our revenue perspective it doesn't matter what the composition is, obviously a longer term. It doesn't matter to us, because we have good technologies in the mobile space and also in the server areas. So we'd like to see more of that penetration or concentration occurring in those areas. But overall, it doesn't really change the dynamic for us.

But in terms of licensing of the key suppliers Elpida, Hynix and Samsung, I think had the strongest position in mobile. And those are the three license group. So from a mobile supply chain the vast majority of it is licensed today.

Our next question comes from Matthew Galinko of Sidoti & Company.

I was just curious, if you had any I guess preliminary view into how Acacia would do with the patency transferred to them? Sidoti & Company: I was just curious, if you had any I guess preliminary view into how Acacia would do with the patency transferred to them?

Well, we are not privy to what revenue they are getting. The way the agreement works with them is that whatever they get in the particular quarter, we will get the sharing that we've agreed with them into the subsequent quarter. So if its material enough we will announce it, otherwise we would just wrap it into the guidance we gave, but we are not cracking it on a pattern-by-pattern basis or a family-by-family basis.

And it is more of a sort of passive back-end relationship. Acacia's activities with respect to their licensing and/or litigation, if they engage in it, it's really something that they control solely and exclusively.

Thank you. And at this time, I'm not showing any further questions. I'd like to turn the call back over to management for any closing comment.

Thank you all for your continued interest and support. Have a very good day. We look forward to talking to you again the next quarter.

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