Satish Rishi - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance Ronald D. Black - Chief Executive Officer, President and Director.

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division Gary Wade Mobley - The Benchmark Company, LLC, Research Division Atif Malik - Citigroup Inc, Research Division.

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Rambus Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Satish Rishi..

Thank you, Jamie, and welcome to the Rambus Third Quarter 2014 Results Conference Call. I'm Satish Rishi, CFO, and on the call with me today is Dr. Ronald Black, our President and CEO, who is joining us from another location. 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 12537633 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'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 the website beginning today at 5:00 p.m. Pacific Time.

In an effort to help provide greater clarity in our financials, we're using both GAAP and non-GAAP pro forma format in our press release and on this call. I need to advise you that the discussion today will contain forward-looking statements regarding our financial prospects and demand for technologies, among other things.

These statements are subject to risks and uncertainties that are discussed during the call and may be 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 also 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 to provide an overview of the quarter.

Ron?.

Thank you, Satish, and good afternoon, everyone. The third quarter was relatively quiet, following a first half where we exceeded our plans on the financial front and also announced significant new products, such as the CryptoManager platform with Qualcomm as the lead customer.

For the third quarter, we ended with revenue coming in at $69.7 million, which was near the midpoint of our guidance but was down slightly year-over-year.

As reported previously, technology licensing revenue from Sony PlayStation and other areas continue to run below our original expectation, although we've made up part of that lost revenue for signing new license contracts. We are, of course, negotiating new deals and will continue to do so and expect them to close in the coming quarters.

We are pleased that we continue to maintain the goal we set early in the year, which was to remain GAAP profitable every quarter, and we have been proactive in managing our expenses to that end.

Turning to the business announcements last quarter, we introduced a family of DPA resistant cryptographic cores, with the first offering including 128-bit and 256-bit AES cores.

These ready-to-use cores offer chip makers an easy-to-integrate security solution with built-in side-channel resistance for cryptographic functions that can be used across a wide range of connected devices.

Our current customers have been asking for these products to help them introduce DPA countermeasures into their products more easily, and we believe these cores will also attract new customers.

On the memory side, we announced that we have been working with Northwest Logic to certify the interoperability of our DDR4/3 PHY, with their memory controller core, which we believe will give our collective customers assurance that they will add our solution to their design and when they do, that it'll be fully compatible.

This continues to be important as the semiconductor IP market becomes more and more complex with SoC vendors needing to manage upwards of 200 IP blocks in a single SoC design. We did disclose at our Analyst Day in June that we signed an MOU with a significant customer on a new memory architecture program.

This program continues in full force, and we have received positive feedback on the solution from a second major customer. So we're even more excited about the project today and are on track for 2016 revenue.

In closing, our team was extremely busy as we continue to create investment programs that we believe will break through solutions as well as explore and negotiate potential new deals. We're optimistic we'll meet our targets, and we look forward to sharing with you more in the coming weeks.

With that, I'll turn the call over to Satish to give you a readout on the quarterly financial results.

Satish?.

Thanks, Ron. I'll begin with a review of some of the financial highlights for the second quarter before going into additional detail. Revenue for the second (sic) [third] quarter was $69.7 million, close to the middle of our guidance of $68 million to $73 million.

Year-over-year, revenue was down 5% and sequentially, revenue has decreased by 9% due to the additional quarterly payment we received in the previous quarter. Pro forma operating expenses plus COGS for the quarter came in at $45.1 million, at the middle of our guidance of $47 million to $44 million.

Pro forma net income for the quarter was $14.8 million, within our guidance of $12 million to $18 million. For the quarter, revenue for MID, CRI and LDT business units was $52.5 million, $11.2 million and $6 million, respectively. These numbers represent a sequential decrease of 11% and 12% for MID and CRI and an increase of 17% growth for LDT.

For the quarter, revenue from DRAM customers was $37.2 million, relatively flat to the last quarter and $41.7 million in the quarter a year ago.

I do want to reiterate that for the next few years, we do not expect to see any fluctuations in our DRAM patent licensing revenues irrespective of how strong or weak the DRAM market is, since the contracts with Samsung and Hynix have fixed royalty payments to us and Micron has a capped payment and is effectively a fixed payment, too.

Total patent licensing revenue for the quarter was $61.8 million or 89% of the total revenue. Of this patent licensing revenue, revenue from DRAM customers was $37.2 million and from the SoC customers was $24.6 million.

Total cost and operating expenses, including COGS but excluding stock based compensation and amortization of intangible assets, were $45.1 million for the second quarter, up 3% from the quarter ago and up 5% from a year ago. The increase was driven by increased headcount mainly in CRI, as well as in our Emerging Solutions Division.

We continue to manage our resource allocation as we continue to streamline our expenses and are investing in areas which we believe will have the greatest impact longer term. For the quarter, engineering and R&D expenses were up 7% and 15% quarter-over-quarter and year-over-year, and SG&A expenses were down 5% and 8%, respectively.

Pro forma EBITDA margin was 40% for the quarter as compared to 47% last quarter and also for the quarter a year ago. Pro forma interest and other expenses for the third quarter was $1.5 million as compared to $3.2 million a quarter ago and $3.4 million a year ago.

Using a flat rate of 36% for pro forma provision for income taxes, pro forma net income for the quarter was $14.8 million, a decrease of 22% quarter-over-quarter and a decrease of 15% year-over-year. For the quarter, cash increased by $25 million and we increased the quarter with cash and cash equivalents of $271 million.

We continue to generate cash and cash from operations was $24 million. Net cash, defined as cash, cash equivalents and marketable securities, less outstanding debt, was $133 million as compared to $108 million last quarter and $56 million a year ago.

In summary, the quarter came in-line with expectations, with revenue around $70 million, pro forma net income of around $15 million and positive cash from operations of $24 million. Now I will provide guidance for the fourth quarter of 2014, as well as for the full year.

This guidance reflects a reasonable estimate and actual results could differ materially from what I'm about to reveal. For the fourth quarter, we expect revenue to be between $70 million and $75 million.

We expect total pro forma operating expenses, including COGS, and excluding stock-based comp and amortization of tangible assets, to be between $46 million and $49 million. Pro forma net income is expected to be between $12 million and $17 million. For the full year, we expect revenue to be between $295 million and $300 million.

We're also managing our expenses in-line with our top line, and now expect pro forma operating expenses and cost to be between $179 million and $182 million, lower than what we had guided you in the last quarter and also lower than what we had guided to earlier in the year.

For the full year, pro forma operating income is expected to be between $113 million and $121 million, fairly close to what we had guided to you at the beginning of the year. With that, I'd like to open the line for Q&A.

Operator?.

[Operator Instructions] The first question comes from Suji De Silva from Topeka..

In terms of the CRI headcount and revenues, what kind of year-over-year growth are you expecting for security? And do you need to continue to add more heads to support that?.

Yes, Suji, it's Satish. Yes, we have been adding headcount. That is an area that has been the largest investment. And if you look at what -- how they have grown year-over-year, just look at the revenue, CRI has already between Q3 of last year and Q3 of this year, they've grown about 120% in top line.

So we are adding to their expenses and especially with the traction we're seeing with CryptoManager and the work with DuPont, Qualcomm and other future customers, we will be adding a few more heads. But I think we definitely are slowing down the ramp in the headcount. And now I think the -- we're getting to a fairly full staff level at CRI.

But I think Q4, we may be adding a few more heads, and then I think we should be stable for the next 3 to 6 months..

Okay, great. And then I know you clarified the memory part of the patent license will be relatively stable.

Can you help us to understand how much exposure you have remaining to things like the Sony PS3 and other variable components?.

Yes, the Sony PS3 -- as we mentioned, we are not in the PS4, and Sony decided to go to with the standard memory solution. And this has been something which has been declining, and we have been trying to make up that revenue that we had in the guidance at the beginning of the year.

But just anecdotally, in the best year that we had for PS3, in 2010, 2011 time frame, we were close to $12 million, $13 million a year coming from the PS3 ecosystem, which we don't have currently. We are probably in the -- maybe I'd say in the couple of million dollars for this -- in this year.

So that is something, which we will -- we're trying to make up in other areas, especially with solutions licensing side that we have been getting traction in with new customers. So I -- with PS3, that'll taper off, I think in 2015, we probably won't see a whole of revenue from PS3..

Okay, great.

And then just lastly, just in terms of the seasonality, would you expect the same sort of first half '15 seasonality versus second half kind of that you have in a normal year where things pick up because of payments being front-end loaded for the year?.

Sorry, Sujee, I missed the middle part.

Can you repeat that again, please?.

I apologize.

So in terms of the seasonality, do you expect the first half of '15 to have the typical sort of front-end loaded payments for the year that you have in a typical year, where the revenue would tick back up because of those payments?.

Yes, we do have a couple of customers that make us annual payments in the first half, so they might be slightly -- again, depending on what the mix ends up being, we may see some -- maybe a slight uptick, but why don't we hold that thought until we give guidance for the next quarter and the next -- in the first quarter of next year and we'll give you guidance for the full year..

The next question comes from Gary Mobley from Benchmark..

Ron, I think I heard you mention, in a few venues, that 2015 can be characterized as a transition year. And I'm assuming that you're referring to a few million dollars and missing PS3 royalties and the sort of calm before the revenue ramp relating to Qualcomm and some of these server relationships.

And so I'm wondering if you can share with us your thoughts regarding 2015, and what you mean by 2015 as being a transition year? And do you think you can grow the top line in 2015?.

That's a good question, and definitely, Gary, our objective is to grow, but I think as Satish said, we're really going to wait to give guidance, for specifically where that's at. We're pulling together the plan right now. The transition that you're describing is the sequencing as you go through the turnaround.

As you recall, we started about 2 years ago on a different path that we settled a lot of the litigations that changed the whole dynamic, where we are now partners with the industry. That led to a set of new products, some of them, which are a little bit ahead like CryptoManager that was really started in mass 2 years ago.

Some of them, like the new memory architecture, which took us a little bit longer to get going. And when you just look at the sequencing of those things, they tend to produce revenue as we referred to in the prepared remarks for 2016. So if all of those things hit, which is certainty our objective, 2016 should be a very good year.

2015, by definition, has to be something in between..

Okay, fair enough. And if I look at the different components of your revenue, it would appear to me that in 2015 the growth drivers might be CRI in the lighting division as well.

Am I fair to assume that maybe both those components can continue on those growth trajectory that's existed throughout this year?.

Well, I think I'll turn it over to Satish to comment about CRI. I can't recall if we've given some guidance on that. With respect to the lighting division, if you recall, we're kind of focused. We divested of the lightbulb. We're really focused on the general lighting part of it.

We're getting traction with some new customers, but that typically takes a longer time. The team has done a fantastic job from nominal lease [ph] , 0 revenue per quarter last year to the $5 million -- $6 million range. I think we're going to be tempering that and looking more to drive more -- on the royalty base.

So it'll depend on the success of our customers. Some of the products that we ship today from our machines and the work that we do, the optical waveguides, the light guides, we're not going to build a substantial PP&E. So there's a limitation to where we'll be able to do that.

However, our customer is doing particularly well, so we're cautiously optimistic that royalties are going to start to increase significantly next year..

Okay. As it relates to the CryptoManager, Qualcomm license arrangement and the memory interface development efforts for potentially some server-related customers.

Will there be any sort of milestone payments to be made to Rambus in the 2015 time frame or is all that just back-end loaded in the relationship and tied to royalties?.

So maybe, Satish, you could describe the revenue recognition..

Yes. So for CM we are getting milestone payments. So we have combination of patent licensing, as well as what we call, percent of completion based on milestones. As far as the -- the CM arrangements we will have in the future will have similar characteristics to that.

And on the other item, although I'll probably defer and we'll talk about it, when we can talk a little more about, with the customers, what the technology is and so on.

But typically, our goal is to have a combination of both for the solution licensing where there is an upfront payment or an NRE that covers the cost of the engineering and sometimes a small margin, and sometimes a breakeven, and then we get paid on royalties when a customer is successful..

Okay. Last question for me.

I know you're not willing to share with us but 2015 revenue growth might look like, but do you anticipate growing OpEx in 2015? And would that be respective of sort of the revenue trends?.

Well, say if you look at our trends for this year, our Q4 numbers are slightly higher than what our Q1 numbers were.

So the growth -- the OpEx we have from headcount will be there, so I think year-over-year you can say there will be a small increase in our OpEx because it'll be -- if you have employees in Q4, they will obviously stay all the way through all of 2015, so we'll have a slightly higher run rate than we had when we started the year.

But as we have shown with the guidance we've given for the full year, our top end of the guidance now is $300 million, but the top end of our OpEx is $182 million -- sorry the $185 million as we guided to you earlier.

So we are managing our operating expenses in line with our revenue guidance and revenue expectations that we have set for ourselves internally..

[Operator Instructions] The next question comes from Atif Malik from Citi..

Satish, can you talk about the renewals coming up in -- for next year? I mean, we have AMD in 1Q and ISAs in 4Q, and VDM [ph] 3Q.

Can you talk about the renewals for next year?.

I think the only one that we publicly talked about was AMD. We had announced that in 2005 and 2010 when we had renewals. The other customers we have not publicly announced when the renewals would be. I think many of them the term and the amounts have been -- we've been bound by confidentiality not to discuss those..

Got it. And then on the Qualcomm, I understand it's a complicated structure, it's been made in security and then the CryptoManager. I mean, it looks like in June quarter you had about $15 million in revenues for Qualcomm.

So I just want to understand the one-time, and is it possible to size kind of an annual opportunity going forward for Qualcomm?.

Much I'd like to, I can't. We, again, like I mentioned, we have confidentiality agreements with the customers and contracts that are material that we file with the SEC. We are able to disclose some information there but others that are in the normal course of business, we can't give much detail on that..

Okay. And then last question for Ron. I mean, Ron, if you look at the midpoint of the guide, and your full year revenues are coming out in the bit below the midpoint of the $295 million, $305 million guidance you gave at the start of the year, and you guys talked about a 12% to 18% long-term revenue growth for the company.

I mean, has anything changed to that thinking -- the long-term growth outside the PlayStation 3 gaining weakness?.

No, not at all. As we described from the very beginning, there were some estimates that we had made for some of the older technology licensing and that pared off. We actually have done better with some of the deals, but it wasn't enough to make up for that. We have a lot of contracts that we're discussing currently with customers.

As we've said a few times, we really don't like to put guidance in a position that we need all of these to be successful. So there's quite a wide range, but I think we're really on track. It's certainly, as I mentioned in the prepared remarks, it was lower than we had liked. But the team is completely focused.

Everything is executing as we want, and we just need to have these few contracts that we're negotiating close..

I'm showing no further questions. I would now like to turn the call back over to Ron Black..

Thank you, all, for your continued interest and support. And we look forward to speaking with you again soon. Thank you..

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day..