Satish Rishi - SVP & CFO Ron Black - President & CEO.

Gary Mobley - Benchmark Matt Robison - Wunderlich Securities Atif Malik - Citigroup.

Presentation:.

Good day, ladies and gentlemen and welcome to the Rambus Second Quarter Finance Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and then instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to hand the meeting over to Satish Rishi, Chief Financial Officer. Please go ahead..

Thank you, Karen and welcome to the Rambus second 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. This incidentally is my 42nd and last earnings call with Rambus, and I want to thank all of you for the support you’ve shown for Rambus.

The Company is in good hands and I look forward to following its progress and successes in the future. The press release for the results that will be discussed here 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 hear the replay by dialing the toll-free number and then entering the ID number, 46588543 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 webcast with a slide presentation.

A replay of this call can be accessed on our Web site 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 both our press release and also on this call.

I must advice you that the discussion today will contain forward-looking statements regarding the financial guidance prospects, product strategies, timing of expected product launches, demand for existing and newly acquired technologies, the expected closing or recently announced acquisitions, the potential benefits of the 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 have posted on our Web site reconciliation 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 Web site 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?.

Thanks, Satish, and good afternoon, everyone. We finished the second quarter with revenue of $76.5 million this is at the high-end of the guidance we provided of provided of $72 million to $77 million. EPS was above consensus, so a strong quarter financially.

We’ve clearly had a very active quarter from an acquisition perspective, utilizing our strong cash position to bring on strategic additions, most recently in our memory and interfaces division. In June, we announced agreements to acquire the Snowbush IP business of Semtech and the Memory Interconnect Business of Inphi.

We’ll share more on these acquisitions in a moment, but before doing so, I wanted to remind investors that we continue to generate cash from operations and maintained a healthy cash position of 259 million prior to these acquisitions, and after the acquisition of Bell ID and Ecebs in January and an accelerated stock buyback late last year.

Over the past few years, we have articulated a desire for synergistic acquisitions to feel and accelerate future growth. With both the Snowbush IP business and in the Inphi Memory Interconnect Business, we saw opportunities in a consolidating market to scale for success and which have been.

By bringing on the Snowbush IP assets we are bolstering our position with Advanced 30 solutions with a strategic networking and datacenter markets, accelerating our development work to more quickly deliver 56 gig and beyond.

The Snowbush IP team we’re bringing on has extensive experience in this space, and gives us immediate access to some strategic relationships with customers and partners, which will help to scale the business more quickly.

Furthermore, as I shared in the call when we announced the acquisition, the business also comes with a customer-funded networking chip that will ramp production in late 2017 or early 2018.

While the program will remain in self note for a while, what I can tell you is that it is targeted at a market with dynamics similar to the buffer chip that we are so excited about. TAM of $200 million to $300 million, relatively high gross margins, a few key customers and core IP that we differentiate, so an exciting new chip opportunity for us.

We’ve also shared the news about acquiring the Memory Interconnect business from Inphi. This is another strategic acquisition that not only gives us instant market share in the memory chipset business, but enhances our ongoing development work in the buffer chip program and rationalizes the segment.

We launched our first Rambus brand in DD4 memory buffer chips at last year and made excellent progress with a solution in the final qualification stage with partners. After closing the transaction, we will rationalize the roadmaps and product plans as quickly as possible to deliver optimum solutions to our customers and value for shareholders.

We hope to give you a more complete picture of the status at our upcoming Analyst Day in September. In the meantime, I want to let you know that we have received very positive feedback from our DRAM customers and the ecosystem overall.

Bringing together the technical expertise of both groups, along with established commercial relationships and an established supply chain to complement ours, we are well placed to accelerate the business and deliver even better offerings with the talent from both companies.

Moving now to our security division, as we announced last quarter we've added key tokenization technologies and product offerings with the acquisition of Bell ID, a leader in mobile payment solutions for banks, and Ecebs, a leader in smart transport ticketing solutions based on the ITSO standard.

Acquiring these entities enables us to get closer to the consumer in these growing markets, utilize our strong security foundation to help create an economy of digital trust.

Our approach of providing value from the chip to the cloud with CryptoManager and now directly to the cloud with key applications is getting great feedback from customers and ecosystem overall. So, we're already seeing synergy benefits.

Turning to showcasing the infield capabilities of our CryptoManager platform, this quarter we announced and demonstrated infield functionality in the automotive space.

At the TU-Automotive Expo in Detroit, we demonstrated secure, over-the-air updates for a Dodge RAM truck utilizing our CryptoManager platform and our partner Movimento's infrastructure.

A lot has been written about the need for high levels of security in the era of the Connected Car and that is exactly what we demonstrated at the show with CryptoManager. Infield provisioning of encrypted keys through secure communication between the vehicle and the cloud.

Also within our security division we're excited to have announced this morning that Dish TV India will be using our CryptoMedia platform. This platform which includes a hardware root-of-trust core embedded in the set-top box ensures the secure distribution of high value content for India's leading satellite TV operator.

Importantly CryptoMedia not only provides the security but also reduces cost by eliminating need for an expensive smartcard that was historically used in the set-top box. Dish TV has roughly 30 million subscribers today with a plan to dramatically to grow that customer base in the coming years.

So, this is a nice revenue opportunity for us and possibly significant if the other players in the industry begin the transition away from expensive smartcards as well. Note, both automotive updates and set-top box authentication are examples of improved security and services for IoT influence, a space where we feel we offer differentiated value.

Turning now to our merging solutions division, we're continuing the development of some interesting and innovative programs.

With our lensless smart sensor program we shipped our latest Partners-in-Open-Development or POD Kit to enable our customers and partners to quickly evaluate the performance of LSS and develop custom algorithm for their specific application.

One application trick is that is gaining interest is Smart Buildings where our smart sensor technology can optimize efficiency, productivity, comfort and safety of buildings and occupants, while protecting privacy. With its tiny form factor, low power, low cost and wide field review our LSS is ideal for building automation systems.

Also this quarter we hosted a very positive showing of our Smart Data Acceleration System at Confidex where we held private demos with some prominent Internet companies to showcase the capabilities of the platform.

If you recall our SDA platform is a card-based solution that utilizes FPGAs and large quantities of DRAM to dramatically improve performance in some key application areas.

While the platform is only development and demonstration vehicle at this point, we're gaining valuable feedback from three partner customers that may allow us to productize this solution in the coming year.

Although, we are still deciding on the exacting of commerce and what the go-to-market strategy would be, needless to say it will be an interesting and natural extension of our memory business. That provides a quick overview of the quarter as a whole. Therefore I turn the call over to Satish to review the financial results.

I would like to take a moment to thank him for his contributions over the past 10 years. As announced previously, Satish will be retiring in the beginning of August and as he stated this will be his last quarterly earnings call with us.

We will certainly miss him, but business continues and I am happy to report that we're in the final stages of the interview process for his replacement. And as Satish himself said in his opening remarks, we will be in good financial hands after his retirement.

With that, I will turn the call back to Satish to review the financial results for one last time..

Thanks, Ron. I’d like to remind everyone that for this call and for internal assessment, we use non-GAAP or 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 items such as stock-based compensation, amortization, impairment and restructuring charges, as we believe that these expenses of charges are not indicative of long-term performance.

As noted earlier, we will provide reconciliations to the most comparable GAAP measures on our Web site.

In the case of any forward-looking projections or estimates containing non-GAAP information discussed on this call a reconciliation may not be available due to the unreasonable effort to make such a determination or provide such information as more fully described in the Web site.

A quick comment about the recent acquisitions that we announced, as of end of the quarter, [Needle] Snowbush know the Inphi Memory Interconnect business transaction have closed and the quarterly financials I am going to discuss with you reflect that. Now let me review some financial highlights for the quarter.

As Ron mentioned revenue for the second quarter was 76.5 million, close to the high-end of our guidance of $72 million to $77 million, a 5.3% increase over the first quarter and 5.1% from a year ago.

Operating income for the quarter was 26 million, again towards the high-end of our guidance of $20 million to $28 million and an increase of 9.7% quarter-over-quarter and relatively flat from a year ago. Cash equivalents and marketable securities were $259 million as compared to 226 million at end of last quarter and 348 million a year ago.

Going into some more detail for the first quarter, our memory and interface revenue was 54.5 million, security was 16.4 million, and our lighting and display technology revenue was 5.6 million. Quarter-over-quarter, these numbers represent an increase of 1.9% for MID, 16.3% for a security division and 12% for LDT. Year-over-year, MID revenue was flat.

Our security division increased by 39%, and the lighting business was down by 12.5%. The increase in revenue from our security division was partially driven by the Bell ID and Ecebs acquisitions in Q1. Q2 was a first full quarter results for Bell ID and Ecebs acquisitions and we're on-track to meet our internal annual targets for that acquisition.

Cost of revenue plus operating expenses or what I would refer to as total operating expenses for the quarter came in at 50.5 million at the lower end of our guidance of 49 million to 52 million, 1.5 million or 3.1% above the previous quarter and an increase of 8.6% from the quarter a year ago.

The quarterly increase was primarily due to the increased cost of revenue, partly offset by seasonally lower payroll and social security taxes. Year-over-year, the increase was driven by the acquisition of Bell ID and Ecebs into our security division.

In terms of headcount, we ended the quarter with a headcount of 622 as compared to 626 in the previous quarter, and 513 a year ago. Operating income for the quarter was 26 million, close to the high-end of the guidance of 20 million to 28 million. On a sequential basis, this is an increase of 9.7% and flat compared to the quarter a year ago.

The increase quarter-over-quarter was driven by higher revenue across all of our divisions. Interest and other expenses for the second quarter was 0.4 million as compared to 1.2 million in Q1 of 2016, and 1.3 million in Q2 of 2015.

The decrease was driven by FX gain resulting from the revaluation of a deferred payment obligation in British pounds related to the acquisition of Bell ID and Ecebs. Just a quick comment about foreign exchange and the impact of Brexit, with the acquisition of Bell ID and Ecebs, we do have some foreign exchange exposure, but not much.

In Ecebs the revenue and expenses are in British pounds so we have natural hedges. In Bell ID, the revenue stream varies and there is a handful of currencies. Our expenses are primarily in euros so there is small exposure to U.S., Australian and Canadian dollars and other currencies.

In the second quarter, as I mentioned, we recognized an FX gain of 0.6 million related to stronger dollar against the British pound. Using a flat rate of 35% for pro forma pretax income, net income for the quarter was 16.7 million or $0.15 a share as compared to 14.6 million last quarter and 16 million in the quarter a year ago.

Overall cash, defines as cash, cash equivalents and marketable securities was 259 million, an increase of 33.8 million from the previous quarter. During the quarter, we generated approximately 32.6 million in cash from operations. We expect the two acquisitions that we announced earlier in the second quarter to close sometime in Q3.

Revenue from these acquisitions will be dependent upon the timing of the close. So in our guidance, we are excluding the impact of the two acquisitions, and we’ll update the full year guidance in September once these two deals are closed.

Our forward-looking guidance reflects our reasonable estimate and our actual results could defer materially from what I am about to review.

Since we had a bit of an expected Q2, we some early acceptances from customers which allowed us to recognize revenue in Q2 for the third quarter and without the impact of any acquisitions, we expect revenue to be between 75 million and 80 million. We expect total operating expenses, which includes COGS, to be between 50 million and 53 million.

Operating income is expected to be between 22 million and 30 million. For the full year, it appears that the consensus without the acquisitions is around $313 million. Our current internal forecasts are quite close to that number. So with the variability built in our guidance would be 313 plus minus 5 million for the full year.

As and when the Snowbush and Inphi Memory Interconnect business acquisitions close, we will provide an update. Either way, we will be in a position to update you on the full year with acquisitions when we see you at our Analyst Day in September.

Our Analyst Day is scheduled for September 20th in New York and we will be sending out a formal invitation with details soon, but please mark the calendars for that date. With that, we are ready to open up lines for Q&A.

Operator can you please open the lines?.

Certainly. [Operator Instructions] Our first question comes from the line of Gary Mobley from Benchmark..

Satish, first of all I want to start off by saying, congrats on a strong 10 year run at Rambus and it's been a pleasure working with you and I wish you the best in your retirement. I want to start with some clarification I missed the last part of what you just mentioned about the fiscal year ’16 revenue comfort level.

I think your last revenue guidance range for the full year was 310 million, the 325 million I am assuming you are more comfortable at the lower end of that range and which would still imply a pretty healthy sequential ramping in Q4.

Can you give us some color and the puts and takes through the balance of the year unfolds and is there any discussion between Snowbush and IMI?.

Yes, sure so, you are right in terms of guidance so I think we are more comfortable with 313 plus or minus 5 million so we would still be at the high-end would end up being at the midpoint of the original guidance. We do have a couple of years in flux and as you know some of the patent deals can be binary, they either happen or don't happen.

So, we are working with some of those and we also have some deals in flux that relate to the course both on the mid side that could also potentially provide additional revenue.

So yes, it is a backend kind of Q4 weighted forecast that we have, but we have a couple of deals that we are working on and if there are any changes we'll provide a better update to you in September timeframe..

Okay, all right. Ron, regarding the Dual Inline Memory Module chipsets I think you have launched already from internal resources and it seem to be complemented with Snowbush and IMI.

Could you give us an update on where you see the Dual Inline Memory Module chipset business in terms of revenue recognition the final stages of qualification and where the roadmap may move towards or is that something with want to go -- dwell into in greater detail during the Analyst Day?.

Yes, it's going to be more towards the Analyst Day, but may be just to give a high level rounding out. There is a classic consolidation and what's in the best interest of customers and shareholders is to ultimately converge the roadmap as quickly as possible. Of course, we can't do any of that work until the deals on both sides close.

So, we certainly have a point of view but we're not prepared to share this at this point in time. So, the spirit of what we've always said on these is we take the best from the best from both companies and that's the way we're going to approach it and the team is off working it..

[Operator Instructions] Our next question comes from the line of Matt Robison from Wunderlich..

Hi thanks for taking my question and also thanks to Satish for your help from the my short year 10 year as an analyst for Rambus, good, great getting to know you. On the SoftBank call this morning, there was a fair amount of focus on ARM TrustZone.

Ron I was hoping you could help us sort of understand how your hardware root-of-trust is positioned well I guess along with the Smart Card Software acquisitions to how your positioned relative ARM it seems like they are kind of focused on automotive with that and you seem to have a bit of a foothold in automotive already yourself?.

Yes, we do so TrustZone is an interesting technology using some CEO simplification liberties. It is kind of a small OS, not a rich OS that allows you to have a trusted execution environment. And there is many of these type of things out there you can think of it as slipping a bit and then you can execute something in that particular container.

So the area that we’ve been trying to facilitate and help the industry with is to have a even more robust bootstrap sequence where you know the state of the system and can guarantee that security, that’s the hardware root-of-trust. So in fact what we do can be absolutely complementary to that trusted execution environment or any other one.

So we look at ARM, as a great partner, we always want to work with them and we think, we’ll be able to do that. We are very passionate our security team that the only way to be successful long time and to have a very secure solution is to have that hardware root-of-trust which is why we’re pursuing it the way that we have.

Yes, automotive is a key area for us. So that’s one of the areas, we’re putting a lot of effort in with our team in business development and creating solutions in partnership with companies like Movimento that we think have a pretty interesting download over the air kind of business model..

So really thinking about the recurring component of this activity being the service fees for key management or is there a royalty component?.

So these are often done on a case-by-case basis. In general for a CryptoManager solution that we would provide, there is a license fee, a royalty element to it and a transaction fee.

What we try to show in the last year’s Analyst Day is that the closer you get to the data and turning the data into information the more value that you have in the total solution.

I think some of you have seen or read our think piece that we did with the GSMA which outlined some of the challenges that the industry faces as there is more stagnant growth I am talking about the semiconductor industry.

And that our approach is to look at monetizing less in the hardware per se and the royalty models, but more at the high value data side. So that’s where we would like to go with this long-term and quite candidly, if you look at the solution for instance that we provide with Ecebs or Bell ID.

We’re at the application and what we’re working very closely with them on and it was really the start of our discussion with them long before we bought them.

It is to through that hardware root-of-trust provide that improved security offer more confidence for people that need things like payment to be sure that they’re doing well and to tie that to a transaction fee. So that’s our objective, that’s where we’re trying to take it..

Is that your first major licensee for a couple of years now? Have you started to see any form of recurring revenue from that?.

So, in that particular business no, it's still ramping up. We're working very closely with them, in fact in other areas like in automotive where we would have that first downstream revenue..

Satish, can you tell me what the CapEx and depreciation was in the second quarter?.

You caught me flat footed there..

Well, we can take it offline. No problem..

Yes I think given that the cash went up by 33.8 million and our cash from operations of 32.6, CapEx was very-very small. But I can definitely give you that number..

Thank you. And our next question comes from the line of Atif Malik from Citigroup..

My first question, I'm just trying to understand the revenue for the full year being slightly lower than the prior guide, what's driving that, is that revenue recognition of FCS or are we seeing lightning market being lower or can you just help us out on what's driving the couple of million downtick?.

When we give guidance, we set the guidance sometime in January timeframe and we have 12 months to go to deliver the guidance, so things change.

Some things get pulled in, some things gets pushed out, so the change having the variability of 1% to 2% in the overall revenue for the full year I don't think is that dramatic, so I think really what's happening in some cases from what we had mentioned earlier I think in Q1 I had mentioned that LDT might be slightly lower than we had expected because of some of the issues that the end-market that they were serving was facing that does come in but other groups have stepped in to cover that shortfall, so I think that's part of where we’re seeing some of that variability between the different divisions and from a process perspective every division gives their own forecast, but there's always a range that they provide because sometimes the things that you could close, new things come in, some things get pushed out, so I think there's some change in the range overtime.

So, nothing that's out of the ordinary from my perspective..

Okay.

And just to summarize the sales and the OpEx contribution from the two remaining open acquisitions Inphi and Snowbush, I have 40 million in sales for [217] from Inphi and [17] million from Snow and then 5 million to 6 million OpEx run rate from Inphi and what is the OpEx run rate for the Snow acquisition for next year?.

Sorry, did you said 5 million OpEx for Inphi, where did you get that from?.

Yes, 5 million to 6 million OpEx for Inphi?.

On a 40 million revenue?.

Yes..

That's a very good business. No, I don't….

I think quarter [indiscernible]..

Yes, where did that number come from? I don't remember providing that at all. That's not -- with the 40 million revenue the 50% gross margin and a $5 million OpEx that is $15 million and $40 million that's a very-very lucrative business..

No, no, 5 million to 6 million OpEx increased by quarter..

Per quarter, okay..

So, annualized will be more or less 20 to 24?.

Yes, so, we will provide you a bit of guidance when we close the deal because the reason why we are -- the cautious is these are businesses that are influx and what we thought for the rest of the quarter at least or rest of the year at least when looking at it, it all depends when we close, what the order book looks like, what the inventory looks like.

So we'll provide a better guidance when we have all those numbers otherwise we'll be guessing and we'll be wrong again one way another more or less, so why don't we wait till September to give you better guidance on that..

Sure.

And then Ron you mentioned in your prepared remarks that you have received positive feedback from the DRAM customers post Inphi, can you just kind of give a little bit more color on what the feedback has been whether it's the consolidation the mark of its montage in [IDPI] or you guys are bringing something more to the table?.

I think there is a couple of things consolidation for stability and strength is always important. I think in both of these acquired businesses when we look at them, they are very core to what we do but not necessarily core to what the divesting companies we're looking at.

So the team I think is going to be excited about being in Rambus and we're going to be able to deliver great solutions.

I think if you look at the history of these two companies just being very dispassionate Rambus has clearly been incredibly innovative in developing new IP that gets embodied into all of these standards and doing different things well it'd be the high speed serial links or DDR. And that's a core to what we do and we're embracing moving into products.

On the Inphi and Snowbush side, we certainly generate IP but they're fundamentally a product-based company and thinking about the product.

So what we're trying to do is blend these two outstanding skill sets to get the most innovative, most creative driving and working with the ecosystem to drive the solutions and in different ways to think about them and at the same time improve our productization skills.

One example where you see Rambus doing that and thought leadership is the project that we announced with Microsoft and looking at next-generation datacenters and architectures. So the work that we're doing there is very natural to flow into possibly other types of product level solutions.

So I think that's the simplest answer of what customers like is tremendous innovation, improving product skills, right a totally committed team, aligned strategically where the Company is going in many ways you can't have a better solution than that..

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Dr. Ron Black for any additional comments..

Thank you, operator. As you can see we believe we have set up our businesses to be well positioned for growth in our key strategic programs. I am proud of the progress we've made and we look forward to sharing more detail with you at our Annual Analyst Day on September 20th. For now thank you all for you continued interest and support. Have a nice day..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day..