Rambus CEO Gets Chip Designer Back In High Gear
By PETE BARLAS, INVESTOR'S BUSINESS DAILY
09/26/2014 04:47 PM ET
When Ron Black joined Rambus as president and chief executive in June 2012, the company's earnings and revenue were falling, and the next month, Rambus stock would touch a 10-year low below 4.
Black's task: refocus Rambus (NASDAQ:RMBS).
The company, which licenses its designs for memory and application-specific chips, began working more closely with customers after ending long-running patent feuds with chip companies, including SK Hynix and Micron Technology (NASDAQ:MU), that had hindered its growth. Black laid off 75 employees, 15% of the workforce, in 2012 to curb costs.
Today, Rambus' year-over-year revenue has grown by double digits the past four quarters, while EPS has reached triple-digit growth twice in that span.
And Rambus stock is up more than 35% this year.
Black recently spoke with IBD about the company's turnaround.
IBD: Is Rambus a turnaround story?
Black: I would characterize it as a rebound. The original strategy was to monetize patents through aggressive tactics and litigation. That worked for a while, but it's really not an optimum way to create value for shareholders.
Last year, we settled a patent litigation (suit with Hynix). Instead of being in conflict with customers, we said, "Let's use our technical expertise to work with them." This is the kind of thing we couldn't have ever done before with this litigious past.
IBD: What other changes did you make?
Black: We were burning cash. The market cap was $400 million or $500 million. We were going to be in a net negative cash position and we had a convertible (debt loan) that was coming due in 12 to 18 months.
We had to do a workforce reduction. The company was rather fat on the G&A (general and administrative) side. (The job cuts) saved $35 million in annual expense.
We also stopped investing in some things that weren't going to drive shareholder value.
IBD: Is the company also benefiting from a renewed memory industry?
Black: It helps. If a customer is making money, it's easier for them to pay you than if they are not. The fact that the memory business is profitable allows them to look at strategic alternatives.
IBD: Company revenue rose 32% in Q2 primarily because of license agreements with Micron, Qualcomm (NASDAQ:QCOM) and others. Why are those deals important?
Black: We solve hard engineering problems for customers. We create intellectual property in the form of designs and patents. The designs are something that you can integrate into a semiconductor chip, and the patents give you the rights to use those designs.
We show the industry these leadership capabilities. The industry integrates them into their products. Those deals are a combination of technology and patent licenses.
IBD: Where does your revenue come from?
Black: About 50% is from dynamic random access memory used in computers, tablets, handsets and data centers. The companies that use them are Hynix, Micron and Samsung.
The other half is licensing to system-on-a-chip companies like Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NYSE:AMD), which make microprocessors or application-specific integrated circuits, those other things that connect to memory devices. We also license security products, cryptography and computational imaging, which is how you use processing to actually improve still photos and video and LEDs, or light-emitting diodes — little chips that emanate light.
IBD: Why license chip designs instead of making chips yourself?
Black: The industry largely has gone to a fabless model (where most chipmakers don't actually manufacture their chips in fabrication plants). Very few companies can afford to develop the process technology that makes the chip and invest in the manufacturing. It's about $500 million a year for process technology and many billions of dollars to build a fab.
What makes Rambus interesting is companies pay for long-term agreements of between five and 10 years. It gives a long period to collaborate on things and generates a lot of revenue over a period of time.
IBD: How has your profit risen by triple-digit percentages over the past four quarters?
Black: We did a reduction in force to control expenses. The company was not as focused on expense control. By having a tight control on expenses, it means that engineers can't keep doing A and B (projects); they have to chose A or B. And through that choice, we tend to get superior results. Tight expense control produces better results.
IBD: In Q2, Rambus beat analyst revenue estimates by $3 million. Why is your Q3 revenue projection flat to below vs. the year-earlier number?
Black: In the first half of this year we closed deals we had planned to close in the second half, so some things just happened earlier than we had anticipated.
IBD: In June, Qualcomm became the first company to license the Rambus Cryptomanager. What is that product? Do you expect to sign more customers this year?
Black: It provides security (to chips) throughout the manufacturing process. During the (manufacturing) process, people can hack the device (chip). They can put nasty things in there. Or they can steal it.
(With our product) you can turn off the chip and make it unusable without the code we provide.
The other thing it does is control the configuration, the different capabilities on it. You can say, 'I want function A and function B to work, but I don't want functions C, D, E and F to work.' We give (customers) a secret key to control that.
Qualcomm is the lead customer, and we are working with many others to try to expand that base.
IBD: What's the company's biggest challenge?
Black: It's about just continuing what we are doing and growing more both organically and inorganically. We are very proactive in looking at acquisitions. The question is: How fast can we grow this company?
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