Q3 2019 Earnings Call
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A reminder, this conference call is being recorded I would now like to turn the conference over to our old Mathare Chief Financial Officer, you May begin your conference.
The press release, what the results that we will be discussing today have been furnished to the FCC on form eight k. a replay of this call will be available for the next week at eight apartheid eight fivenine to 056, you can hear the replay by dialing the <unk> toll free number and then entering I'd number seven 170.
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A replay of this call can be accessed on our website beginning today at five PM Pacific time, our discussion today will contain forward looking statements, including our financial guidance for future periods product and investment strategies.
Timings expected product launches demand for existing and newly acquired technologies the growth opportunities in various markets. We serve the expected benefits of our merger acquisition and divestiture activity, including the expected timing of transaction completions and big success story integration efforts and the effects of the ITSI six effects on reported.
Avenue amongst other things. These statements are subject to risks and uncertainties that are discussed during this call and maybe more fully described in the documents we filed with the FCC, including our AK is 10-Q's and 10-K's.
These forward looking statements may differ materially from our actual results and we're under no obligation to update these statements.
I could you provide greater clarity in our financials were using both GAAP and non-GAAP financial presentations in both our press release and also on this call. A reconciliation of these non-GAAP financials to the most directly comparable GAAP measures has included in our press release in our slide presentation and on our website at Rambus dotcom on the Investor Relations page.
Under financial releases the order of all call today will be as follows Luke will start with an overview of the business I will discuss our financial results, including our guidance for future period, and then we will and wouldn't Humanaone I'll now turn the call over to lose to provide.
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Thanks, why would and good afternoon everyone.
Over the past here, we have consistently demonstrated strong execution and product revenue growth.
The meeting or exceeding the expectations in the markets.
This quarter was no exception with revenue above the high end of guidance that's $57.4 million.
We strengthened our balance sheet by generating $25.6 million in cash from operations thinking the year to they totaled $93.1 million, which already exceeds the cash generated for all of 2018.
The company has made tremendous progress toward the strategic objectives set out at the beginning of the year not a critical to our company success.
Our efforts continue to be driven by refocusing our product portfolio and research they want our cost twice in semi conductor optimizing the company for operational efficiency and leveraging our strong cash generation to reinvest for growth.
In Q3, we had significant M&A activity in line with all areas of focus and mission to Delever data Foster and safer.
We announced two exciting silicon IP acquisitions that we'd enhance our offerings and expand our market position in interfaces and security.
We began with the acquisition of digital content a company northwest logic.
That's a market leader in memory, P.C.I.E. and meet P. digital Comscores northwest logic expands our interface solutions for data Center, AI communications and automotive.
Every if we'll see design that uses if I also needs an associated controller.
With a combination of complementary digital and physical Nike portfolios from northwest logic, and Rambus, we can offer fully integrated pciethree and memory interface subsystem for all customers.
As we mentioned the LASG wants this last quarter school. This transaction will not materially impact 2019 resolves, having just closed in August which we expected to have an immediate positive impact on the business and be accretive to revenue and earnings in 2020 .
We also announced an agreement to acquire the secure silicon IP imports of coal business is a very matrix former insights secure.
Much like the birth rates of northwest logic, the anticipated acquisition of the insights secure teams and offerings, we augment our portfolio of offerings for data center, AI networking and automotive.
This will bring more mission critical embedded security products, expanding our global reach and creating the industry's most comprehensive portfolio of silicon proven security IP and she provisioning solutions.
We expect the acquisition to close before the end of the year subject to customary regulatory approvals.
Finally, two weeks ago, we closed the sale of all payments and ticketing business to visa, marking a very important milestone for the company.
This deal was a critical stateful, rambus and where do you find out perimeter in the semiconductor markets.
Why is the rumbles team has worked very hard on successfully closing and integrating acquisitions all business units continue to execute on existing programs.
We continue to drive sustained revenue growth in Silicon IP whiskey design wins for both our interface and security IP solutions.
We closed for tier one its we'll see design wins across the portfolio for data center edge Aiotv and government.
We also announced a combined interface and security IP, we not seeker for aerospace and satellite communications.
The team expanded our portfolio with leading edge interface solutions for GRC H.B.M. to an 112 gig on TSMC is leading edge seven nanometer process.
These are critical building block for AI data center Fiveg an automotive.
And finally, we announced the industry's fastest completes memory subsystems solution for GDB, all six including defy uncalled for capable of running at 18 gigabit per second.
Turning now to chips Q3 was the second consecutive quarter of record revenue for our memory interface chip business, which we now expect to almost doubled year over year.
This is driven by increased OEM and data center qualifications needing to steady gains you know ddrfour memory interface chip market share.
The industry's also starting to recover from the softness already this year into memory market.
In closing.
Rhombus has made tremendous progress toward the strategic objective is critical to our future and have successfully realigned the company around our core strength in semiconductors.
With record revenue from our chip business and continued city can IP design wins, a tier one is to see customers, we exceeded our commitments to the market and delivered a great quarter.
With that I can the quote Rahul to discuss the quarterly financial results Rahul Thanks Lou.
Once again with our financial results for the third.
Let me start with some highlights on slide six as Lou mentioned, we continue to execute in our product businesses and delivered solid financial results above our revenue and earnings expectations.
We've adopted easy fixes six using the modified retrospective method, which is not restate.
But rather runs the cumulative effect of the adoption through retained earnings at the beginning balance sheet adjustment any comparison between our results under its these 606 and prior results under 86. So five is not an accurate way to track our company's progress we'll continue to provide operational metrics such as licensing billing to give our investors better in.
Right into our operational performance.
We delivered revenue of 57.4 million and licensing billings 63.1 million revenue was higher than our expectation due to strong buffer chip sales, we have a very strong balance sheet and ended the quarter with cash.
Cash equivalents and marketable securities of 338 million flat from the previous quarter. That's cash from operations of 25.6 million was offset by cash used for the acquisition of northwest logic.
We delivered solid results, while continuing to leverage our high margin historic businesses to fuel growth in adjacent areas, where we have strong technical and market expertise with a focus on trips and silicon IP.
Let me talk you through some revenue detailed on slide seven revenue for the third quarter was 57.4 million above our expected range due to market share gains in our buffer chip business.
Royalty revenue for the third quarter was 19.4 million, while licensing billing was 63.1 million the difference between licensing billings and royalty revenue primarily relates to timing as we don't always recognize revenue the same quarter, we built our customers.
Going into additional detail our product revenue was 21.4 million consisting primarily of our buffer chip business. Our contract. Another revenue was 16.6 million consisting primarily of our silicon IP business as we expected due to the timing of the close our acquisition of northwest logic did not have a material impact on that.
Third quarter.
We recorded 5.1 million up revenue and 6.8 million in operating cost and expenses associated with our payments and ticketing business in Q3.
Let me walk you through our non-GAAP income statement on slide.
Along with our solid revenue performance in Q3, better profitability on non-GAAP basis cost of revenue plus operating expenses for what we refer to a total operating expenses for the quarter came in at 67.1 billion. This was above our expectations due to higher Cogs related its record buffer chip revenue excluding pain.
Listen ticketing, our profit was nicely above our expectations.
We ended the quarter with headcount at 840 up from 772 in the previous quarter as we welcome employees from northwest logic and converted several long term contractors to employees in Bangor.
Under AC success, six we recorded 4.9 million of interest income related to the financing component of our fixed fee licensing arrangements for which we recognize revenue, but not yet received payment.
We incurred zero point Sixmillion interest expense related to the convertible notes we issued in Q4 2017.
This was offset by incremental interest income related to the return on our cash portfolio.
After adjusting for non cash interest expense on our convertible note. This resulted in non-GAAP interest and other income for the quarter of 6 million.
Excluding the interest income related to the significant financing component related to 66. This would have been $1 million, assuming a flat rate of 24% for non-GAAP pretax loss non-GAAP net loss for the quarter was 2.9 billion or diluted net loss of three cents per share.
Now, let me turn to the balance sheet details on slide nine we're very pleased with the strength of the balance sheet cash cash equivalents and marketable securities totaled 338 million flat from the previous quarter as cash from operations of 25.6 million was offset by a purchase of northwest logic.
Our Q3, ending cash balance doesn't reflect the cash we received for our payments and ticketing business nor does it reflect what we expect to pay for the secure silicon IP and protocols businesses very metrics.
Given 93.1 million of cash from operations through our first three quarters, we expect over 100 million of cash from operations. This year, our strong balance sheet allows us the flexibility to invest strategically and our patent portfolio and in our growing product programs.
At the end of Q3, we had contract assets with $560 million, which reflects a net present value of unbilled a are related to licensing arrangements for which the company has no future performance obligations.
I expect this number to continues to trend down as we bill and collect for these contracts. It's important to note that this metrics doesn't represent the entire value of our existing licensing agreements as several customers have royalty based agreements that allow us to recognize revenue each quarter under 86 effects.
As a sale of our payments and ticketing business did not close until October 20, Onest at the end of Q3, we classified the assets and liabilities for this business as held for sale. The net carrying amount of this business as in the third quarter was $74 million considering assets and liabilities.
After considering the 75 million purchase price and transaction costs, we recorded a recovery of 1.9 million in Q3 that offset the impairment charge in our Q2 GAAP results, we will make another adjustment to reflect final working capital in our Q4 results.
Third quarter Capex was 3.2 million and depreciation was 4.4 million looking forward I expect roughly 3 million of Capex for the fourth quarter and that makes roughly 9 million for the full year 2019.
I also expect depreciation of roughly 4 million for the fourth quarter and roughly $14 million for these full year of 2019.
Overall, we have a strong balance sheet with limited debt and expect to continue to generate strong cash from operations in the future.
Now, let me turn to our guidance for the fourth quarter on slide 10.
As a reminder are forward looking guidance reflects our current best estimates and our actual results could differ materially from what I'm about to review.
In addition to financial outlook under eight to 606, we've also been providing information on license in billings, which is an operational metric that reflects amounts invoiced to our licensing customers during the period adjusted for certain differences.
As you see in the supplemental information we provided on slide 16 of our earnings deck licensing billings closely correlates with what we had historically reported as royalty revenue under 86, so five.
We expect to close our transactions a fair matrix in Q4, as we complete regulatory approvals and other customary closing conditions until we close those financial results will not be included in our guidance with that said under 86 Sussex, We expect revenue in the fourth quarter between 50 and $56 million, we expect royalty revenue.
Between 15, and 21 million, we also expect licensing billings between 60 and 66 million.
Excluding the payments and ticketing business, we expect Q4, non-GAAP total operating expenses, which includes cogs to be between 59 and 63 million.
We remain focused on our execution and are very pleased for their continued market share gains in our buffer chip business. We now expect that business nearly double year over year, adding near the high end of the 50 to 70 million range, we'd anticipated previously.
Under 80, 606, non-GAAP operating results for the fourth quarter is expected to between a loss of 12 and $2 million.
The non-GAAP interest and other income and expense, which excludes interest income related to six or six we would have expected 1 million an income which includes your point 6 million of interest expense related to the notes due in 2023.
Based on the new tax legislation passed at the end of 2017, we expect our pro forma tax rate in 2019 in 2020 to remain consistent with our 2018 pro forma tax rate of roughly 24%.
The 24% is higher than the new statutory rate of 21%, primarily due to higher tax rates in our foreign jurisdictions.
As a reminder, we pay roughly $20 million of cash taxes, each year, driven primarily by or licensing agreements with our partners in Korea.
We expect non-GAAP taxes to be between a benefit of 3 million in zero in Q4, we expect our Q4 share count to be roughly a 115 million basic and diluted shares outstanding.
This leads to the between a non-GAAP loss per share of eight cents in one sense for the quarter.
Looking ahead to 2020, we remain comfortable with the business outlook, we provided another analyst day in September .
I expect our revenue trends by quarter to be similar to 2019 with Q1 down seasonally slight improvement in Q2, and then growth in Q3 and again in Q4, I expect our total expense trends, including Cogs will be more linear through the year with small increases in Q3 in Q4 for higher product shipments.
I also expect Capex of 26 million for 2020, roughly half of which is related to our headquarter move the first half the year and depreciation of 29.
Let me finish for the summary on slide 11.
We are proud of the solid performance by our team and the progress we continue to make against our strategic initiatives to drive long term profitable growth. We've had a significant amount of M&A activity as we refocused our company and are very pleased with our execution on organic and inorganic growth.
While we understand that assay success out of the level of complexity to our financial reporting its important to reiterate the underlying financial strength of our business remains strong reflected in our demonstrated ability to generate cash.
In closing, we have refocused our product portfolio around brand versus core strengths in the semiconductor industry improved our operational efficiency and profitability generated solid cash from operations and leveraging our strong balance sheet to support our strategic initiatives. We continue to focus on our core markets and are very well positioned for long term profitable growth.
With that I'll turn the call back over to the need to begin queuing day could we please have a first question.
Thank you Mr. my there.
Thank you, ladies and gentlemen, if you like to ask a question. Please press star one on your Touchstone telephone.
Your first question comes from the line up Suji desilva with well capital.
Bluekai Rahul congratulations on strong cash generation here.
So.
Every quarter I try to go through these numbers to make sure I get the kind of as the stick. So five pro forma correct. If I did the math correctly.
Right well for Threeq to 19, I get revenue of 101 million would have been reported EPS of 23 cents those numbers sound reasonable.
So suji I am we can't report the six so five numbers anymore. As you know, but if I were to do that math that I think you're doing I've got the same numbers.
Okay. Good to know and then for Fourq. Your 19 couple of moving parts here, but it seems like if I put it together I can get to something like 98 million midpoint revenue guidance and 25 cents.
And if you back out the payment attack and ticketing from three Q3 revenue is the sequential growth does that sound right as well.
Yes, again I understand the master doing that would get the same results, but thats not math that we can do as a company.
Understood that's fair enough, Okay, and then for the business for 28, you you reiterated the guidance for the analyst day can you give us maybe some more color detail on what northwest logic of Parametrics contribute to the 20 run rates, we have some idea the inorganic versus organic year over year.
Yeah, absolutely so what we expected and we said that's at our analyst day in September in New York is we expect to northwest projects to generate roughly 10 million of revenue for us in 2020, and we expect that businesses from their matrix or farmland side security to generate roughly 20 million of revenue for us in.
2020, and both of these should be minimally accretive to our EPS now as I wonder.
Uh huh.
For a significant portion of 2019, so when you strip pick those numbers out of 2019, you see very nice growth.
Across the board in our product business.
Product revenue I think what we said as we now expect to be at the high end of our range for 2019 of almost 70 million and again, that's almost entirely our buffer chip business I think what we said in September is that our range for that product revenue in 2020 is between 75 and 95, so thats the business thats growing very nicely.
You also see as growth in our silicon IP business and that's.
Really reported as contract and other as a reminder, there's about 20 million billings that we have and licensing billings that we think are really directly related to that silicon IP business.
So if you had I think what we said in September between 70 to 90 or 80 at the midpoint, yet that 20 I think in 2020, that's almost a $100 million of billings associated with our silicon IP business, which is really nice growth over over 19, both organic and inorganic.
So we're certainly pleased with our execution.
Yes.
As we've talked about repeatedly suji, what we see as structural on in our structural patent licensing agreements to see step downs concern again.
And what you see it then that product growth is offsetting any step down. So we have and also growing from a bottom line and from a cash from operations perspective as well. So we're very pleased with our performance in the guide.
Okay, and Thats, a lotta helpful color I appreciate that.
A question, what that's not a ddrfour memory, you had kind of upside versus your expectation was driven potentially by perhaps the hyperscale or datacenter recovery that Intel called out or are there competitive factors versus I'd Tcs Renaissance that might be also in the mix here.
Hi, So can you tell it's actually both we do see some recovery in the market, we see the inventory levels normalize in the market and demand is up from data center and the resume parfaits to our customers. So that's one factor on the other factories that.
We are starting to see the results continued to see the results of our design win activity on the Cascade late platform, where no footprints of design wins was twice what it was on the Skylake platform. So the combination of our increase of footprint in the design wins, we see.
Recovery of the memory market explains these these results for the buffer cheap.
Okay. My last question is you talked about closing.
Closing a set of deals here in the quarter I was curious what the numbers were up relative to that number you reported in the most recent quarters weather.
Was that the typical level of number of deal you'll see our theres more or less than that that's a quarter historically.
Yes, I think Q3 was very active for us because we were able to announce the divestiture of our opinions and ticketing and we also announced the closure of northwest logic and our intent to acquire the business from their matrix.
I think we have an opportunity we have a very strong balance sheet, we definitely have an opportunity to continue to drive more inorganic growth.
But it's really driven by what the opportunities are and how they aligned from a timing perspective I.
I think we will continue to be judicious, what I'm very pleased with that certainly.
The execution on the divestiture of payments and ticketing health refined our focus back to our semiconductor business and certainly the acquisitions and northwest logic, we expect to acquire from inside secure very nicely bolster both our memory insecurity portions of that silicon IP business, but I think we certainly we'll expect to continue.
To look forward to other inorganic opportunities.
Okay. Thank you very much guys.
Your next question comes on the line of Gary Mobley with Wells Fargo Securities.
Yeah.
Mr. Michael Your line is open for your question.
Sure.
Yes. My response from that line will go well go to the line of Sidney Ho with Deutsche Bank.
Great. Thank you.
Just wanted to follow up the previous questions at the Analyst Day, you gave a full year guidance for next years.
She checks or license billings up to 20 to 40, which is down about one about 10% from this year, just taking the midpoint of the guidance.
So one is that still a valid assumption and if so can you help us understand the moving pieces how much of that decline is really to sale of to ticketing business. How much will lead to any schedule step down that we seem to share and what take both as it means for the rest of the business.
Yeah, It's a great question, Sydney and what I'll tell you is that there's really not that much of that that's related to the payments and ticketing business. Most of the revenue in the payments and ticketing business has more on the contract. Another segment, we did have a little bit in that.
Licensing billings, but most of the revenue that we recognized and particularly with under contract and other it really is almost entirely related to just the structure of our licensing agreements on what we did as we signed long term licensing.
2014, 15 16 17.
And those have very defined structures in terms of how much we are able to collect from our partners each quarter.
There are some of those agreements, which our royalty based and so you will see some variability in terms of what we come in.
But really it's almost entirely related to just the structure those agreements. What we found is that you know those years were very strong for many of our partners and our partners you took out as an opportunity when they were having strong gears to upfront some of the payments that they hadn't those agreements with what we looked at as what's the total value and we're very comfortable with.
That total value.
Again to answer your question is almost entirely related to the structure I'm looking forward beyond 2020 I'd expect it to be roughly flat with what we showed here.
There are upside I think one thing that we've talked about that's very difficult for us to predictive that's really what happens with China and again.
How that happens and how those agreements are structured are going to be something that we'll we'll work through.
Hopefully that helps to answer your question.
Thats helpful. Thanks.
Well look maybe a follow up question is on the Cryptomanager business, you announced the design with Micron at the end of last year end pacing Micron, just announced that products and services as a matter back just a couple of weeks ago can you help us understand your revenue opportunity there how do you think about the ramp.
How would it look like and maybe compare and contrast, with some of the I guess the other customer that you have.
Okay.
Yes, Thanks Sidney.
Just to clarify things so two hour Cryptomanager AR device key management system is the software foundation that micron is using for the authentic key management services and for the multi application. So it's nice to see that these product is being commercialized.
As every one of our Cryptomanager deals, it's a combination of a license.
To that customer.
That some buying teams.
Linked to volume tiers, and that's a that's the kind of business model that that we haven't you kind of give more details on that.
But it's a great opportunity for US we are the software foundation for the Ironkey services based on that memory.
And I had the just to just to know.
Okay, maybe when one quick question for me.
In terms of that Fiveg side of things, we've been hearing a lot of deceleration of Fiveg fiveg infrastructure, Buildout and expectations for Fiveg handsets are quite high and 8200 250 million units next year can you help us understand how and when you will start benefiting from from that kind of rollout.
Yes, sure obviously, great question, we actually stop to benefit from the department of Fiveg, one of the key interfaces being used in Fiveg storm season, PCIA you Gen five interface using.
So I need that 40 gigabit per second so a lot of the design wins that we have announced over the course of the past quarters actually used in associates that are being used in fiveg infrastructure. So the way we benefit from Fiveg is actually people designing sbcs with that type of interfaces, but only platform.
For Fiveg.
In the call today.
We mentioned.
Several types of applications that are using all IP cost.
I would just side.
You asked to add to lease that he's always very large cap customers trendsetters and one of them Vectren really addressing besides you markets.
Great. Thank you very much.
Thank you so again for additional questions. Please press star one at this time.
At this time there no further questions I would now like to turn the conference back over to look.
Thank you everyone for your continued interest on time and have a good day. Thank you.
Thank you. This now concludes today's conference call you may now disconnect.