Q2 2020 Rambus Inc Earnings Call
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Welcome to the Wattenberg second quarter fiscal year 2020, <unk> earnings Conference call.
Yes, all participants are in listen only mode at the conclusion off our prepared remarks, we will conduct course trimming down for such thing. If you would like to ask a question to hear me Press Star one on your touched on pad at any time.
Anyone should require assistance during the conference. Please press star you're right on your touched on how to any time as a reminder, this conference call is being recorded I wouldn't like to turn the conference over to Rahul Mathur Chief Financial Officer, you May begin your conference.
Thank you operator, and welcome to the ramp a second quarter 2020 results conference call on Bothers CFO and on the call with me today as Luke tariff in our CEO. The press released 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 8.5.
Slide eight Fivenine to 056, you can hear the replay by dialing the toll free number and then entering I'd number 1788 075, when you hear the problem.
In addition, we're simultaneously webcasting this call and along with the audio webcast implies that we will reference during portion of today's call.
Even if you're joining us to be a conference call you may want to access the webcast with the slide presentation.
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 investment strategies timing of expected product launches demand for existing and newly acquired technologies the growth opportunities at the various markets. We serve the expected benefits of our merger acquisition and divestiture activity, including the successful.
Our integration efforts risk and the potential adverse impacts related to arising from the noble core it on a virus Ur cobot 19, and the effects of 86 cents six on reported revenue amongst other things.
These statements.
Our subject to risks and uncertainties that are discussed during this call and maybe more fully described in the documents, we file with the FCC, including or a case tend to use and 10-K's.
These forward looking statements may differ materially from our actual results and we're under no obligation to update these days.
In an effort to provide greater clarity in our financials were using both GAAP and non-GAAP financial presentation 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 been included in our press release in our slide presentation and on our website that rambus dot com on the about.
After relations page under financial releases.
During our call today will be as follows loop will start with an overview of the business.
I will discuss our financial results, including her guidance for future periods, and then we will end with queuing <unk> I'll now turn the call over to loop to provide an overview of the quarter Luke.
Thanks, Rahul and good afternoon, everyone.
This was another excellent quarter for rambus delivering in line or above expectations for the eighth consecutive quarter.
We delivered $59.9 billion in revenue and most notably $62 million in cash from operations, breaking a 10 year record quarterly cash generation.
He is tremendous performance was enabled by our sustained focus on quality and execution, demonstrating our ability to consistently deliver.
The team is fully adjusted to remote operations and continues to maintain high levels of productivity as well as our commitments to our customers.
One thing that has remained constant during these uncertain times you see increased demand for data bandwidth and performance driven by the significant increase in online activity from corporations and consumers.
We expect the outlook for data center to remain healthy as trends like working from home and online learning I likely to continue.
Good.
As a result, we're seeing sustained investment from our customers in products and solutions that will help improve the performance of the global data infrastructure.
Memory and interface cheap led all strong performance with the fifth consecutive quarter of record revenue.
This sustained growth trajectory is driven by a combination of ongoing data center and OEM qualifications and strong overall demand in the market.
The confluence of existing technology trends like a I had the edge and the transition to the cloud with a paradigm shift to remote collaboration is accelerating infrastructure deployment and upgrades.
This translates into greater demand and increased shipments for cloud DRAM in server modules.
From an operational standpoint, our supply chain remained strong with sodium wafer supply and good cycle times and test.
The operations team has done an excellent job of actively managing any potential risks and as a result, we continue to meet all of our customer commitments.
Based on the latest round of data from our customers and the industry. We believe first half inventory levels is indeed overall surface supply chain was slightly above normal but remain have you given the increased uncertainty in the current environment.
As of this time, we expect demand remains consistent and stable in the second house, but we continue to monitor inventories.
Looking forward DDR size continues to progress with the recent former publication of the specification biogenic.
We're working closely with the industry and our customers as you just straight to by the recent Mike when announcement of their gd outside ecosystem, enabling them program.
Paul the rollout of our next generation systems.
I am best remains poised as the first mover and will be on the forefront of DDR five deployments with our customers.
Finally for Silicon IP, we maintained our momentum with further interface and security IP design wins, a tier one assets he makers of course data center.
And communications.
We continue to deliver solutions that enable new architectures and capabilities well hyper from in systems across our focus markets.
In closing, we continue to deliver excellent results demonstrating the resilience of our business model and ability to execute in these unprecedented times.
Rhombus, he's done looking products and solutions to address the Mega trends, which are reshaping the data center and the network at large.
We have confidence in our ability to execute on all technology Roadmaps and believe we're well positioned to capture the growing opportunity in data centric applications.
With that I'll turn the call to Rahul to discuss the quarterly financial results Rahul.
Thanks, Luke I'd like to begin with our financial results for the second quarter, Let me start with some highlights on slide five.
As Louis mentioned, we continue to execute in our product businesses and delivered excellent financial results at the high end of our revenue and earnings expectation, while continuing to strengthen our balance sheet. We've adopted easy fixes six using the modified retrospective method, which should not be state prior periods, but rather runs the cumulative effect of the adoption through.
We retained earnings at the beginning balance sheet adjustment.
Any comparison between our results under 86 to six and prior results under assay six so five is not accurate way to track our company's progress.
We will continue to provide operational metrics such as licensing billing to give our investors better insight into our operational performance.
We delivered revenue of 59.9 million and licensing billings of 60.7 million at the high end of our expectation we have a very strong balance sheet and ended the quarter with cash cash equivalents and marketable securities a 486.1 million up in the previous quarter due to cash from operations of 62 million.
$1, our best quarterly performance in over 10 years.
Our continued execution on our strategy and our operational discipline have yielded excellent financial result.
Strong balance sheet that affords us flexibility on our strategic initiatives.
Now let me talk you through some revenue detailed on slide six.
Revenue for the second quarter was 59.9 million at the high end of our expected range due to another record quarter for a buffer chip business.
Royalty revenue for the second quarter was 17 million, while licensing billings was 60.7 million the difference between licensing billings and royalty revenue primarily relates to timing as we don't always recognize revenue in the same quarter, we bill our customers going into additional detail our product revenue was 31.7, consisting primarily.
Our buffer chip business, our contracted other revenue was 11.2 million consisting primarily of our silicon IP business, our silicon IP business was down quarter over quarter as expected due to the timing of customer engagement.
As you saw in our press release, we expect this to return in Q3.
For the year, there's roughly 35 million of our silicon IP business, that's being reflected in our licensing billings. This is almost double what we expected our analyst day last year due to the structure of our contract and acquisition accounting.
Let me walk you through our non-GAAP income statement on slide seven.
Along with our excellent revenue performance in Q2, we again exceeded our profitability targets total operating expenses, including Cogs for the quarter came in at 59.5 million operating expenses, a 47.7 million were lower than our expectation due to lower spending on employee related expenses.
But higher revenue and disciplined execution on spending our profit was nicely above our expectations.
We ended the quarter with headcount of 670 flak from 665 in the previous quarter.
Under 86, a fix we recorded 3.7 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.
Encouraging <unk> point 8 million of interest expense, primarily associated with our convertible notes. This was offset by incremental interest income related to the return on our cash and investment portfolio.
After adjusting for non cash interest expense on a convertible notes. This resulted in non-GAAP interest and other income for the second quarter of 3.8 million.
Excluding the interest income related to the financing components related to 86, six that's would've been 0.1 million.
Using an assumed flat rate of 24% for non-GAAP pre tax income our non-GAAP net income for the quarter with 3.2 million.
Now, let me turn to the balance sheet detailed on slide eight over the past several years, we've built a very strong balance sheet cash cash equivalents and marketable securities totaled 486.1 million up significantly from the previous quarter, primarily through cash from operations up $62 million.
I mentioned previously this is our best performance in over 10 years into first half of this year, we've generated nearly $100 million of cash from operations at the end of Q2, we had contract assets worth 444.5 million, which reflects the net present value of Unbilled a are related licensing arrangements for.
The company has no future performance obligation.
I expect this number to continue to trend down as we billon collect for these contracts. It's important to note that this metric doesn't represent the entire value of our existing licensing arrangements as several customers have royalty based agreements that allow us to recognize revenue each quarter Andre agassi six effects.
Second quarter, Capex was 14.9 million and depreciation was 4.8 million.
We delivered 47.1 million of free cash flow in the quarter.
Looking forward I expect roughly 19 million of Capex and for the third quarter and roughly 36 million for the full year of 2020, a third of which is related to the relocation of our headquarters facility.
I also expect depreciation of roughly 5 million for the third quarter and roughly 20 to 20 million for the full year of 2020.
Our strategic refocus on our core markets and operational efficiencies have set a solid foundation for our company are predictable high margin licensing business has put us in a position to come out of current environment stronger than ever we continue to build cash and have limited debt with a disciplined financial approach that has built capital while investing in grow.
We are well positioned to grow both organically and Inorganically, our historical an ongoing investments in technology R&D have helped us build a patent portfolio that is foundational to our industry.
Our historical agreements, including those we signed this quarter position us well for our licensing renewals in the upcoming periods.
Now, let me turn to our guidance for the third quarter on slide nine.
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 the financial outlook under his seasick Sussex, we've also been providing information on licensing 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 13 of our earnings deck licensing billings closely correlated with what we had historically reported as royalty revenue under 86 or five.
We feel that we are very well positioned in the market, but remain cautious regarding a near term outlook do you did a lack of visibility created by cobot 19.
With that said under AC six effects, we expect revenue in the third quarter between 54 in $60 million.
I expect royalty revenue between nine and 15 million. We also expect licensing billings between 55, and 61 million quarter over quarter, we expect growth in our silicon IP business stuff that small reductions in patent licensing.
We expect Q3, non-GAAP total operating costs and expenses, which includes cogs to to be between 64, and 60 million as we continue to invest in programs.
Under 86, Sussex non-GAAP operating results for the third quarter is expected to be between zero and a 10 million dollar loss.
For non-GAAP interest in other income and expense.
Which excludes interest income related to 86 to six we expect this to be approximately zero, which includes 0.6 million of interest expense related to the notes due in 2023.
Based on the tax legislation passed at the end of 2017, we expect our pro forma tax rate in 2020 to remain consistent with our 2019 pro forma tax rate of roughly 24%. The 24% is higher than the statutory rate of 21% primarily due to higher tax rates in our foreign jurisdictions. As a reminder, we pay roughly 20.
$1 million of cash taxes, each year, driven primarily by a licensing agreements with our partners in Korea we.
We expect non-GAAP taxes to be between a benefit of zero and $2 million in Q3, we expect our Q3 share count to be roughly 116 million basic and diluted shares outstanding.
This leads you to between a non-GAAP loss per share of seven zero cents for the quarter.
While we don't provide guidance beyond Q3 as a reminder, in Q4, we will see our last step down related to one of our large licensing agreements with no. Other changes. This represents incrementally better profit than current consensus estimates for Q4.
As I've mentioned previously in the coming years, I expect licensing billings to stabilize at the same level, we expect to see in 2020, our product growth will then provide leverage on both the topline and the bottom line.
Let me finish for the summary on slide 10.
We are proud of the excellent performance by our team and the progress we continue to make against our strategic initiatives to drive long term profitable growth.
While we understand that 86 effects added the level of complexity true financial reporting its important to reiterate that the underlying financial strength of our business remains strong reflected in our demonstrated ability to generate cash.
We have refocused our product portfolio around Grand buses core strength in the semiconductor industry improved our operational efficiency and profitability generated solid cash from operations and leveraged our strong balance sheet to support our strategic initiatives.
We continue to focus on our core markets and are well positioned to come out of the current environment stronger than ever.
Before I open up the call today I would once again like to thank our employees for their amazing resilience during these uncertain times.
Everyone. Please stay safe and take care of yourself and your families.
With that I'll turn the call back to our operator to begin queuing day could we please have a first question.
Thank you.
Ladies and gentlemen, if you have a question. Please press star one on your thoughts tell tell us Alan.
Your first question comes from the line as Gary Mobley with Wells Fargo Securities You May ask your question.
Yes, Thanks, Hey, guys.
Let me start out by asking about some reconciliation items from GAAP to non-GAAP results in focusing specifically on substituting billings.
Substitute royalties for buildings.
That make that adjustment that gets to an adjusted revenue number, but just reported a quarter of roughly 103.6 million am I doing the math right there.
So Gary it's probably a great to hear your voice and I hope that you and your family are well I think what you're doing is your substituting licensing billings for what we typically report for royalty revenue.
And obviously, that's not a a GAAP measure, but if I were to do the math had to get the same number.
Okay, and translating down the different.
GAAP to non-GAAP reconciliation items from the expenses you get to roughly what 29 cents for the quarter.
Yes, Gary if I were to do that math as you did I would get the same number but again those aren't on numbers that we we present.
Understood Alright, I wanted to ask about.
Genability up your buffer chip business, it's been great now for several quarters, there's been a lot of chatter concerns as you addressed on your prepared remarks about inventories of again.
The a in the channel.
Related to some buffer inventory, it's the best year knowledge, how much of your strength in that portion of your revenue has been driven by.
Sustained demand for server capacity in data center operations versus inventory.
Increases versus market share shifts basically your handful competitors and any sort of step up in the market for what you're addressing just given the very best changes in the Intel processors process or cycles.
Hey, Gary.
Nice to talk to you.
We have a little bit of of all happening. So we continue to gain market share in the DDR for generations of products as Cascade Lake or ramps in into the market.
And we expect our design win progress to continue.
As new generations hit the market by the end of this year isolate is going to be introduced and we have a very good footprint. There there's going to be an increase of number of channels Weve isolate which can probably also increased the total demand. So so the traction in the market is is there.
And again is driven by the demand for work from home learns from home online Entertainment No. We don't see we don't direct customers a building all of the inventories snow, we said directly to our customers.
And are we able to meet their they commitments.
We hear some slight inventory build up at the system level I think people to some caution.
About a you know any possible disruption in the supply chain. So we've seen a little bit of buildup during the first half.
Of this year, but we don't expect too high a huge correction in the second half we put in for the second house, but I think the inventory buildup piece is very reasonable and he's there too.
Just prevent any possible disruption with the supply chain. So given that you know that get there could be nineteena environments.
Okay now in the long right in the long run we see more demand for full full buffer chip when when we move to isolate we're going to have another cheap with DB when the market moves to DDR. Five you know we expect a you know the markets to be.
Probably twice the size is what are these today by 2024.
DDR five is going to see a more content on the modules and ER and we're going to invest in all of these that chips that are going to be on DDR high modules. So in the long run we can see very high market growth for these these products. So we continue to be very optimistic in their own work with these business.
Okay. That's helpful Luke's and on the topic of the buffer chip business I think maybe you originally guided this business a couple of years ago to be it.
It's best to 60% gross margin business. It was 63% in 2019 at 68% and the most recent quarter, what's the limit on this and whats sustainable over the long term.
Hey, Gary its Robert So, yes, we've been delighted with our gross margins and any given quarter. It will go a little bit higher little bit lower just depending on mix and shipments and these other things as well and obviously as we continue to ramp volumes that you've seen a record and time and time again over the last five quarters.
Then we get to leverage some of our existing costs you know what I've talked about is gross margins in the 55% to 60%.
Branch long term, we've been posting as you know do closer to about 65.
But I think somewhere in that 60 odd range long term is it sustainable for us.
Alright, Thanks, guys I'll turn it over.
Thanks, Gary.
As a reminder to.
To limit to your question to one question and one follow up.
Your next question comes from the line Sidney Ho with Deutsche Bank, You May ask your question.
Hi, This is Jeff read on for sitting there congratulations on the nice quarter.
The licensing step down in Q4 do you think is points towards a sick sequential revenue decline in Fourq, you or do you think your product in contract growth can offset.
Yeah, Jeff I'm not to talk to you and I hope that you are well you know we gave guidance for Q3, because we guide one quarter at a time. So you know as as we mentioned in the prepared remarks as well, there's still a little bit of lack of visibility related to cover 19. So if everything else stayed flat then you'd see it.
Exactly that I think what I've talked about historically is that specific contract has a step down interest structural or something then negotiated I think five seven years ago of about 5.5 million in Q4.
That steps back up in Q1, so all other things being held equal you'd see a a Q4 that was down 5.5 on the top line and we had run that through and that we run a pro forma 24% tax rate. So that's about four cents.
So right now it's kind of.
Hard to gauge what's going to happen in the fourth quarter were very pleased with the progress that we have across our businesses licensing has come in exactly as we thought at the beginning the year you've seen a buffer chip performed very very well, we expect to see our silicon IP business rebalance in Q3.
But right now, we're taking that one quarter in time.
Great. Thank you that's helpful and you've got some design wins recently, how should we think about the incremental revenue opportunities when and how quickly should they ramp up.
The design wins Hi, Jeff. This is Rick the we continue to have design wins on the buffer cheap as we talked about earlier with our customers and we'd all customers customers and every time, a new processor and new DRAM or you deem architecture is introduced at the market that gives us an opportunity to win.
Designs and not explains the growth we have on the on the buffer chip.
We continue on the IP cores and security to have a healthy.
Design win.
History and pipeline.
Most of our design wins half of them are in the a data center fields. The other half is split between now you'll t. fiveg and AI titles that type of applications. The business model for IP causes a bit different.
People pay us for license and sometimes royalties or reuse season.
So the revenue comes quite quickly after we win the designs typically within the year or you don't have that follows that design.
And our design win pipeline is is is healthy Oh, we had some a slowdown in Asia.
Earlier in the year, when there were seeing shut down, but but activities continues to be to be healthy.
Great. Thank you so much.
Thank you Jeff.
Yeah question. Please press star one on your Capstone telephone. Your next question comes from the line of Suji Desilva with Roth capital.
Ask a question.
Hi, Luke I Rahul congratulations on a strong cash flow here very impressive.
So I'm just following up on Gary's question, Yeah, sure filling up a gary's question about the other revenue, yes, just asking about now the third quarter, the guide and stuff like doing math here I think it implies 103 million just slightly down sequentially revenues and EPS of 27 cents also.
Down little bit does that sound right Rahul.
So I think Suji again, what you're doing as you're taking the guidance for licensing billing from substituting that for for what we guide for for royalty revenue.
Then if I if I would do the same mapping to get the same view, which is one of the three and on a like compares and that's roughly flat quarter over quarter.
Then I'm sorry, what did you say on on the bottom line.
27 cents.
Yeah I is same thing if I run that through on a pro forma expense and tax affected at the 24% I get the same.
Great. Okay, and then a question on the business on the memory interface side, you Kinda Kinda cross currents and in the marketplace, you have strong share gain and grocery and memory buffer, but maybe you know some people took some some customers took some.
Accessing the in the beginning to kind of prepare for the second half.
Can you talk about that that the memory interface business and whether you expect it to continue to grow steadily this point or potentially pause after five quarters or growth or any color there to help.
So yes, it has suji high.
So I think we saw some as we said in the first half of the year, we so our customers taking some precaution because of could be 19.
But we believe that the inventory levels steal a healthy.
Going into you know the second half of the year. You know we are prudent with our outlook for full full buffer chip. We don't think there's going to do a correction, we think that the inventory level as steel steel healthy.
We'll continue to you know support that business, we thought design wins at the end of the year, a weakness and start seeing a you isolate.
Being up and next year I think is going to ramp Delphi is going to start to ramp and as I said when did you off Iran. Because we were when we were the first two inch would you Delphi some present the market. We believe our market share is going to continue to increase and in addition to that.
We developing companion products that are going to go in the same DDR beads. So the potential market for us is going to further increase when that happens.
Second half a as I said inventory levels I healthy, but we just prudent.
Okay understood and then last question coming off of a Intel's earnings. The you talked about the manufacturing challenges and emphasized perhaps use of chipsets and I think I'm curious for your silicon IP business mid Thirtys, if that's a potential tailwind in it. So you could kind of maybe talk about how important that could be to that kind of breaking up at the chip and having to connect the chips.
Yes.
Yes, that's a great question Suji wouldn't when you move into very seem technologies like seven nanometer or thinner like five nanometer the cost of masks and the complexity of designing especially on the policies is increasing so one of the solution to that problem is to actually.
Separate the interface or from the main chips itself and produce chip.
Hi to from this chip list and we have those developments in house. A you know we are either foods speeds of up 112 gig.
Three short range, Yeah, IP interface that can be used in shiftless. So that's an area that we watch very very closely I think there is a great market potential for that and that plays into one of our strengths, which is a very short reach 120 Saudis.
[laughter] technology.
Okay. Thanks, Congratulations again.
Thank you.
Thanks.
If you ever question. Please press star one on year Touchstone tell a sound.
At this time during no further questions. This concludes the question answer session I would now like to turn the conference back over to lift.
Thank you everyone, who has joined US today, where you continued interest in time, we hope each one of you stay cellphone healthy and look forward to speaking with you again soon have a great day.
Thank you. This now concludes todays conference you may now disconnect.
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