Q3 2020 Rambus Inc Earnings Call
[music].
Oh come into the T Force babies Bonnie Police conference is scheduled to begin more weekend will be a good time to like get deeply said told before your fishing once again to these conferences khaki begin momentarily.
Time your lines will be placed in whole. Thank you. Please continue to stand by.
[music] [noise].
[noise] welcome to the Rambus fourth quarter and fiscal year 2020 earnings conference call. At this time, all participants in listen only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session.
If he would like to ask a question the QB Press Star one on your Touchtone pad at any time, if anyone should require assistance. During the conference. Please press star zero on your Touchtone, Patrick and time as a reminder, this conference call is being recorded I would now like to try to conference over to you.
Rahul Mathur Chief Financial Officer, you May begin your conference.
Thank you operator, and welcome to the Rambus third quarter Twentytwenty results Conference call.
Whom author CFO and on the call with me today is Luc Serafin our CEO.
Press release for 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 Fivefive 8592, 056, you can hear the replay by dialing the toll free number and then entering I'd number two to eight 110.
For when you hear the prompt.
In addition, we are simultaneously webcasting this call and along with the audio we're webcasting slides that we will reference during portion of todays call. So even if you're 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 website beginning today five P.M. 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 done.
Man for existing and newly acquired technologies the growth opportunities that the various markets. We serve the expected benefits of our merger acquisition and divestiture activity, including the success of our integration efforts.
Risks and the potential adverse impacts related to or rising from Corona virus Jacoby 19.
And the effects of AC six or six on reported revenue amongst other thing these.
These statements are subject to risks and uncertainties that are discussed during this call.
It may be more fully described in the documents, we file with the SEC, including our 8-K's 10-Q's and 10-K. These.
These forward looking statements may differ materially from actual results and we are under no obligation to update these statements.
In an effort to provide greater clarity in our financials, we're 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 at Rabbit Satcom on the Investor Relations page under financial releases.
The order of our call today will be as follows Luke will start with an overview of the business.
Will discuss our financial results, including our guidance for future periods and then we will end with today I will now turn the call over to Luke to provide an overview of the quarter Luke.
Thanks, Rahul and good afternoon, everyone.
The company had another very solid performance this quarter.
It's an important growth continues we delivered on revenue of $56.9 million and exceeded expectations for profitability with continued great discipline on the bottom line.
It was another very strong quarter of cash generation with $44.1 million in cash from operations.
This brings the total for the year to over $143 million, which already significantly exceed our total for the entirety of last year.
As our proven track record of cash generation and progress on strategic product initiatives continue we are poised for healthy topline growth in 2021.
Data center remains a key growth markets across all of our businesses.
Cloud demand K work you did in the first half driven by significantly increasing online activity from corporations and consumers.
And has returned to more normal growth rates in the second quarter.
We continue to see sustained investment from our customers in products and solutions that will help improve the performance and security of the global data infrastructure.
Memory and interface cheats delivered a solid quarter with quarterly revenue up 39% year over year.
We are on track to have another record year with over 50% growth in our product business versus 2019.
Why do we continue to gain DDR for market share the third quarter. So the beginning of the short term data center inventory digestion, we cautioned about in previous calls.
We expect the bulk of these adjustments to occur in the fourth quarter and a return to normal consumption levels early next year.
We still anticipate to end 2020 significantly above the full year guidance, we provided in 2019.
Looking forward to 2021, we have a larger qualification footprint in the upcoming DDR for server platform transition, we should drive further market share gains.
For DDR size, we are in a leading position for qualification with our memory customers and partners.
DRAM suppliers are now sampling DD offline modules with our chips to system companies.
Looking forward, we are investing in the development of additional chips for DDR five platforms as well as new architectures and IP for number of memory subsystems.
This will further strengthen our memory leadership position in the years to come.
Turning to Silicon IP, we have strong quarter with increasing design win momentum across data center Fiveg edge.
This was supported by excellent execution from last year's acquisitions with a form of very matrix Innoswitch logic teams, both seating that targeted run rate for revenue.
I am delighted with this performance.
The successful integration of these teams gives us confidence in our ability to create greater value from future acquisitions.
Our solutions continue to lead the industry with the latest example, being our silicon demonstration of the worlds fastest HD into the memory interface.
Running at up to four gigabit per second.
At this speed our comprehensive solution delivers the highest bandwidth with.
For the most demanding data center applications include.
Including AI machine learning training and high end graphics.
Lastly.
We are very pleased Mike when extended their license agreements for an additional four years under the existing financial returns.
This extends their license agreements beyond the next renewal dates for sensing and SK Hynix.
And he is a great testament to the ongoing strength and relevance of our patent portfolio as well as our growing partnership with Michael.
With this extension we have solidified a sustained foundation of cash generation from our licensing program that allows us to return value to our stockholders and build our growing product businesses.
With that he said.
Afternoon, we announced a new stock repurchase program, which will who will discuss in more detail later on in the call.
The program demonstrates the board's confidence in our strategic direction and underscores our ongoing commitment to investors.
Strong cash generation also gives us the flexibility to invest and expand our technology roadmap to address loans data centric applications.
Through our ongoing focus and execution, we have multiple revenue streams across the company and with our structural step downs behind us. After Q4, we would be well positioned for significant absolute growth in 2020 one.
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 third quarter, Let me start with some highlights on slide five as Luke mentioned, we delivered a solid quarter, we delivered financial results in line with our revenue expectations and at the high end of our earnings expectations, while continuing to strengthen our balance sheet and make price.
Address on a number of business initiatives as well as our long term growth strategy.
We've adopted a 606 and 2018 using the modified retrospective method, which did not restate prior periods, but rather runs the cumulative effect of the adoption through retained earnings at the beginning balance sheet adjustment any comparison between our results under 86 or six and prior results under 86. So five is not an accurate way to track our company.
Its progress.
We will continue to provide operational metrics such as licensing Billy to give our investors better insight into our operational performance.
We delivered revenue of 56.9 million and licensing billings of 63.1 million in line with our expectations.
The strength of our model reflects our proven track record of generating strong cash flows we have a very strong balance sheet and ended the quarter with cash cash equivalents and marketable securities of $520.2 million up nicely from the previous quarter, primarily due to cash from operations of $44.1 million.
This brings year to date cash from operations for the nine month to 143.4 million well above last year's full year total of $128.5 million with another quarter remaining in the current year our.
Our continued execution on our strategy and our operational discipline have yielded solid financial results and a strong balance sheet that affords us flexibility to support our strategic initiatives.
Over the past years growth in our product businesses has enabled us to offset the known Stepdown in patent licensing we are.
We're well positioned for next year, but our final significant licensing stepdown scheduled for Q4, our products will drive overall company growth in 2021, improving both our top and bottom line.
Now let me talk you through some revenue details on slide six.
Revenue for the third quarter was $56.9 million in line with our expected range royalty revenue for the third quarter was $16.6 million by licensing billings with 63.1 billion. The difference between licensing billings and royalty revenue primarily relates to timing as we don't always recognize revenue in the same quarter as we bill our customers.
Going into additional detail.
Product revenue was 29.8 million, consisting primarily of our buffer chip business our.
Our contract and other revenue was 10.5 million, consisting primarily of our silicon IP business.
For the year Theres, roughly $40 million of our silicon IP business, that's being reflected in our licensing billings. This is almost twice what we expected our analyst day a year ago.
Strengthen our security IP business in particular enabled us to meet our revenue expectations in Q3.
These results represent excellent growth year over year.
Let me now walk you through our non-GAAP income statement on slide seven.
Along with our revenue performance in Q3, we again exceeded our profitability targets as we have done consistently over the past many years toll.
Total operating expenses, including Cogs for the quarter came in at 56.7 million.
Operating expenses of $45.8 million or lower than the prior quarter due to lower expenses related to our headquarter facility and other variable expenses.
Multiple revenue streams to enable us to offset quarterly variances in any particular business.
We ended the quarter with head count of 679 slightly higher than 670 in the previous quarter as we continue to invest in our product programs.
Under eight see statistics, we recorded $3.3 million of interest income related to the financing component of our fixed fee licensing arrangement for which we recognized revenue, but not yet received payment.
We incurred zero 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 our convertible notes. This resulted in non-GAAP interest and other income for the quarter of $2.7 billion.
Excluding the interest income related to the significant financing component related to 86 or six this would have been zero point $6 million of interest and other expense.
Assuming a flat rate of 24% for non-GAAP pre tax income non-GAAP net income for the quarter was $2.2 million with.
With continued focus on cost and disciplined execution, we delivered profit that was nicely above our expectations.
Now, let me turn to the balance sheet details on slide eight over.
Over the past several years, we've built a very strong balance sheet cash cash equivalents and marketable securities totaled $520.2 million up significantly from the previous quarter, primarily through cash from operations of $44.1 million as I mentioned previously year to date cash from operations for the nine months was 143.4 million.
Well above last year's total of $128.5 million with another quarter remaining in the current year.
As we continue to deliver on the topline and execute on operational efficiency, we expect to continue to deliver strong cash from operations into the future.
At the end of Q3, we had contract assets worth 401.7 million, which reflects the net present value of Unbilled AR related to licensing arrangement for which the company has no future performance applications.
I expect this number to continue to trend down as we bill and collect for these contracts it's.
It's important to note that this metric doesn't represent the entire value of our existing licensing agreements at several customers have lower fee based agreements that allow us to recognize revenue each quarter under 86 are fixed.
As we announced previously we were pleased to extend our existing licensing agreement with Micron at September at our existing financial terms, demonstrating the strength and relevance of our patent portfolio.
When this extension comes into effect in Q4, we expect to account for this agreement to be recognized as a variable contract. We do not expect to onetime impact to revenue nor the corresponding addition to our unbilled contract assets. Instead, we expect to recognize AC 666 revenue on a quarterly basis, starting in the first quarter of 2021.
Between this extension and buffer chip growth our AC fix as such revenue is poised for strong growth next year.
From a licensing billings perspective.
As negotiated in the original agreement Micron contract will step down to $4.5 million in Q4, and then step back up to 10 million a quarter from Q1 21 through Q4 of 2024.
It's also worth noting we renewed our agreement for four years longer than the extension period. Initially specified we have a strong partnership with micron and this bodes well for our upcoming renewals and extensions with our other partners.
Overtime, we endeavor to transition renewals and extensions to variable agreements that could allow us to take revenue overtime as opposed to upfront under AC six or six.
Third quarter, Capex was 10.6 million and depreciation was $4.8 million we.
We delivered 33.5 million of free cash flow in the quarter.
Looking forward.
Spec roughly 14 million of Capex for the fourth quarter. This represents roughly $35 million for the full year of 2020, 80% of which is related to the relocation of our headquarters facility.
I also expect depreciation of roughly $5 million for the fourth quarter and roughly $19 million for the full year of 2020.
Now, let me turn to our guidance for the fourth quarter on slide nine.
As a reminder, our forward looking guidance reflects our current best estimates and our actual results could differ materially from what im about to review.
In addition to the financial outlook under 86 or six 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've seen the supplemental information we provided on slide 13 of our earnings deck licensing billings closely correlates with what we had historically reported as royalty revenue under AC six or five.
Under 86 effects, we expect revenue in the fourth quarter between 45 and $51 million we.
We expect royalty revenue of between 12 and $18 million. We also expect licensing billings between 61 and $67 million.
We've been making steady progress on our business and financial initiatives.
Similarly, we're very pleased with the execution on the acquisitions, we made last year.
The teams have integrated well into our company and on a trajectory nearing our expectations at the time of each acquisition.
Our guidance reflects the contract term for the patent licensing extension with Micron I mentioned previously as well as the inventory digestion impacting our buffer chip business as.
As we've been discussing we've been monitoring the inventory build we thought at the beginning of the year and we are confident this pause it doesn't reflect any change in our competitive position our market share.
As Luke mentioned, we expect to be through this in early 2021.
Our Q4 guidance and buffer chip reflects annual growth of over 50% year over year as almost 30% better than what we anticipated at last year's analyst day.
In total our Q4 guidance reflects financial results for 2020 that are substantially better than what we expected to last year's analyst day on both the top and bottom line. Despite the unprecedented challenges presented by COVID-19.
We expect Q4, non-GAAP total operating cost and expenses, which include Cogs to be between 59 and $55 million as we continue to invest in programs.
Under AC successes.
Non-GAAP operating results for the fourth quarter are expected to be between four and a $14 million loss.
For non-GAAP interest and other income and expense, which excludes the interest income related to FX effects. We expect this to be approximately $1 million of expense, which includes zero point $6 million of interest expense related to the notes due in 2023.
We expect our pro forma tax rate in 2020 to remain consistent with our 2019 pro forma tax rate of roughly 24%, 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 million of cash taxes, each year, driven primarily by licensing agreements with our partners in Korea.
[music].
We expect non-GAAP taxes to be between a benefit of one and $4 million in Q4, we expect our Q4 share count to be roughly 117 million basic and diluted shares outstanding. This leads you to between a non-GAAP loss per share of three and 10 cents for the quarter.
We have gone through a successful transformation over the past several years and our strong product growth has offset structural step downs and patent licensing the divesture of payments and ticketing and the shutdown of our lighting business. This.
This has resulted in a roughly flat top line as we transition back to our core semiconductor focus through this transition. However, our operational discipline resulted in fantastic growth in cash from operations.
As we look forward the scheduled step down for patent licensing will be behind us and in the coming years, we expect patent licensing to stabilize at the same level, we expect to see in 2020.
As I mentioned earlier, our product growth will translate into profitable growth in 2021.
With that said, while we don't provide guidance beyond Q4, we're comfortable with the analyst consensus estimates at the topline and bottom line for each quarter of 2021.
The near term macroeconomic conditions are difficult for any of us to predict cancer.
Consensus estimates are currently in line with our long term strategy, reflecting product growth that continues to be significantly better than the broader semiconductor industry.
Our confidence in our long term prospects as reflected in the near 20 million share repurchase authorization from our board that we announced earlier today.
Let me finish with a summary on slide 10, we are proud of the excellent performance by our team in this unpredictable that are economic environment and the progress we continue to make against strategic initiatives to drive long term profitable growth.
While we understand that AC success, six added a level of complexity to our financial reporting it's important to reiterate that the underlying financial strength of our business remains strong we have a predictable base of revenue and a demonstrated ability to generate cash.
We have refocused our product portfolio around rambus its core strength in the semiconductor industry and are well positioned with a predictable licensing base and multiple product revenue streams across the company.
We have continued to execute and our operational discipline has yielded solid cash from operations.
We continue to leverage our strong balance sheet to support our strategic initiatives.
Before I open up the call to Kuni I would once again like to thank our employees for their continued teamwork and execution 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 Q any could we please have the first question.
Thank you Nicole ladies and gentlemen, if you have a question. Please press star one on your capital pilots talent.
Your first question, Karen Fairchild synergy so far with Roth capital you May now ask your question.
Hi, Lou payroll congratulation on the very strong cash generation the good side of.
The Terra.
Well I model out assay six or five I just wanted to check for.
The three key revenue if I do my numbers it seems to be it.
$103 million.30, EPS lots are like what the EPS of six so five might look like.
Typically I think what you're doing is you're substituting what we report for licensing billings for what.
Well see Robyn, so you're kind of mixing some apples and oranges, there, but I understand that how a lot of our investors and analysts look at our company and Daimler and Thats, how we look at it ourselves, but I think at the ready to do that math, yes, I get the same numbers that you have.
Okay, and just to check on the guidance for Fourq, I think with the stuff or the the drop in the product revenue. It seems like it's more like $97 million from 25 cents does that sound reasonable as well.
Yes, again it in math that we cant publish because it's company specific non-GAAP results, but if I were to do that math and get the same numbers eight okay.
Okay, and a couple of questions on kind of EPS, perhaps starting.
Several I think the Fourq you 20 relations Stepdown is the last one you see in the near future quarter Wise is that correct 21, the more normalized year without an expected step downs that what you're saying.
Yes, that's right. So this is something that we've been talking about for not just quarters I think per year.
As the agreements that we signed over the past several years 2016, 17 18 were structured in a way that allows our partners to take advantage of a very positive time in our industry with more payments upfront and then fewer billing, but what we said fairly consistently is that we think for the full year 2020 that should be.
Roughly the rate will be at for the next several years, we were very excited to extend the micron agreement for four years instead of what was contractually three and so that essentially then comes back up.
End of 2024, and as you know we have Samsung coming up in the Middle of 23, and then Hynix also in 24. So what we said is we expect license is going to be roughly flat now.
For the next several years of the basins. We had in 2020. The one caveat is that we also have our silicon IP businesses and in some cases, there our billings associated with that business, but also show up in our life the drilling and I think as I mentioned in our prepared remarks, there's probably about $40 million of licensing billions in 2020, that's really related facilities.
Yes.
But that base associated with just our patent licensing business I expect to be roughly flat for the next couple of years.
Because we don't have large essentially inroads with the big three DRAM partners until 23 and 24.
Okay, and then maybe one more question for ROE and perhaps look what's.
Its burgeoning cash amount I appreciate the buyback in place, but with the success of acquisitions can you talk about the target areas for further acquisitions Similarly to beef up security and what size of acquisition, maybe perhaps willing to go to our similar.
Thanks to you yes. Thanks.
Yes, we continue to generate cash in the quarter and we buy back but.
We constantly look at acquisitions.
Designed to continue to grow sales allows physicians to better address the meeting of anything that would complement our offering in the data infrastructure.
To grow our business through acquisitions.
We look at this very regularly we think most a lot of acquisitions that we think are not going to be good for us strategically or financially.
But that's thanks to our strategy going forward.
Okay, and maybe a few more perhaps for look the data center side, the memory buffer share opportunity to counter 21 is it is the visibility driven by a resumption of Intel platform that during todays spending back or data center cycles or is it your share gains.
But whats your end in calendar 2000 shares versus quarterly share opportunity.
Yes, so we continue to gain.
Care in please Wendy.
As Robert said, we generate we time to generate about 60% growth over the last year in a market that probably grew about 5%. It will heavily front end loaded because ecosystem ordering more in the first half.
Yeah, I think once that could be 19, those tiers are.
Winding down and people are doing who are the same thanks.
Digesting the inventory overall, Oahu OPI will have utility in the less than the second.
We grew 50% over last year in the market that grew only 5%. So we continue to gain share now when we look at Twentytwenty one.
There are a few things that are.
Tailwind for US one is we believe that early next year.
Inventory digestion is going to be over.
The processors.
The next generation.
To be launched in the market.
And as we said.
We are focusing the 10 minutes so whatever the share.
Hello.
You know our strongest market grow we grow with them now in the longer run.
You know we have the upside coming from July we have today.
All of our.
Smoking faced sample orders will geoscience.
Indeed.
So that's going to be an upside for us in the longer run that's going to start to ramp at the end of next year.
And we invest into the companion shifts that are going to be required on the platform.
As well as new architecture that we believe are going to emerge over the next few years victory from the cloud companies yes.
Business.
Is showing very nice growth potential for us very nice.
Share gains for us.
You need to go.
Q4, where we think the investigation discrete happen.
The order after that we will see tailwinds.
Okay last quick question will pass it along any thoughts on the Intel man Divesture to hide anything application correct.
It really doesn't have any implications for us.
This pilot.
Prediction I think will happen the three areas that we see a lot of consolidation.
People are going to start to develop domain specific platforms, because they have to deal with an exponential growth of data workloads.
Coming from the new applications like video work from home AI and so forth. So we see some of that consolidation happening now in the industry will get sold benefit because he is that everyone is going to need to have access to more data faster and thats, where we spend our investment money.
And I think this is going to vary requiring more security as well.
And if you look at the track record.
Surety design wins, we CGC translating that track record. So all of this is good for US and continues to increase our doesn't have a direct impact on our business.
Your next question comes from the line as Gary Mobley with Wells Fargo Securities You May ask your question.
Hey, guys congrats on a strong finish the year.
As for taking my question.
I wanted to ask about product cycles for the buffer chip business as we look into next year.
When you get your opinion on who will be the first to a gap year five will be the Hyperscalers and then with respect to Intel's 10 nanometer ice Lake looking from six memory channels to eight wonder if you can give me sort of a take on how that might.
Relate to your to your average selling prices in your content in these memory modules.
Yes, Thanks, Gary.
These are really good questions. So.
First of all the move to six to eight channels is going to happen before our size in the next version of the video.
Ddrfour processor from Intel and that will give their customers the ability to populate more memory processor, so thats a potential growth in the mid market.
And thats going to be up to their customers to decide whether they realize that gross loss.
Because all of their platforms that are used to some six to eight memory channels. When we moved from.
Hi, Blake, we eight channels in the us or to.
The G. Five platform, we can stay on an eight A.H. on their platform, so that capacity deals or potentially more memory.
The answer will be we continue.
Good for us we see.
A couple of triggers next year, one is the move to make.
And you know.
The fact that.
The new platform there is an opportunity for us as a better a design win footprint and we know that our footprint slightly better than what it was for testing.
Calculates so thats the first thing that is happening.
So DDR high.
If we really run when the order is 10 ready and as they.
They are different stages of development on I'd say, there's the processor guys on the memory guys as well.
The good news for US we do have.
And Paul Murphy is orders now from all of them.
We are shipping into modules. These modules are shifting into.
The very early central system companies.
So all of these are two sides and I think Kerry.
Thanks, everyone is ready.
We are going to be diversified position to enjoy.
Enjoy nice share from these trends.
Thanks for that.
Yes, do you roll I wanted to ask about your buyback in your timeframe for the buyback in the past you've done accelerates share repurchases.
So assumptions underpinning go at this time with the more I guess methodical approach or slower approach in doing the math right.
Given sort of the offsetting.
Lower share count offset by lower interest income this could be potentially 20 cents accretive on an annual basis.
So Gary Thanks for the question to put a little bit of context. The last time, we did a share repurchase authorization was in 2015 and that was also for 20 million shares.
And then from an actual activity perspective, we did about $100 million accelerated share repurchase in 2015, we did another I think $50 million and 17, another $50 million in 2018, So thats, how you get to the 3.6 that was on the previous authorization, which we cancel with a new one of the reason I provide that history is that.
Now this is something we look at for several years in the future I think it's a very strong signal from our company and from our board that we believe in the long term value of our company now that said, we have done accelerated share repurchase in the past because I think it's very positive signal and it also gives us the shirt.
He is taking share sub market that then were opportunistic in terms of when we actually add now of course, and we can be in any possession of material non public information whenever we choose to be in the markets that we have to look at some of those guidelines as well.
But if you look at what we've done in the past.
But that typically refers to is.
That 43, 40% to 50% of our expected free cash flow over the next three or four years. So thats I think how we look at how we size that amount hopefully that's helpful to you.
Sure sure I appreciate the commentary with respect to your comfort level with current consensus through fiscal year 21 in which I believe currently from a revenue perspective sits at $437.2 million, which of course is adjusted revenue number but I was wondering if you can give us any sort of preliminary view into sort of your opex true.
And against that backdrop.
Sure sure so just from an opex trend.
Thank you know what we look at is we're going to continue to look at investing in our business right. We have done a fantastic job over the past couple of years of taking costs out of our company.
So what you would see is from a total opex perspective is that.
It would be a little bit larger.
Then than we have in the.
You're 2020, because we will continue to go invest in our in our program I think I would expect to see our gross margins on the product side continue to be very strong kind of in the 60.
55% range and then you also have higher margins in the silicon IP business as well.
So I think that's what adds up to our comfort on the consensus both on the topline as well as the bottom line for each quarter of 2021.
Your next question comes from the line as Sidney Ho with Deutsche Bank. Please ask your question.
Hi, This is Jeff breakdown for Sydney, Congrats on a nice quarter early in the year, you announced a panel agreement with a Chinese company building DRAM has the recent escalations and trade tensions had any impact on this how do you think about the China market going forward.
Hi, Jeff This is Rick.
Basically you we'd watch what's happening in China like everyone else.
[music].
What's the tensions we don't have an impact.
Yes in fact, I would say on that at Raymond This is pure patent licensing agreements the legal agreements that allows the partners in China two deals DRAM devices.
And we see a.
Royalty agreements so our revenue will ramp in the branded products. So I would say the impact could be indirect depending on how fast they ramp their products for other reasons.
But you will not have direct impact EPS is just the legal agreements for them to be able to guilty of EPS for us.
Great and I guess I was just looking out a little what we talked about is that we don't expect to see a significant impact from a dollar perspective in the near term just as the partners ramping.
And as as Luke mentioned, there's no technology transfer and the prices that shift the legal agreement that allows them to to ship.
I think one of the benefits of the license from from my view is that you know.
License agreements are usually five years or longer and so that extended beyond the existing renewal and essentially timeframe or are the big three DRAM manufacturers letter talks to the strength and relevance of our portfolio.
Great and then just following up on some commentary from earnings so far point to on chemistry, extending still being pretty weak can you talk about how our on premise spending this client spending impacts your business.
You mean on on premise pending continuous was yes.
Okay client spending.
Okay.
Well, it's difficult for us to to to.
Track that are.
Buffer chip business, mostly goes into.
Data center type types of applications.
You will see a shift from cloud demand.
From from enterprise to cloud demand.
But does not affect us because usually memory modules go either not surprisingly cloud.
And just by the same token we feel we're almost indifferent to the relative share in television D. became of indifference to the share between enterprise cloud strongest market growth and we continue to gain share in terms of 72 point, we should see a nice continuation of our share gains.
In that index that we don't ship any products into the space.
In terms of buffers.
Suffers.
Okay. Thank you.
Your next question comes from John.
That said wed Craig Smith can you ask your question.
Hi, guys. Congratulations on the solid results, especially free cash flow and thanks for let me ask the question.
I guess my first question is on the datacenter side.
Yes, and you see in the calendar fourth quarter is there anyway to quantify kind of the hit but that you that you're expecting to see in the fourth quarter because of that and at this point.
Because customers have too many too much CP use they bought too much early in the year or is it because they actually have too much memory and I guess, it's important because as you think about visibility as to data set are coming back why are you confident that its only a one quarter phenomenon.
Sure Don it's Robin Thanks, very much for your commentary, let me start now Rcs liquid like to add if you look at the guidance that we gave for Q4, we had our buffer chip business dropping from roughly $30 million in Q3 to that 21 million in Q4, and what we said is that all of our channel checks and conversations with our.
Our partners and indicate that should come back sometime early.
Next year in terms of what's there I think it really is the best phrase to use his inventory digestion.
I think there are partners and you see the downstream a restaurant or just being very cautious in terms of how much inventory they have in hand.
It's really something we've been talking about all year right. We saw great demand in the first half of the year and I think really that was because of the uncertainty of what was going to happen from a supply chain perspective under under coated and I think now as I mentioned earlier as people have better visibility and have more faith in the Brazilian so of the supply chain than what they're trying to do.
There is just go manage their their inventories so.
Well pause there and see if there's anything we can do that.
Yes, I think what has been John is.
Earlier in the year the system company, starting to build inventory because they were concerned about.
Destruction downstream supply chain, but.
But the lease inventory build up as far as we understand it was it was more upstream from us at the system level now these concerns aren't going away. So people are starting to Jews digest the inventory at the system level.
You asked a question about we see pockets so memory.
That's a great question.
The memory is on a different cycle soon can populate their system.
[music].
In.
In the process, we can build these demand. Nevertheless, these post great memory, which is good for us because we track that we can track how our memory.
Really says they are going to go but also because the population late closers that gives us flexibility and gained share in that transition or one platform ramps when at the end of the day.
Memory modules are going to be used in one of the other platform I wouldn't think go back on track.
Changes you on Q1 based on just talking the ecosystem, so very close ecosystem.
There are some payers.
The current Q4, we're going to see the digestion early next year, but as the demand picking up again.
That's good color and then just as my follow up well you kind of implicitly answered. This one you commented that you feel comfortable with.
Street consensus estimates for the quarters next year and 21%.
Just kind of curious on the Opex front, how do we think about kind of.
Good as an opex driver how much more expenses was this year because the kobin, Conversely, where there any cuts that you were able to take out of this year's opex that come into next year's Opex I'm, just kind of curious how we should be thinking about that dynamic.
Yes, that's a great question and I think as I had mentioned earlier, we've done a fantastic job over the last several years, taking cost out of our company you see it in our guidance on operating expenses and you see it in the overall come down, particularly in terms of that Jenny.
I think from a coded impact we actually had fewer expenses this year, particularly related to travel.
And that's something I think that helped US one of the things that I think we've done very well at the company is use the opportunity with Covance kind of re imagine how we want to go run our company. So things like hybrid work in our facility for that for example, right. So I think there are definitely things that we can do to continue to take cost out.
The company next year and what we're going to do is then take that cost that we might have otherwise had on on.
Infrastructure and invested back in the program I think I've been delighted with the growth in our product program and so its something where we're using the learnings that we've seen over the course of this year with total bid to become more efficient next year as our employees back to work.
I hope that helps answer your question I gave some feedback a little earlier just in terms of a range of about Opex I think I have here a little bit of increase.
So quickly on the R&D side year over year, but you should have flatter cheniere coming down.
Perfect. Thanks, guys appreciate it.
Thank you John.
Thank you.
Once again, ladies and.
Gentlemen, if you have a question. Please press star one on your taps talent talent found again, if you have a question for Eastern Star One on your touch Stone tablets now. Your next question comes from Mark both passive Jeffery.
Jefferies' ask your question.
Hi, Thanks for taking my questions.
I just wanted to make sure I was clear on that so for the renewed micron contract. This is under the same terms as before and there was no change in revenue recognition from an AMC.
Six or six standpoint is that did I understand that properly.
So.
Let me spend a little time on this mark because the reason that it could sound confusing is because it can be and it is when we adopted the assay six so six in 2018 and.
If you look at the existing agreement, we had with micron and because of the nature of the agreement essentially we had earned everything associated with that contract even through the end of this year. So when we adopted NSC six effects in 2018, the entire balance was adjusted EPS as part of retained earnings the entire.
Well you have the contract.
Now when we.
The renewal that we signed in Q3 that renewal actually doesnt come into effect until next quarter in Q4.
And then what ends up happening is that from a billings perspective contractually that contract comes down by five and a half million for us in Q4, and so Thats why you see a kind of a delta in terms of our expected results from Q3 to Q4 and that comes back up to 10 million a quarter in Q.
[music] one of 21 and it should be 10 million a quarter from Q1 21, all the way through the next four years. So Q4 of 2024 now from an assay currently.
Currently trending that way back from a billings perspective, it will just be 10 million a quarter for the next 16 quarters from an assay six or six perspective, because we've essentially signed an extension I do expect that we'll be able to treat that agreement as a variable contract and recognize NSC six of six revenue.
On a quarterly basis, starting in Q1 EPS of 21, so as I mentioned in my prepared remarks, I don't expect to see a massive one time entry for revenue in Q4, when that license income essentially takes effect, nor do I expect to see a massive increase in our contract asset our unbilled.
Contract assets, rather what I'd expect to see that are able to recognize that ratably as 86 or six revenue from 21 through 24, I hope that helps answer your question.
Gotcha, I think I I think I understand so it so.
Previously you when you adopted success next Utica you took a one time.
We took a one time.
Revenue you recognized onetime revenues and then just on a billings basis, you would you would get you again you'd have billings, but we wouldn't have.
The six or six revenues recognized on this.
No actually hard yes, I'm, sorry, if I can answer because actually because the contract was signed before our adoption of basis ex FX, we were never able to recognize revenue. It was a onetime adjustment to retained earnings to reflect the assignment that billing okay.
One of the vagaries of sex effects.
So that the the chances are you are going to recognize revenues quarterly now from micron. According to see success. Thanks.
Starting in Q1 of 21 that got you okay.
Okay Thats, great and do you think is is this what you would expect to happen with future.
On tracks as as they.
As they come up for renewal.
So mark that's exactly what we've been trying to do as we sign new agreements or as we sign new.
Those are extensions is to have contracts that are more friendly from a success ex perspective.
We've also been very straightforward that we're not going to give up economic value in order to get slightly better accounting.
Yes in our roads and extension Thats, what weve been trying to do.
Okay, all right I understand so your your your revenue stream.
Revenues recognized and expenses recognized on micron going forward or are going to more closely resemble your cash flows.
That's fair.
Yes, we don't really have specific expenses associated with with micron.
The revenue associated with that will be better and it's one of the things I mentioned in my prepared remarks is that given the variable treatment of the micron extension as well as our expected growth in buffer chip I expect to see a fairly significant increase in Essex, a fixed revenue in 2021 versus 2020.
Right got you Okay alright.
Thanks for reviewing that for me again.
Now on the share repurchase is is the way to think about this that you.
You guys throw off a lot of cash you look you look for opportunities.
We look for inorganic opportunities.
If none manifest and.
You build up a pile of cash and then you say, okay well the right thing to do is returned to shareholders is that is that the right way to think about your ammo.
So mark we've been very consistent in terms of capital allocation, we look at organic investment inorganic and then return to shareholders and we ended the quarter with I think $520 million of cash. So we continue to do a great job investing organically in the places that are growing and you see it particularly in our product growth.
We've also been active Inorganically Im very pleased with the progress on the two acquisitions, we made last year. When we look at our cash balance what it shows is that we have enough cash on hand continue to invest organically and also to continue to participate in the industry consolidation from an inorganic perspective as well.
And then what we've done is.
Then been kind of opportunistic in terms of capital return as well so I think as I mentioned earlier.
Continues as part of our commitment has the company to return cash to our shareholders and what we target is returning somewhere between 40 and 50% of free cash flow back to our shareholders and we have been doing a pretty good job of that over the past. Several years. One thing also is just to be clear the share repurchase does not.
Preclude us from doing the right M&A I think Luke talked a little bit earlier about some of our focus areas in terms of a data center and memory and security and we're constantly looking for more opportunities to add to our business like we did very successfully last year.
I'd also remind you it's fair for our size, we have relatively little debt. We have one convertible issue that comes due I think in.
In early 2003, there's a call spread there so it's not dilutive to us until were trading at $23.30.
So it gives us.
Level of fire power that I think is unusual for unusually high for a company our size and certainly we'd like to see ourselves continue to grow both organically and inorganically.
Very helpful. Thank you will appreciate that.
Yes, welcome. Thank you.
At this time there are no further questions. This concludes the question and answer session I would now like to turn the conference back over to Luke therapy.
Thank you to everyone, who has joined US today for your continued interest and for your time, we hope each would you stay safe and healthy and look forward to speaking with you again soon have a great day. Thank you.
Thank you. This now concludes todays conference.
Okay.
[music].
Yes.