Q3 2021 Rambus Inc Earnings Call
Ladies and gentlemen, welcome and thank you for standing by. Today's conference is scheduled to begin momentarily until that time your lines will again be pleased and hold. Thank you for your patience. Once again, today's conference is scheduled to begin momentarily under about time. Your lines will again be place and hold. Thank you, and please continue to stand by.
Welcome to the Rambo's third quarter, and fiscal year 2021 earnings conference. Call at this time. All participants are in a listen-only mode. At the conclusion of our prepared remarks. We will conduct a question and answer session. If you would like to ask a question. You may press star one on your touch-tone pad at any time. If anyone should require assistance during the conference, please press the star. Is there, L on your top Stone path?
Anytime, as a reminder. This conference call is being recorded. I would like to turn the conference over to - MS. Lynch, Vice, President of Finance and investor relations. You may begin your conference.
Thank you results conference call. I am dead VP of finance and investor relations. And on the call with me. Today is Works Edison or CEO Rahul master or CFO and Keith Jones, our chief accounting officer, the press release for the results that we will be discussing today, has been filed with the SEC on form. 8-k a replay.
If this call will be available for the next week. Eight five, five, eight five, nine 2056. You can hear the Replay by dialing the toll-free number and then entering ID number 953. 7075 when you hear the trunk, in addition, we have several taneous. Lee webcasting, this call and along with the audio. We are. Webcasting slides that we will reference during portions.
It's of today's call. So even if you're joining us via 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 5 p.m. Pacific time. Our discussions today will contain forward-looking statements, including our expectations regarding business opportunities product and investment strategies timing of expected product launches.
The mines for the existing and newly acquired.
Is it could also opportunities of the various markets? We serve the expected benefits of a merger acquisition and divestiture activity. Including the success of our integration efforts, the company's ability to deliver ongoing profitable growth, the company's Outlook, and financial guidance, for the fourth quarter of 2021 and related drivers risks and the potential adverse impact related to or arising.
COVID-19, and the effects of EXE 606 on reported Revenue, amongst other things. These statements are subject to risks and uncertainties that are discussed during this call. And maybe more Philly described in the document. We file with the SEC, including our ak's 10-qs, and 10ks. These forward-looking statements need, therefore, materially from our actual results and we are under no obligation to update these
In an effort to provide greater Clarity and listen and choose. We are using both Gap and non-gaap financial presentations. In both, our press release. And on this, call a Reconciliation of these non gaps in and chose to the most directly compatible. Gaap measures has been included in a place release in our slide presentation and on our website at around this.com on the investor relations page under Financial releases.
We adopted ESC 606 and 2018 using the modified retrospective method which did not reach the prior periods. But rather than the cumulative effect of the adoption through retained earnings, as a beginning, balance sheet adjustment, any comparison between a results under ASC 606 entire results. Under ASC 605 is not an accurate way to track. The company's progress. We will
Send you to provide operational. Metrics such as license Billings together, investors better insight into our operational, performance. The author over call today, will be as follows. Luke Who start with an overview of the business. The who will discuss the financial results. He threw discuss our guidance for future periods, and then we will end with QA. I will. Now you tell me to call over to work to provide an overview of the quarter.
Work.
Thank you, Dez and good afternoon. Everyone. Q3 was another spoon quarter for Rambis. We delivered Revenue in line with expectations at eighty. One point, three million dollars generated 46 million dollars in cash from operations and hit our targets for profitability. This performance was driven by great execution from the entire Global team.
Memory interface. Chips delivered record, revenue of roughly 37 million dollars, which is up 18% quarter of the quarter and 23 percent year-over-year. This high demand for server memory. And with that, we expect further growth and another record quarter in Q4.
All of this growth and momentum.
I happening in the context of the very challenging supply chain environment across the entire city, conductor industry.
As we mentioned last quarter, we seeing the same shortages and cycle time challenges experienced by our peers. We are proactively managing our supply chain and working closely with our partners to ensure our ability to satisfy the growing customer demand for our products and she probably aggressive memory interface. Keep revenue targets. We set at the beginning of the year.
Despite these challenges as I stated earlier, we delivered 18% quarter-over-quarter growth in Q3 and will continue to grow in Q4.
In addition to the solid financial performance. We also achieve some very exciting. Product Milestones are first-generation ddrm, CD is in production, and shipping in volume to customers.
In anticipation of the ever-rising needs of future data centers. We are also the first to sample a second generation ddrm, V out 3D.
This is an important achievement as we raise the bar on performance and maintain our leadership position in ddrm, 5 memory interface chips.
Turning to our cxl interconnect initiative. We seeing High engagement across the entire ecosystem, including ddrm, OEM and Cloud, players alike. And I getting great feedback on the needs of both the markets and our customers for our future roadmap.
We launched our industry-leading cxl 2.0 controller IP including Integrated Security functionality. Is that protects data with no performance. Overhead. This IP was developed by the team that recently joined from plda and will be a key ingredient for future Data Center, architectures.
This brings me to a board of progress across the city and it business where we are, growing in size and scale with new products and design ways. We are leading the charge for critical Technologies in our Focus areas, including cxl, hbm and security ID.
Through our continued internal development efforts and the additions of Northwest Logic. The security IEP team from verimatrix analog cxmt, LDA total silicon. It. Business is now on a run rate of over 100 billion dollars in bookings annually.
In support of our company's performance. We are increasing our attention on environment, or in Social matters. We are focusing on opportunities, to drive, responsible inclusive, and sustainable practices across our own operations, as well as our supply chain.
This has led to continued improvements, in res, G structure and disclosures.
Overall, the team is executing very well. We brought in record product revenue and achieved industry-leading technology. Milestones across multiple businesses. We see a growing number of opportunities to address the critical challenges facing the industry and remain on the Forefront of next-generation data-intensive architectures.
As we continue our journey as a leading product.
Technology company. I am very excited about what the run this team can accomplish.
Before I turn the call over to who I would like to take a moment to thank him for his contributions over the past five years and wish him well in the next chapter of his carrier, as we announced last month, Rahul will be leading rhombus to pursue an opportunity outside of the Senate conducted industry. We have appointed Keith Jones, our current Vice President, Chief accounting officer and corporate controller as the interim CFO.
Jesus brings a wealth of experience and expertise. And I am confident. He will help lead the team through a successful transition.
With that, I'll turn the call over to Rahul is to discuss the quarterly Financial results. Rahul. Thanks, Luke. I'd like to begin with a summary of financial results. For the third quarter on Slide Five. Once again, we delivered a solid quarter with product revenue is growing 19% and generated 46 million in cash from operations. We have consistently executed on our possible growth over the past many years. This has enabled us to invest in strategic initiatives, return Capital to and
And improved cash from operations and free cash flow. We've built a strong foundation for future growth. Let me walk you through our non-gaap income statement on slide six revenue. For the third quarter was eighty one point, three million in line. With expectations royalties. Revenue was 33 Point 1 million. While licensing Billings was sixty six point 1 million the difference between licensing Billings and royalties Revenue. Primarily relates to timing as we don't always recognize Revenue in the same quarter. We Bill our customers.
There's licensing Billings for the quarter included 1.7 million related to plda which closed in the quarter including our product and silicon IP business. We were delighted to report record billing for the company in Q3 product. Revenue was thirty six point, seven billion consisting. Primarily of our memory interface, business memory, interface chip Revenue was at an all-time high for the company. Despite. The supply chain challenge is seen in our industry. And we're delighted to see such a strong demand from our customers contract and other Revenue was 11.
Five million consisting primarily of the Silicon IP business. We were pleased to report. Another quarterly record for our security IP business. Total operating costs including cost of goods sold for the quarter came in at 60 2.8 million. Operating expenses of forty eight point. Two million were in line with our expectations, as lower variable are decent, was offset by higher expense associated with the acquisition of plda, which closed after we had, provided guidance. For the quarter. We expect to continue to grow investments in our product roadmap.
In the coming quarters to drive long-term growth. We ended the quarter with total headcount of 694. This was over a hundred heads higher than the previous quarter, as we integrate the strong engineering Talent from both analog X and plda. Under AC 6 of 6. We recorded 2.2 million of interest income related to the financing component, a fixed fee licensing arrangements for which we have recognize Revenue, but not yet received payment. We encourage zero point seven million of interest expense primarily associated with with rdram.
Convertible note, this was offset by incremental.
Tristan Tom associated with our cash and Investment Portfolio. After adjusting for non-cash interest expense on the convertible, note this resulted in non-gaap interest and other expense for the third quarter of two million dollars, excluding the financing interest income related to a sec 606. This would have been zero point two million of interest in other expense. Using an assumed flat rate of 24 percent for non-gaap pre-tax income.
Mm. Non-gaap, net income for the quarter was 15.6, million with continued, focus on cost and disciplined execution. We again delivered profit that was above expectations. Now, let me turn to the balance sheet details on slide seven. Our ability to generate cash, has helped us both invest in growth drivers and consistently return Capital to shareholders. The end of quarter Cash Cash equivalents and marketable securities, totaled, 419 point seven million down from the previous quarter as cash from operations of 40.
Million was offset by net payments for the Acquisitions of analog X and plda of approximately 97 point 1 million. As we deliver on the top line and execute on operational. Efficiency. We expect to continue to deliver strong cash from operations in the future. At the end of Q3. We had contract assets worth two hundred eighty nine point seven million, which reflects the net present value of unbilled. A are related to licensing arrangements for which the company has no future performance obligations. We expect this number to continue.
To Trend down as we Bill and collect for these contracts. It's important to note that this metric doesn't represent the entire value of our existing licensing agreements. As we have consistently renewed, our royalty based agreements in a manner that allows us to recognize Revenue. Each quarter. Third quarter capex was 4.9 million. While depreciation was 5.4 million. We delivered 40 1.1 million of free cash flow in the quarter looking forward. We expect capex for the fourth quarter to be roughly five million. We continue to expect appreciation of roughly 21.
And for the full year of 2021. Now, let me hand the call over the keys. Who will go through our guidance for the fourth quarter. Thanks for holding. Let me turn to our guidance for the fourth quarter on slide eight as a reminder, the forward-looking guidance, reflects. Our current best estimates at this time. Our actual results to differ materially Quantum about to review.
In addition to the financial Outlook under ASC 606. We've also been providing information on licensing Billings, which is an operational metric. It reflects amount, invoiced to our license and customers During the period adjusted for certain differences.
as we have reported, historically licensing, Billings closely correlates with what we had historically reported as royalty Revenue under ASC 605
Under ASC 606, we expect Revenue in the fourth quarter between 84 and 90 million dollars. We expect royalties in between 26 and 32 million dollars and Licensing Billings between 62 and 68 million dollars.
As Luke mentioned, this Outlook represents another record revenue for the buffer chip business at a record Billings for the total company. We continue to actively manage through the supply chain. Challenges in our industry.
We expect you.
Gap. Total operating costs which includes cogs to be between 68 and 64 million dollars as we increased investment in our strategic initiatives and include a full quarter of impact of plda expense.
Under ASC 606 non-gaap operating for the fourth quarter.
Which includes six hundred thousand dollars of interest, expense related to the convertible notes in 2023.
We expect the pro forma tax rate to remain consistent at roughly 24 percent, but 24 percent is higher than the statutory tax rate of 21%, primarily due to higher tax rates are formed jurisdictions.
As a reminder, you pay roughly 20 million dollars of cash taxes. Each year driven primarily by licensing agreements with our partners in Korea.
We expect non-gaap taxes between an expense of four and six million dollars in Q4.
We expect Q4 share count to be roughly 150 million. Basically, do it. Shares outstanding as we have completed the repurchase program. We announced in the second quarter.
Overall, the anticipate do not get profit per, share range, between 10 cents and 16 cents for the quarter.
Let me finish with a summary on slide nine over the past several years. We have made substantial progress, strategically operationally and financially.
We have relied our portfolio to address opportunities in the data center and to support long-term growth.
Our product businesses are well positioned in the market. And we anticipate long-term growth in each segment. We continue to invest organically and products, like, ddrm V and R cxl initiative. Make inorganic Investments such as our Acquisitions of n log, X, and plda, turn value to our shareholders, who share repurchases.
Before I open the call up to Q&A. I would like to thank our employees for the continued, teamwork, execution, and resilience during these uncertain times, everyone. Please stay safe and take care of yourself and your loved ones.
With that, I'll turn the call back to our operator. To begin QA. We have our first question.
Thank you, Keith. Ladies and gentlemen. If you have a question, please press star one on your touch-tone telephone.
Your first question comes from Sidney. Ho with boys, back here lines open.
Thank you for taking my question. Thank you. For the question, is on the supply chain. You guys have done a pretty good job managing a supply chain. Last quarter seems like the quarter before as well. Have you seen any customers holding back on purchases of your products? Because they can't get all the parts from other suppliers and conversely. Have you seen customers ordering more than they need? Because they worry about getting departs from you. What are the indications?
I'm looking at.
Yeah, I see.
Thanks for the question on the supply chain. We do not see customers building by purchases because of the constraints they have with potentially other components. So, we don't see that Dynamics happening to us, with respect to people over ordering, what we see in the current environment that need times a bit longer Cycles, a bit longer and is lack of visibility. And we also in the middle of a transition between ddrm.
Our foreign gdpr side. So people make sure that they manage their ramp into ddrm side in the correct way. So we don't see any, I would say, whirring behaviors from our customers, but our customers are managing the condition from the airport to the outside and we are supporting them for that transition.
Great, this helpful. Levi, follow-up question is on the licensing. Billing side. I'm surprised to see you expect your queue for licensing is only coming down a little bit on the sequential basis, and I've only slightly year-over-year given Q4 is typically seasonally stronger. Plus you have the Silicon IP business going, very nicely in the past few quarters, and you also have the acquisition coming in. Can you talk about this, any? I mix a little bit here? Thank you for thanks. So Sydney. What? We see in our
Licensing Billings. We have a little bit of a mix in how their revenue gets recorded relate to our silicon. I beat business. So, some of that ends up in the contract and other line on it, but you see and then some amounts and up in the royalties in the license buildings and in large part, it has to do with, if there's any services that we have associated with those agreements that I will impact the reporting, but in any event, you know, we really do see strong momentum and both businesses. So if you take a look at the whole and aggregate, you do see growth.
Okay. Thank you very much.
Much. Thank you your neck. Your next question comes from mehdi Hussain. Hang with Mig your lines open.
When I take your guide details, especially looking at your licensing billion contract and product Revenue. It seems to me that there is a little bit of an upside to expectation given what you have guided to for a calendar year. 21. Now, you also have the plda cars that is dialed into your car.
Still the pro from what UPS is going up, despite lack of Revenue contribution from plda.
Follow up.
It's very good of core. Business is really strong. You can see the guidance that we put forward for our ship business and what you're seeing is just growth there, as we really steep demand for server memory. So that is a really strong business. Our patent license buildings and businesses solid. It's pretty stable and we don't see a lot of fluctuation as we are really doing a good job at renewals and last but not least you can I mentioned on the Silicon IP business and that has been a
Luke mentioned that is exiting the year at $100,000,000 run rate for Revenue. When we take a look at plda and analog X, we do see been contributing. So in the current quarter in Q3, they contribute about 1.7 billion, dollars of Revenue. Looking out to Q4. We're looking at a range of about three to four million dollars, and in particular who you expect a similar amount of cost. So overall, it will be relatively break-even in 2021, but as we talked about
About before we're looking at the revenue is increasing for those acquisition to about 20 million dollars in 2022, and then they'll start contribute to the bottom line as well.
Got it. Clear. Thank you with details. And then just looking at the trend with ddrm v. I should I think about introduction of ddrm V, all the mixed signals out there with the silver Bill and a new CPU. How do you see ddrm V traction, from you end and Associated Revenue contribution?
Typically the case, when the industry moved from generation to generation and finally, what's really exciting for us, is that when we look at our design, we footprints on ddrm V. It continues to be better than what we had in the successive generations of ddr4. So as the into the market, we expect to continue to go share. We probably saw as well that we
Announce the introduction of a pastor to be a side chick at five point. Six is thirty four point eight and this is in anticipation of the future needs of processors. So we continuing to challenge the lead in terms of increasing the latest product to this market so that we can continue to grow share.
Your next question comes from Gary Mobley with Wells. Fargo security, sir, lines open.
I selected take my question because they steal someone obligated to say some nice things about rule, which is kidding. You know, it's been great working with you over the last five years Whirlwind and you will be missed. I want to ask about the outlook for product Revenue, in fiscal year 22, maybe not so much an actual dollar amounts, but maybe help us level set. How the Year may Trend in terms of the key determinants of
Demand the uniformity of the quarter to quarter demand. In other words are some customers perhaps prepping their supply chain in anticipation of shipping servers, baseman ddrm 5. Can you fill the demand based on the wafer Supply you have lined up with kids and see and and and as well perhaps if there's any inventory or any inventory related considerations?
And as well, perhaps some of the supply can supply chain constraints. It's on your competitors may be dealing with it or allowing you to take some market share. Thank you. I know. It's a lot.
Yeah.
A year, which is a Much Higher Goals than the market books, which is still, you know, losing your digit. So we do continue to gain share in that market and we have no concerns whatsoever about the demand regarding the supply, we facing with the whole industry place in today, in terms of Supply. This is something we working on with our suppliers and the support of our suppliers. I would say almost on a daily basis. We manage to work.
Work with our supply chain Partners to get a record Revenue into three. As we said, we would continue to grow in Q4, but I think what we say seeing, as we said in the early call is lack of visibility. It's something that we plan week after week after week, working with our partners and it's difficult to have, you know, visibility. These things said the fundamentals remain very small. We expect to continue to grow share as we move into 2022.
We met in terms of, as I said.
Mix of our products as well. And so far. It's been working for us. As I said, you had a record quarter in Q3. We see growth in Q4, you know, I think to 1 Q2 are going to continue to be tight, ice cream to continue to be a daily fight. Maybe the second half of the year is going to be. Even though that's that's the way you get it, appreciate all that color, Luke wanted to ask about the
Operating margin in the fourth quarter. I think you're all your difference guidance parameter might point to adjusted operating operating margin somewhere in the mid to Upper 40 percent range. Substituting license buildings for for royalties order to get away around. And and so I'm wondering if that's mid-to-high 40% operating margin of sort of the new bogey, you know, as we think about 2020 to. Thank you.
That's a great question carry. So the Matthew did is, is accurate as we look into the the 2022, one of the impacts that we do have is that her overall mix will change. So, we will have more products being part of a percentage of the revenue which has a 60 to 65 percent margin on it. Opposed to the licensing which has a hundred percent margin. So overall it could be that that range. What we do expect is overall.
This was profitability as our Revenue Grows, Where our profit margins overall, should be relatively stable.
Appreciate that. Thanks guys.
Your next question comes from John. Pitzer with credit Smith, your lines open.
Yeah, of course, as I said, we do what we do.
Chain that can potentially impact us directly. But for the last, I would say couple of months or three months. We've been working on men, you know, in collaboration with our partners to minimize the impact on our customers and our and our growth.
Open at the midpoint of your guidance. The the product revenue is going to be up about 25% plus or minus this year. And I know that that it in the buffer business at the end of last year, you had some customer inventory that needed to get you through. But when you think about the 25 percent growth this year, do you feel that that's keeping up with the market that that imply, share gains. And I guess more importantly, as you continue this transformation to more of a product Revenue company. How should we think about the three to five years?
Tiger kind of in the product Revenue, especially with things like ddrm on the cusp.
Sure. So we, we do see continued growth and she'll gain. And as we said earlier, it's mostly coming from the increased food, Plains of Designing, from generation to generation. So, even though the last generation of ddr4 isolate, we had a better could point that in the previous generation, so that I translated into share gaming video for we were first to Market to ddrm. And as I said earlier, we have
William production orders from all of our customers in ddrm v. And based on the information we have we are leading position in the first generation of ddrm v and we introducing as the first company producing it, the Next Generation vehicle rcd. So being first to Market with high quality products leads to a very good point in terms of design lines and qualification and that leads into game shape. Okay, so that that is what's happening.
Going forward to answer the second part of your question. We continue to see us gaining share. I think our position is very, very strong. You know, once we go through, you know, the supply constraint, this will translate into higher gross and what we are for and beyond that. We also working on development of companionship that are going to ad revenue on to the DL client modules.
And on the cxl based products that we hit the market towards the second half of 2023. So, we have a rollout of products that would fuel the growth on the product side. And because we use those products to Market.
Should we think about the, the DDR transition? And before you answer, I should have started this. But I wanted to also thank rally publicly for all the helped over the years Monsieur Carey. So if we take a look at our gross margins, what we have and what we see is that for ddr5, it's a new product introduction. So it's gross. Margins are a little bit higher. The conversely on ddr4 given where it's at in its cycle.
Those margins are being a little bit compressed. As we see a little bit of a
He pricing pressure of though, our team is doing a great job from a manufacturing standpoint to reduce the standard cost. But at the end of the day on a net basis, you do see that Blended 60 to 65 percent range for our gross margins on product.
Once again, if you would like to ask a question, please press star one on your telephone keypad to ask a question, please press star one on your telephone keypad. Your next question comes from Kevin, Cassidy with Rosen, lot security, score lines open.
Thanks for letting me ask a question and congratulations and sorry, I didn't get to work with you much. Rather, the on the cxl. Can you say, what the adoption rate is the visibility into the next generation of server processors. Do you have an idea of what, how much the adoption is of motherboards designing with that? But are going to use the cxl standard.
Third generation of processors but they seem that I am. The others will offer cxl interface.
I'm sure as you know, whatever processor you use you may need access to more memory. So the first product, the secret product that we're going to develop, is going to be a cxl memory, extender. And that's under, which will be compliant to cxl 2.0, is going to be able to be used by any processor platform. Being used in data centers.
Okay, great. And it mentioned on ddrm, other components that you might be going after. Can you give us a maybe, a high-level picture of what? We'd expect, the increase in your tan would be per module.
Sure, first of all the time, they say the free companion products on the DL paas module, you know, given our development schedule and qualification schedule, you know, they will keep the market probably second half of next year. So that's where it's going to increase the potential for us and I would say that
add content compared to itself onto onto the module. We're going to be monitoring that we introducing those products to the market. Now. I think this is going to be something that will be relevant to our Revenue growth in the second half of next year.
Okay, great.
Thank you.
Thank you, Kevin.
All right, at this time, there are no further questions. This concludes the question and answer session. I would like to turn the conference back to Luke surfing.
Thank you. This now concludes today's conference. You may now disconnect.