Q1 2022 Rambus Inc Earnings Call
Yeah.
Welcome to the Rambus first quarter and fiscal year 2022 earnings conference call. At this time, all participants are in a listen only mode.
Conclusion of our prepared remarks, we will conduct a question and answer session. If you would like to ask a question you meet press star one on your Touchtone part at any time, if anyone should require assistance. During the conference. Please press star zero on your Touchtone part at any time as a reminder, this conference call is being <unk>.
I would now like to turn the conference over to des Lynch, Vice President of Finance and Investor Relations you May begin your conference.
Thank you operator and welcome to the ramp is first quarter 2022 results conference call I am Desmond Blench VP of finance and Investor Relations and on the call with me today is looks Edison, our CEO and Keith joined our interim CFO.
The press release for the results that we will be discussing today has been filed with the SEC on form 8-K.
A replay of this call will be available for the next week at 855859 to Seattle five six.
Can hear the replay by dialing the toll free number and then entering I'd number six to 854 to six when you hear the prompt.
In addition, we are simultaneously webcasting this call and along with the audio we are webcasting slides that we learned actions during portions of today's call. So even if you are 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 five P. M Pacific time.
Our discussion today will contain forward looking statements, including our expectations accounting business opportunities industry could allstate's product and investment strategies timing of expected product launches demand for existing and newly acquired technologies the growth opportunities.
As the various markets, we serve the expected benefits of our manager acquisition and divestiture activity, including the success of our integration efforts the company's ability to deliver long term profitable growth. The long term sustainability of the company to increase revenue and cash.
Generated from operating activities, the company's outlook and financial guidance for the second quarter of 2022, and really two drivers the company's ability to effectively manage supply chain shortages risks and the potential adverse impacts related to auto writings.
COVID-19, and its fit in and the effects of ASC 606 on reported revenue amongst other things.
These statements are subject to risks and uncertainties are discussed during this call and may be more fully described in the documents, we file with the SEC, including our eight Ks 10, Qs and 10-Ks. These forward looking statements may differ materially from our actual results and we are under no obligation.
Asian update these statements.
In an effort to provide greater clarity in the financials, we are using both GAAP and non-GAAP financial presentations.
Both our press release and on this call.
A reconciliation of these non-GAAP financials to the most directly comparable GAAP measures has been included in our press release and our slide presentation and other web site at Rambus don't call on the Investor Relations page under financial releases.
We adopted ASC six to six in 2018, using the modified retrospective method, which does not restate prior periods, but rather by the cumulative effect of the adoption of India.
As a beginning balance sheet adjustment.
Any comparison between our results under ASC 606 and <unk>.
Higher results under ASC 605 is not an accurate way to track the company's progress.
We will continue to provide operational metrics such as license billings to give our investors better insight into our operational performance.
The author of the call today will be as follows one consultants an overview of the business Keith Who'll discuss our financial results and then end with Q&A.
I'll never tell Nicole over to Blake to provide an overview of the quarter Luke.
Thank you, Dave and good afternoon, everyone.
The company had a strong start to the year with Q1 revenue exceeding guidance at $99 million and earnings at the high end of expectations.
We generated solid cash from operations at $42 $6 million and continue to grow the business profitably.
We expect the company's growth trajectory to continue into Q2 with strong demand in the data center driving our results even as the industry continues to be supply constrained.
Rambus has a balanced and diverse portfolio across chips and silicon IP and patent licensing.
All contributing at scale and we are investing strategically in new and exciting programs to accelerate our growth.
As we continue to execute on our strategy. We are confident in the long term trajectory of the company and choose to strengthen our balance sheet by retiring a significant portion of our debt.
Turning to memory interface chips, we continued to perform well even in a very challenging industry wide supply chain environment.
We delivered another quarter of record product revenue at $48 million.
And expect to continue to grow.
The team continues to work very closely and proactively with our supply chain partners.
To minimize the impact to our customers as demand continues to outstrip supply.
We are a leader in DDR memory chips and the transition to DDR five provides us great opportunity for growth and expansion.
Our DDR five RCD is in volume production with a growing qualification footprint, but.
<unk> five is still in the early stages of its product lifecycle.
As our customers continued to build in earnest ahead of next generation server volume shipments later this year.
We expect the demand ramp for <unk> to be somewhat lumpy in nature.
With that our memory interface chip product mix may shift as we march toward the projected DDR for DDR five school silver late in 2023, while strong overall data center demand drives top line growth.
Let's turn now to Silicon IP, where we had a solid performance we are leading in our chosen focus areas, including H P. M <unk> PCI Express and security IP.
Our biggest markets continued to be data center, and AI and over the course of the quarter, we augmented our silicon IP portfolio with certified solutions to expand our footprint in automotive and government.
Moving to ESG, we published our first comprehensive report for Rambus outlining our strategy and commitment to responsible operations and sustainable developments. These.
This report is a great next step to codify and advance our programs around supplier sustainability product stewardship and environmental responsibility.
In closing.
This was another very strong quarter for the company and a great start to the year as we continue to execute on our long term strategy and deliver on our commitments.
We exceeded our target for revenue earnings where the high end of guidance and we expect our growth trajectory to continue in Q2.
While supply remains tight strong data center demand is driving results with record revenue and some memory interface chips and sustained momentum in silicon IP.
We have a solid foundation from licensing and multiple revenue streams and remain at the forefront of next generation data Center architectures.
This unique combination positions us well for continued growth in 2022 and beyond.
With that I'll turn the call over to Keith to discuss the quarterly financial results Keith.
Thanks, Luc I'd like to begin with a summary of our financial results for the first quarter on slide five.
Once again, we delivered a solid quarter and we are very pleased with the ongoing execution of our growth initiatives.
We delivered financial results above guidance for revenue and at the high end of our earnings expectations.
As a company we are focused on strategic execution, which we believe will drive further shareholder value with.
With this goal in mind, we elected to retire our convertible notes early in life.
With future increases in the value of the notes.
Doing so we elected to utilize our on hand cash in investments to pay down such amounts as we did not elect to refinance the notes.
Our decision to do so speaks to our strong belief in our continued ability to generate strong cash flows and profitably grow the company.
Let me walk you through our non-GAAP income statement on slide six.
Revenue for the first quarter was $99 million exceeding our expectations royalty.
Royalty revenue was $30 4 million bylaws.
While licensing billings was $64 1 million.
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.
Product revenue was $48 million.
Consisting primarily of our memory interface chip business.
As Luke mentioned.
Interchange revenue was a record for the company despite supply chain challenges seen in our industry and we are delighted to see such strong demand from our customers.
Contract and other revenue was $26 million consisting.
Consisting primarily of the silicon IP business.
Total operating costs, including cost of goods sold for the quarter came in at $74 $9 million.
Operating expenses of $56 million.
Yeah.
Spectation as a result of incremental payroll taxes associated with employee stock vesting and other variable payroll expenses.
We ended the quarter with total head count of 715 employees, an increase of 25 employees from the prior quarter.
Under ASC 606, we recorded $1 8 million of interest income related to the financing component of fixed feed licensing arrangements for which we have recognized revenue, but not yet received payment.
We incurred a half a million dollars.
Interest expense, primarily associated with our convertible notes.
This was offset by incremental interest income associated with our cash and investment portfolio.
After adjusting for noncash interest expense on our convertible notes. This resulted in non-GAAP interest and other expense for the quarter of $900000.
Excluding the financing interest income related to ASC 606, this would have been around $300000 of interest and other expense.
Using an assumed flat tax rate of 24% for non-GAAP pre tax income.
non-GAAP net income for the quarter was $19 6 million.
With disciplined execution and focus we again delivered earnings that were above expectations.
Now, let me turn to the balance sheet details on slide seven.
We ended the quarter with cash cash equivalents and marketable securities totaling $343 $7 million a decrease from the prior quarter, primarily as a result of payments made to repurchase a large portion of our convertible notes.
This decrease was partially offset by generating $42 $6 million in cash flows from operations during the quarter.
During Q1 and as I mentioned earlier, we entered into privately negotiated transactions to purchase a significant portion of our verbal notes, which are due to mature in February 2023 at.
At the end of Q1, we had paid a net amount of $157 $2 million in cash to repurchase $107 9 million of the <unk>.
Principal amount of the notes and settle the underlying hedge agreements.
In Q2, we completed the scheduled repurchases as we paid $24 $7 million in cash to repurchase $15 $3 million of the principal amount of such notes.
At the completion of the purchase process. We retired 71, 4% of the original debt with $49 $4 million of our convertible notes remaining.
At the end of Q1, we had contract assets worth two.
$225 1 million, which reflects the net present value of Unbilled accounts receivable related to the 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 is important to note that this metric does not represent the entire value of our existing licensing agreements.
Each renewal opportunity, we restructured our patent agreements in a manner that allows us to recognize revenue each quarter.
First quarter Capex was $4 9 million, while depreciation expense was $6 million.
We delivered $37 7 million of free cash flow in the quarter.
Looking forward, we expect capex for the second quarter to be roughly $7 million.
As a reminder forward looking guidance reflects our current best estimates at this time.
Our actual results could differ materially from what I'm 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 that reflects amounts invoiced to our licensing customers during the period adjusted for certain differences.
We have reported historically.
<unk> billings closely correlates with what we had historically reported as royalty revenue under ASC 605.
Now, let me turn to our guidance for the second quarter on slide eight.
Under ASC 606, we expect revenue in the second quarter between $115 million and $121 million.
We expect royalty revenue between 42 and $48 million.
The licensing billings between 61 and $67 million.
Due to the timing of revenue recognition on certain patent licensing agreements. There is a one time benefit to ASC 606 revenue reflected in our guidance.
We expect Q2, non-GAAP total operating costs, which includes costs fruitful.
<unk> 75 and $79 million.
Under ASC 606, non-GAAP operating results for the second quarter is expected to be between a profit of 27 and $35 million.
For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect approximately a half a million dollars of expense, which includes approximately $100000 of interest expense related to the convertible notes due in 2023.
We expect pro forma tax rate remained consistent at roughly 24%.
The 24% is higher than the statutory tax rate of 21%, primarily due to higher taxes in foreign jurisdictions.
As a reminder, we pay roughly $20 million of cash tax each year, driven primarily by licensing agreements with our partners in Korea.
We expect non-GAAP taxes to be between an expense of $9 million and $11 million in Q2.
Q2 share count to be roughly $114 million basic and diluted shares outstanding.
Overall, we anticipate non-GAAP earnings per share range between 24 and 30.
<unk> 34.
For the quarter.
Let me finish with a summary on slide nine.
Our financial results showed continued investment in our long term growth strategies.
Im very pleased with our results for the quarter and the trajectory that we're showing for long term growth.
We continue to execute on our strategic objectives, both operationally and financially.
Our product portfolio leaves us well positioned to capture growing opportunities in the datacenter and cloud markets.
Our consistently improving our profitability investing in growth opportunities and delivering value to our shareholders.
I open the call up to Q&A I would like to thank our employees for their continued teamwork execution and resilience during these uncertain times.
Please stay safe and take care of yourself and your families with that I will turn the call back to our operator to begin Q&A, we have our first question.
Thank you ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone.
Your first question comes from the line of Sidney Ho with Deutsche Bank. Your line is open.
Hi, guys. Thanks for taking my question and congrats on a good quarter and guide.
First question I have is more of a clarification.
If I look at the Q1 numbers the strength came from contract another well obviously they can packet gross margin this morning, 90%.
What drove the upside is it just that more of a licensing billing is included in contract and other this year.
Hi.
Great question. So this quarter, we really saw a continued strength from our silicon IP business. So that trajectory of that business, we had talked about before including the acquisitions. We had exited the year in Q4 with a $100 million run rate now that we're seeing but those businesses.
Performing and scaling that run rate is a lot closer to a 100 to 100 $120 million to $130 million per year. So we're very pleased with the growth rate of that silicon IP business Silicon IP business.
But also as you note we had good growth from our product business, we see $2 million increase in that as well. So those are the two biggest drivers for growth period over period and then we're also happy to say that our patent business remains relatively stable, it's been very consistent for us.
Great. That's helpful. Maybe a follow up to that product revenue, obviously very strong first quarter and second quarter guidance is good.
I know you did you just mentioned that the product revenue can be lumpy can you give us an update on your forecast for the product revenue for the full year.
I guess kind of flattened line second quarter.
For the remainder of the year, I guess somewhere close to 40% growth in 2022 is that the right way to think about it.
Thanks Sidney.
So just just as a reminder, if we take the midpoint of guidance for the current quarter.
Q2 is going to be about 9% higher than Q1, and if you compare this to last year.
We are about 6% to 9% growth over the same quarter last year. So we are continuing to grow our business.
In the buffer chip I think we've done that in a very challenging.
Supply environment.
Also during the DD of $40 five product transition. So I think we need we need when you put them we need to be prudent for the second half of the year.
<unk>.
Italy fluke.
First half of last year compared to the first half of this year, taking the midpoint for Q2, we're still above 60% growth.
I think what's happening is that the ecosystem starting to buy DDR five keeps early that's why we had a very strong fourth quarter as well last year.
There's going to be lumpy for the rest of the year because of the transition.
<unk> transitioned from DDR four to five in the ecosystem an ecosystem.
Partners having to absorb.
The.
Transition, but also because of the supply constraints.
So you know I would be prudent for the second half of the year.
We don't have visibility on.
I will now supply beyond.
The second quarter that situation has not changed.
The supply situation has not improved.
And there will be lumpiness in the transition from DDR quarter DDR high. So he can give you guidance for the second quarter I think we should just be prudent for the second half this being said.
If you look.
Most quarters, we growing much faster than the market.
In the first half of this year compared to first half of last year and there is momentum for the launch of DDR. Five we're just going to have a few lumpy quarters ahead of us.
Great and maybe I can squeeze one more in.
Yes.
Just digging in.
Go ahead Scott.
No I would say I would add too to loops point, we were absolutely thrilled what we're seeing in terms of demand.
It has been a really compelling story since loop kind of articulated in terms of the growth rates that we're seeing in particular on a year over year basis, something outgrowing the market, but your outlook.
<unk> and.
In terms of the back half of the year.
More of indication of what we're really seeing from a supply perspective. So the amounts that you were talking about are relatively consistent what we see from Asian supply case scenario.
The demand is much greater than that but once again when you have to manage our business within our supply constraints.
Great. That's helpful. Maybe one more for me there has been a lot of concerns on the macro environment not talking about supply side, but more on the demand side, whether it's inflation west geopolitical.
That eventually will hurt consumer spending in enterprise spending on top of that there.
Seems to be elevated inventory in the supply chain curious how you guys handicap this kind of environment in your forecast and more importantly, your operations and which part of your business do you think is most at risk to this kind of environment. Thanks.
That's a great question.
Our business is mostly directed to the data center.
So that.
That data center business is not as much affected by inflation.
I would say consumer markets.
We do see a continued demand for having access to more data faster.
And great activities in terms of new architectures in the data center.
So, although we prudently with the.
Economic environments, we do continue to see very high demand as Keith said in the data center space, we're not.
Really affected by what's happening on the consumer space just given the portfolio that we have the other thing that.
He is working in the favor of Rambus is that we have a balanced portfolio of offering so above and beyond our product offering that goes into the data center.
We have the patent licensing business, which remain stable year over year on strong jewelry generally just cash and we also have.
A very solid silicon IP business that builds products that will be in the market in a few years from now so this balanced portfolio.
It makes us.
Pretty strong against the economic environment.
Thank you.
Your next question comes from the line of Gary Mobley with Wells Fargo. Your line is open.
Hey, guys. Thanks for taking my question and congrats to a strong start to the year I wanted to ask a few questions about DDR five.
I know Intel said recently that their Sapphire Rapids.
The platform is ramping with select customers currently.
With a more meaningful ramp in the second half of the year Amd's Gino.
I guess set to ramp later this year.
So.
Should we think about the DDR five shipments you are shipping into the channel today is that just priming the channel for these eventual launches and therefore, when and if we do see these two different platforms ramp from AMD and Intel that maybe there's not.
So much of a step up in <unk> related revenue.
Hey, Gary Thanks.
Youre right I think that the market for us is transitioning from DDR four to deal size.
So.
In the long run that's a good thing for us our footprint continues to be much stronger in <unk> than it is in <unk> four.
We are introduced we introduced our first generation <unk> five on two quarters ago, we are introducing a second generation of DDR hard so we believe in.
And the momentum in that market.
With the announcements of AMD and Intel.
We will see demand increase, but we will see some lumpiness quarter over quarter.
Integrate over a year to year basis.
The growth is there and our share is going to continue to grow we might see some lumpiness from quarter to quarter. That's all what we're seeing now.
Okay. You mentioned Gen. Two of your DDR five solution is that the degeneration that includes the companion chips.
Sensor timing and.
And in the related power management.
And.
Specifically when would you expect it to launch that and then I also noticed that the gross margin on the product line was down a bit was that more a function of the high DDR for mix in the quarter.
Thank you so a couple of questions. The first one regarding the companion shapes.
Companion sheets are independent from the generations of DDR five we always.
Put the emphasis on the RCD cheap itself the buffer chip itself.
Because this is where most of the value is so when I mentioned generation one the generation two I mean that we are introducing our generation two of buffer chip to to our customers the companionship.
Are going to be.
Used both for generation, one and generation two and for the companionship.
<unk> said last quarter, we are on track with our programs.
We should make some announcements in the second half and you should stop.
No sampling and ramping those products to our customers in.
In the second half of the year for food production next year. So nothing has changed there, but they will support both generation one and generation two of buffer chips.
With respect to margin as we said last quarter, we had an exceptional good quarter with respect to product gross margins in Q4 of last year.
This was the initial purchases of DDR five so the mix of products that we had between <unk> four was very favorable for.
<unk> five <unk>.
Going into Q1.
It makes us changed.
Between $2 25.
But it's still within the range of what we previously communicated.
<unk>.
You know we continue to maintain you know.
Gross margin outlook for the total year.
We will see some lumpiness from quarter to quarter and as I said earlier.
Thanks Luke.
Yes.
Alright, well thank you Amy.
Once again, ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone.
Your next question comes from the line of Kevin Cassidy with Rosenblatt. Your line is open.
Thank you and congratulations on the great results.
Just to understand your Gen. One gen two for the RCD.
Are you going to run those products in parallel.
Or just.
Dr. <unk> Gen. Two replaces gen one.
I, Kevin Great question.
What we were seeing the <unk> generation of products is exactly what we saw in the DDR for generation of products.
Every new generation of processor in that generation will offer higher speeds on the memory bus. So every time the highest speed is offered on the memory bus you do have to have a higher speed.
Buffer chip.
That's what we mean by second generation, so they will not.
Cannibalize themselves. It's just that we're going to have a sequence of generations of DDR five buffet shifts within the DDR five.
Generation of memory. This is what happened.
In previous generations of DB, all technologies geographies and DDR four.
Okay great.
And then also in your prepared remarks, you mentioned.
Expanding into the automotive and government businesses can you explain that a little further.
Yes, absolutely.
We were making very good progress with.
Our security technology as part of our IP programs.
And the demand for NV.
Embedded security.
In the automotive market in the government market is just increasing.
And what these group is doing is that the pre certify.
Our offering.
For these specific markets so as much as.
A year ago, the vast majority of our business was with the.
Yeah data center type of applications, we're starting to see.
Inroads into five <unk>, Iot automotive and government.
Starting with the secured mostly with the security IP.
Okay. So if I understand that that's more of a pulse like the automotive companies are telling their suppliers that they want to use your embedded security.
Yes, and if you look at this in the longer run.
There's going to be more and more electronics in cars as we know.
There's going to be more and more of a mini data center type of applications in the cars themselves. So you want to make sure that all the data that is being transmitted within your power electronics system is being secured and in the longer run. This is what's driving the interest.
For security technologies in automotive.
And government.
It's just obvious that.
People are just requiring harder and harder security and all of their systems. So these two trends in the market are favorable to our silicon IP business for security.
Okay, great. Thank you.
Thank you Kevin.
And your.
Next question comes from the line of Mehdi Hosseini with <unk>. Your line is open.
Yes, Thanks for taking my question a couple of follow ups.
This is for Keith.
What should I assume.
Sure.
Sure.
Gross margin for calendar year 'twenty, two I believe for last year.
You guided to.
60 to 65, and you came in slightly above that and I'm. Just wondering if there is a big look into 'twenty, two and I have a follow up.
Hi, Betty so we're still anticipating that gross margin range to be 60% to 65%.
Luka talked about that we'd see a little bit.
The mix between DDR for DDR five in but overall, what we see is staying within that range between 60% to 65%.
Great and then for Luca I wanted to better understand what's driving the silicon IP in the past.
Highlighted opportunities in high Tech.
Bandwidth memories, CX actually CX or pushed out.
And.
The security that you have highlighted but what is the biggest driver in revenue or what is the biggest incremental revenue contribution and your silicon IP business in 'twenty two compared to 21.
That's a great question. So first of all we have a very focused approach to seek an IP.
Offering we focus on high speed memory interface G D R.
<unk>.
And then we focus on high speed series or high speed serial interfaces piece.
Pcie and CSL and on the security side, we focus on root of trust. So so this is a very very focused strategy and we are having traction with with our with all of them.
I would say that.
The emergence of new.
Connectivity requirements in the data center is driving growth for our CSL and pcie offering in the silicon IP business. So people are buying from us either five or controllers.
I'd go into chips that feature EXL, a pcie interfaces.
The acquisition of <unk>.
Analog X and <unk> last year.
Contributing quite a lot to that.
Growth in demand.
So we see a lot of growth there.
We see a lot of growth in.
GDR high speed interfaces.
And then the security side, we continue to see growth in our traditional markets, but as I said earlier.
They are emerging markets that are really interested in in security automotive and government in particular, so it's really across the board I would say that the vast majority of our growth.
In 2022 is driven by.
Pcie and <unk>.
If I may just follow up to that.
And I'm wondering impression that.
The reader itself is more for next year's CX <unk> two that Oh.
So when you talk about opportunities in 'twenty two related to pcie for those <unk>.
These more R&D.
So without Oh comes out six Oh, then those R&D projects will scale into production is that the right way of thinking about it.
Yeah, So one way to think about it is.
Is this.
As Rambus, we have our own EXL product initiatives.
We are in full speed the development of our CX L shaped and they will hit the market.
<unk> next year and being in production in 2024, but we are also sending building blocks.
Silicon IP to people, who build their own ships that feature <unk> Pcie and that's the silicon IP sales. So we do sell the IP today, it's an IP sale of license that we sell today.
It creates revenue and revenue growth.
As a naive T cells today for our customer products that will hit the market in 'twenty two 'twenty three in 2024. So there's this kind of phasing approach to <unk>, we can sell the silicon IP today to people, who develop <unk> and pcie capable chips, but we also there.
Looking at our own ships that will hit the market in the same timeframe.
Great. Thank you.
Thank you Manny.
At this time there are no further questions. This concludes the question and answer session I would now like to turn the conference back to the tariffs.
Thank you everyone, who has joined US today for your continued interest in timing Rambus. We look forward to speaking with you again soon and have a great day.
Thank you. This now concludes today's conference.
Okay.
[music].
Okay.