Q2 2022 Rambus Inc Earnings Call
And this variance 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 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 to update these statements.
In an effort to provide greater clarity in the financials, we are using both GAAP and non-GAAP financial presentations in both our press release and on this call.
Conciliation of these non-GAAP financials to the most directly comparable GAAP measures has been included in our press release and our slide presentation and on our website at <unk> Dot com on the Investor Relations page under financial releases.
We adopted ASC 606 in 2018, using the modified retrospective method, which did not restate prior periods, but rather run the cumulative effect of the adoption through retained earnings at the beginning balance sheet adjustment.
Any comparison between our actual results under ASC 606, and prior results under ASC 605 is not an accurate way to track the company's progress.
We will continue to provide operational metrics such as licensing billings to give investors better insight into our operational performance.
The order of our call today will be as follows Luc will start with an overview of the business I will discuss our financial results and then we'll end with Q&A.
I'll now turn the call over to Luke to provide an overview of the quarter Luke.
Thank you, Dave and congratulations on your newly announced CFO .
I know many on the call already know you, but I'd like to take a moment to introduce you before we dive into our results.
This brings over 20 years of finance experience to the table, including leadership roles at the major players like Renaissance IDT at Mt and National semiconductor.
His deep understanding of runners and demonstrated success of the company make him an ideal choice with CFO .
I'm very pleased to have him in his expanded role on the senior management team and will now turn to our results for the quarter.
The company delivered a strong performance in Q2 with revenue and earnings at the high end of guidance and generated $56 $5 million in cash from operations.
In Q3, we expect strong demand in the data center to drive our results.
Even as the industry continues to be supply constrained.
We are addressing the needs of the data center with our diverse portfolio of chips and silicon IP and patents.
Each of which is contributing at scale and shooting the company's long term profitable growth.
Memory interface chips delivered another record performance driving $53 3 million in product revenue, even in the face of a very challenging industry wide supply chain environment.
The situation remains dynamic and the team continues to work very closely and proactively with our supply chain partners to help minimize the impact to our customers.
As a leader in DDR five memory interface chips, Rambus has a great opportunity for growth and some expansion as the industry transitions to DDR five.
Our <unk> RCD is in volume production with a growing qualification footprint.
And just a few weeks ago, we expanded our DDR five chipset offering with the introduction of our new companion chips, the SPD hub and temperature sensor.
These chips, along with the RCD or integrated into server memory modules.
SPD hub is also used in PC memory modules.
We are sampling to customers now and expect initial production shipments of the companionship late this year with a ramp in 2023.
This is a very exciting milestone for the company.
But as we've discussed before <unk> is still in the early stages of its product lifecycle and is dependent on the rollout of new computing platforms.
As our customers continue to build ahead of next generation server volume shipments.
We expect the demand ramp for DDR five to be somewhat lumpy in nature.
With that our memory interface chip product mix may shift as we March towards a projected DDR for DDR five call silver.
In addition, as we look to the longer term evolution of the data center, we are seeing strong engagement across the entire ecosystem and getting great feedback on the needs of the market for <unk> memory expansion and cooling solutions.
We are working closely with key players, including leading cloud service providers and major DRAM vendors on next generation platforms addressed by our <unk> initiatives.
We also amplified our world class product team with the addition of hardened and further strengthen the development of CX cell based data Center solutions.
Turning now to Silicon IP, we delivered another strong performance highlighted by key design wins and continued momentum across multiple markets.
Data center and AI are driving robust demand for our high performance Silicon IP solutions, and we are seeing growth in edge government and automotive.
Rambus continues to demonstrate leadership in our areas of focus with a major Fi controller and security IP wins.
In closing this was another strong quarter for the company.
We have a team continuing to execute on our long term strategy and deliver considerable growth from our key programs.
We achieved revenue and earnings at the high end of guidance we.
We delivered another record quarter of product revenue driven by memory interface chips and expanded our Sam with the addition of the DDR five companion chips.
Silicon IP remains on track for a record year with sustained momentum in the data center and strong inroads into adjacent markets.
And finally, we have a solid foundation from licensing as part of our balanced and diverse portfolio of offerings with multiple revenue streams.
We continue to invest in critical programs that keep us at the forefront of advanced data Center architectures.
And our unique combination of products and expertise will fuel sustained growth in 2022 and beyond.
Before I turn the call back over to Dave I'd like to take a moment to thank Keith for his contributions during this interim period.
Has done a very good job working closely with both Nee and days to bring the company through a successful transition and.
And we remain very well positioned for the future.
With that I.
I'll turn the call over to Dan to discuss the quarterly financial results.
Yes.
Thank you Luke and thank you to Keith as well for his support.
To begin with a summary of our financial results in the second quarter on slide five.
Once again, we delivered a strong quarter and we are very pleased with the ongoing execution of our growth initiatives.
We delivered financial results at the high end of our revenue and earnings expectations.
During the quarter, we successfully completed the acquisition of Heartland, Inc.
We are very excited about the acquisition as it adds an extremely talented group of engineers, which will bolster our CX sale initiatives.
Let me walk you through our non-GAAP income statement on slide six.
Revenue for the second quarter was $121 $1 million at the high end of our expectations.
Royalty revenue was $48 million up from Q1 and in line with our expectation driven by additional upfront revenue from several license agreements.
Licensing billings was $66 $1 million the.
The difference between licensing billings and royalty revenue primarily relates to timing as we do not always recognize revenue in the same quarter as we bill our customers.
Product revenue was $53 $3 million, consisting primarily of memory interface chip business.
Memory interface chip revenue was a record for the company. Despite the supply chain challenges seen another industry. We are delighted to see such strong demand from our customers.
Contract and other revenue was $19 $8 million.
Consisting primarily of Silicon IP.
As a reminder, only a portion of our silicon IP revenue is reflected in contract and other revenue and the remaining portion is reported in royalty revenue as well as licensing billings.
Total operating costs, including cost of goods sold for the quarter came in at $76 $1 million.
Operating expense of $54 $9 million were in line with our expectations.
We ended the quarter with a total head count of 747 employees, an increase of 32 employees from the prior period, which includes the strong engineering talent added through the Heartland acquisition.
Under ASC 606, we recorded $2 $7 million of interest income of which one $5 million related to the financing component of fixed fee licensing arrangements for which we have recognized revenue, but not yet received payment.
Additionally, we benefited from approximately $1 million and favorable foreign currency exchanges during the quarter.
We incurred $300000 of 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 the convertible notes. This resulted in non-GAAP interest and other expense for the second quarter of $2 $4 million.
Excluding the financing interest income related to ASC six <unk>. This would have been $1 million of interest and other income.
Using an assumed flat tax rate of 24% for non-GAAP pretax income non-GAAP net income for the quarter was $36 $1 million.
With disciplined execution and focus we again delivered earnings that were at the high end of 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 351 $6 million an increase from the prior quarter as cash flows from operations of $56 $5 million were partially offset by payments made to the final settlement of the <unk>.
Previously announced debt repurchase and cash paid for the Hudson acquisition.
At the end of Q2, we had contract assets worth $211 $9 million.
This reflects the net present value of Unbilled accounts receivable 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 in place for these contracts.
It is important to note that this metric does not represent the entire value of an existing licensing agreements.
The <unk> opportunity, we restructured our patent agreements in a manner that allows us to recognize revenue each quarter.
Second quarter, Capex was $8 9 million, while depreciation expense was $6 $2 million we.
We delivered 47 $6 million of free cash flow in the quarter.
Looking forward, we expect capex for the third quarter to be approximately $8 million.
As a reminder forward looking guidance reflects our current best estimates at this time and our actual results could differ materially from what I'm about to review.
In addition to the financial outlook under ASC 606, we have 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 we have reported historically licensing billings closely correlates with what we had historically reported as royalty revenue under ASC 605.
Now, let me turn to guidance for the third quarter on slide eight.
Under ASC 606, we expect revenue in the third quarter of between 104 and $110 million we.
We expect royalty revenue between 29 and $35 million in licensing billings between 63% and $69 million.
We expect Q3, non-GAAP total operating cost, which includes cogs to be between 81 and $77 million.
Under ASC 606, non-GAAP operating results for the third quarter is expected to be between a profit of 23 and started the million dollars.
For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect approximately $1 million of interest expense.
We expect the pro forma tax rate to remain approximately 24%.
24% is higher than the statutory tax rate of 21%, primarily due to higher tax rates in our foreign jurisdictions.
As a reminder, we pay approximately $20 million of cash taxes, each year, driven primarily by licensing agreements with our partners in Korea.
We expect non-GAAP taxes to be between an expense of five and $8 million in Q3.
We expect Q3 share count to be 113 million basic and diluted shares outstanding.
Overall, we anticipate our non-GAAP earnings per share range between 15, and 21 for the quarter.
Let me finish with a summary on slide nine.
We continue to profitably grow our business demonstrating strong cash flow generation, while having minimal debt.
This financial leverage allows us to continue to focus on the strategic investments both organically and Inorganically.
This has allowed us to develop a diverse set of products and solutions and Leverages our strengths in the data center and cloud markets.
In addition to the success of memory interface chips, delivering another record quarter.
I am pleased with the success and Silicon IP.
Silicon IP continued its momentum and remains on an annual run rate of $120 million to $113 million.
With ongoing discipline and focus we are well positioned to continue the strong execution of our long term strategic plans.
Before I open up the call to Q&A I would like to thank Kevin employees for their continued teamwork and execution.
With that I'll turn the call back to the operator to begin Q&A.
Because we have our first question.
Certainly the first question is from the line of Gary Mobley with Wells Fargo. Your line is now open.
Hey, guys good afternoon.
Let me extend my congratulations.
<unk> on the appointment.
I'm, most curious to start out asking about.
Your buffer chip revenue your memory interface revenue.
<unk>.
On the chipset side, specifically and.
And I'm curious if you were able to grow your backlog considering the deferred.
Shifting trends in the demand dynamics as well as incremental supply and presumably.
Youre getting more supply coming on is maybe there is some fungible capacity at your foundry partner and maybe if you can just share some additional details there.
Hi, Gary I'll start and then does.
Okay.
Comment we are still in an environment, where demand is much higher than supply in the first half of this year, we had a meaningful gap between supply and demand and that was that's.
That's the case again through Q3, we are working on a weekly basis with our suppliers and our customers to manage our backlog.
And our orders.
We have large orders on the books, we have not seen any cancellations from these orders what's happening is the foot in the supply constrained environment with shifting the backlog in the out quarters.
As we as we work with our with our suppliers, we have a little more visibility into the front end capacity for Q4, but it remains very very tight because we are still in the technology node that is that is quite tight. So we can also our attention to the to the backend and at this point.
In time.
Between.
Managing the backlogs managing our suppliers.
Shift of crossover between DDL foreign DDR five.
We still believe the street estimates that that we have for Q4 flat over Q3.
Right assumptions.
Thanks Luke.
And we've been delighted with it could also go on our product revenue in Q2. It was another quarterly record at $53 million, we were able to get up.
Lately for the Q3 midpoint.
When we look at the sort of back half of the year got it I think most analysts have modeled somewhere between $200 million to $210 million for product revenue.
Assumes a relatively flat Q3, and Q4 revenue number given the ongoing supply challenges and the uncertainty of the DDR five ramp I think thats, a reasonable assumption and that would assume roughly year over year being up over 40%.
At fiscal year 'twenty, one demand remained strong and we remain very optimistic about our product business.
Well. Thank you for all that detail both of you I wanted to extend the conversation that ask about.
Your view on the.
Substantial.
Ramp up <unk>, five and so I think.
Sure.
<unk> Sapphire Rapids official last week that that is delayed to the very end of the year I think best case.
More so into next year is that kind of how you view.
Your official DDR five.
<unk>.
Yes, Gary.
As you know we started to ship our <unk> chips in the second half of last year in the second half of 2021.
Because the module makers go into production.
Ahead of the initial product builds.
So we are monitoring what both Intel and AMD are doing with <unk>.
Think that the crossover.
Over between DDR foreign DDR five in volume.
Might be slightly shifting from the end of 2023 to the beginning of 2024.
But we are shipping to the apparel skus, we're getting orders from our customers and I think we are just monitoring this very very closely it's going to be lumpy in nature that transition between DDR foreign DDR five.
But the market is going to be there and we are confident in our position in that market is just going to be lumpy.
Okay. Thank you guys I appreciate it.
Yes.
Thank you for your question.
Next question is from the line of Mehdi Hosseini with <unk>.
Your line is now open.
Thank you for taking my question.
You had a very strong product revenue in Q.
Q2 up 70% year over year occur.
Almost 12% on a sequential basis and this is despite the fact that the deal side.
It's somewhat pushed out because of Sapphire rapids. So can you. Please help us understand the dynamics behind this strength.
And why should it go through like.
Some sort of a pause before.
Ill give you a far adoption accelerates when Sapphire Rapids, it's available and I have a follow up.
Thanks Mehdi.
The main reasons, we continue to post.
Growth that is much higher than the market growth is because we had a very strong design win footprint in the last generation of DDR for many times on this call we explained that.
Print that we have in qualification translates a few quarters later into market share and this is what happened with the DDR for isolate platform. We had a very strong footprint with our three customers does that platform ice Lake is.
Lasting a bit longer than expected precisely because of the delay of DDR five and that explains why.
We see this growth year over year and quarter over quarter. The other thing is we've.
We've literally worked very very closely with our supply chain partners on a weekly basis and with our customers on a weekly basis to make sure that we optimize the supply and backlog management.
At period of supply constrained environment.
Yes.
Regarding DDR five as we said, we believe is going to be lumpy in nature, but DDR five is going to ramp.
Have received orders.
From the end of last year, and we continue to see orders, but I think the transition may take a little longer than we expected earlier.
But the demand that is not going to be fulfilled by the Sapphire Rapids.
Platform is going to be fulfilled by the isolate platform. So we're just monitoring that transition.
Sorry.
The weak.
Gotcha, and then one quick follow up based on.
Based on the ASC 605.
Your revenue guidance for Q3, and plus $1 million incremental increase but the total cost is going up.
$3 million to $4 million.
How should I think about this dynamic and wood.
Your cost.
Moderate.
After Q3.
Cost increase was monitored after Q3.
Hi, Matt. This is days looking at the Q3 guidance, we gave a total operating cost and expense, which includes cost of goods sold $79 million at the midpoint.
This was up a few million dollars fastest Q2, mainly driven by the timing of some favorable R&D expense. If we look at the back half of the year for <unk>, We would expect SG&A to remain relatively flat with what you saw in the first half of the year, but we will from time to time see some.
Increases in vehicle out of India to support some of our R&D programs.
<unk> ramp in the back half of the year.
Okay. Thank you.
Thanks.
Thank you for your question. The next question is from the line of Sidney Ho with Deutsche Bank. Your line is now.
Thank you congrats on the solid results and Thats also on our CFO appointment.
My first question is on the supply constrained site.
Can you talk about supply constraint impact last quarter and probably.
Going forward as well.
Is there any way you can help us understand the impact in the past quarter in terms of revenue and margins and what's your expectations going forward.
What kind of flexibility in terms of supply constraints do you have beyond 90 days.
If youre talking about the last couple of quarters.
The impact on supply constraints that we could have had higher revenue how do we have the supply to pull that revenue, we had a meaningful gap between our supply and demand as a result of that we had to shift some of our customers backlog.
<unk> into Q3 and Q4, so thats the main impact.
We're trying to maintain cost to goods to the right level. So we are posting the margins that we said we would we would make despite the supply environment and as I said, we weren't working week after week with our suppliers and customers to optimize that equation until we get out of that situation.
So Dan maybe I'll just add to the gross margin question as well, we've consistently talked about a blended product gross margin being between 60% to 65%. If you look at our gross margin for Q2 on the product side neighborhood around 62%, which was <unk>.
Relatively flat to Q1, so we have been operating in the first half of the year in the middle of the sort of product range that we mentioned, we will continue to watch the underlying sort of product mix.
On a long term basis, we remain committed to the 60% to 65% product gross margin.
That's helpful.
All of our questions.
In CIT.
And M&A.
So you announced the SPD hubs and the temperature sensor can you just remind us the timing of when you when you're recognized directly from these opportunities what is the revenue potential firstly, it's your existing RCD chip.
What do you expect the attach rate with the RCD products.
How do you expect that overtime.
Yeah.
Yesterday so.
As we say with sampling customers as we speak these.
Two companion chips.
Are added to the DDR five memory module. So the ramp of those companion chips also going to depend on the <unk> transition.
I mean by this is at this time on these calls when <unk> starts in the market.
We are not expecting any meaningful revenue. This year. This will ramp next year and there are several suppliers for these type of products.
So we don't expect either a.
One to one attach rate to the RCD, but the RCD remains the main.
Component on these memory modules for DDR five.
We believe the companionship.
Could add.
Some some some time too.
Due to the buffer chip.
When we look at the market size for <unk>.
Companion ships in 2024, when the off highway is going to be out there that as a sign of about above $400 million in total to the sun and we're going to compete for a share of that Sam.
Okay, that's fair.
You mind, if I ask one more question.
Absolutely Yes. Please go yes definitely higher than acquisition, what does it bring to the table that you don't already have and how does that change the timeline for you or T cell chip. Thanks.
Thanks, Sidney so the hardened acquisition brings a couple of.
Advantages to a <unk> sale.
Our program. The first one is that they are.
Very knowledgeable in some specific technologies like ECC and these kind of things.
And secondly, and probably more importantly for US we have a long experience as complex Soc design.
<unk> is known for buffer chips profit shifts of small chips with.
Single integrity being the most important aspect of those six cell shape is going to be much larger chips. So ctrip and this is something that we.
We didn't have in house, so we're bringing a team that had many many years of experience building launch associates together as a team and that's going to help us in the backend design of Aussie accent chips.
Okay. Thank you.
Thank you Sydney.
Thank you for your question. The next question is from the line of Kevin Cassidy with Rosenblatt Securities. Your line is now open.
Hi, This is mclean cover on for Kevin Cassidy. Thank you for taking my question and congratulations on your appointment.
I know you touched on it in the <unk>.
Remarks, but have you experienced any slowdown in licensing activity.
And is that activity more weighted memory interface Tfl or security.
I'll start.
I'll, let derrick comment.
It was the silicon IP business can be lumpy in nature, because we are going after a lot of customers and a lot of designs, but as Dave.
Said.
We are on track to deliver homes within $20 million to $130 million from that business and then if we look back to last year, that's about $20 million to $30 million more so the trajectory is the trajectory of growth, but we do see some.
I would say variation from quarter to quarter, depending on the timing of the designs that we win.
We're winning designs across the board between interface IP and security.
In the security IP.
The address market beyond data centers in AI.
With the security IP that we have our first wins with automotive.
Governments are types of types of applications.
And just to add we can.
Very happy with the momentum and traction in our Silicon IP business, we did reconfirm the $120 million to $130 million range for silicon IP in the prepared remarks, it's really great to see this business growing and approaching scale and as you mentioned this comes from the combination of interface IP in the <unk>.
<unk> offerings that we have.
Great. Thank you.
Okay.
Thank you for your question.
There are currently no further questions registered so as a reminder, it is star one on your telephone keypad.
Okay. So if there's no more question, yes. Thank you I'd like to thank you to everyone who has joined the call today for your continued interest and time and we look forward to speaking with you again soon have a great day. Thank you.
That concludes the conference call. Thank you for your participation you may now disconnect your line.