Q3 2022 Rambus Inc Earnings Call
Welcome to the Rambus third quarter and fiscal year 2022 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 Touchtone pad anytime.
If anyone should require assistance during the conference. Please press star zero on your touchdown pad at any time as a reminder, this conference call is being recorded.
I would now like to pass the conference over to Desmond Lynch Chief Financial Officer, you May begin Sir.
Thank you operator and welcome to the Rambus.
Third quarter 2022 results conference call I Am Desmond Glenn Chief Financial Officer at Rambus, and Don Nicole with me today is Luke's Edison our CEO .
The press release for the results that we will be discussing today have been filed with the SEC on form 8-K.
A replay of this call will be available for the next week at 868 once the 94 three.
In addition, we are simultaneously webcasting this call and along with the audio we are webcasting slides that we will reference during portions of today's call.
A replay of this call can be accessed on our website beginning today at five P. M Pacific time.
Our discussions today will contain forward looking statements, including our expectations regarding projected financial results.
Financial prospects market growth demand for our solutions, the company's ability to effectively manage any supply chain shortages.
The effects of ASC six O six on reported revenue amongst other items.
These statements are subject to risks and uncertainties that may be discussed during this call and there are more fully described in the documents, we file with the FCC, including our eight Ks 10, Qs and 10 keys.
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 our financials, we're using both GAAP and non-GAAP financial presentations in both our press release and on this call.
They can filiation 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 web site at Rambus don't call 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 than the cumulative effect of the adoption through retained earnings at the beginning balance sheet adjustment.
Any comparison between our results under ASC six so six 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 it a 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 will end with Q&A.
I will now turn the call over to Luke to provide an overview of the quarter.
Luke.
Thank you Dennis.
The company delivered an excellent performance in Q3, we exceeded our guidance for both revenue and earnings and delivered a record $80 million in cash from operations.
These strong results were achieved in the context of a challenging macroeconomic environment.
Our strategic focus in data center strength of execution and diverse portfolio of offerings are driving the continued profitable growth of the company.
And give us confidence in our outlook for strong Q4.
In addition, we are able to consistently return value to our stockholders. Most recently with the initiation of a $100 million accelerated share repurchase program and further debt retirement.
And just this morning, we announced that we have extended our comprehensive patent license agreements with Samsung for an additional 10 years.
With this extension we have solidified the sustained foundation of cash generation from our licensing program.
It allows us to continue to return value to our stockholders and build our growing businesses.
Samsung has been a trusted partner for many years and we are very pleased to strengthen our strategic relationship.
This extension enables deeper collaboration products and is a testament to the continued value of our innovations for the ongoing advancements of the industry.
Turning to our detailed results memory interface chips drove another record quarter of product revenue at $58 $6 million up 10% sequentially and 60% year over year.
This was a great performance from the team.
We remain vigilant as we navigate through dynamic macroeconomic conditions.
We continue to focus on execution and are actively managing through a rapidly evolving supply demand environment.
Visibility is improving in the supply chain and we expect continued growth in Q4.
Demand for our DDR for RCD remains strong and DDR five continues to ship as our customers prepare for the ramp of the next generation computing platforms.
We are in the midst of simultaneous platform in DRAM transitions and as such we continue to expect the demand ramp for DDR five to be somewhat lumpy nature.
With that.
Memory interface chip product mix may shift as we March toward the projected DDR for DDR five server memory crossover, which we now project to be in the first half of 'twenty four.
In addition, as we mentioned in last quarter's call, we expanded our chipset offering with the introduction of our new DDR five SPD hub and temperature sensor.
These companion ships, along with the RCD integrated into server memory modules.
We expect production in response to ramp in 'twenty three in line with market demand.
As we look to the longer term evolution of the data center industry momentum around <unk> is accelerating.
Multiple applications with the extent of attached memory are emerging enabling new tiers in the memory architecture.
<unk> enabled architectures promise to deliver higher performance and improved total cost of ownership in server generations to come.
We continue to work in close collaboration with the ecosystem to develop <unk> solutions for memory expansion and pooling.
We're seeing strong engagement from cloud OEM, and DRAM makers alike, and are well aligned with the market means and timing.
Turning now to Silicon IP, we delivered another strong performance with sustained momentum across multiple end markets.
We remain on track to deliver $120 million to $130 million in revenue and over 20% growth year over year.
Data center and AI are driving robust demand for our high performance Silicon IP solutions, and we have growing traction in government and Automotives.
Rambus continues to demonstrate leadership in our areas of focus with major Fi controller and security IP wins.
In closing this was an excellent quarter for the company.
We delivered results above guidance and expect an even stronger Q4, we are confident in the long term growth of the company, but remain vigilant given the challenging macro environment.
We are continuing to invest in the right programs for the data center market to drive continued growth.
And we are leveraging our strong balance sheet to return value to our stockholders.
I am extremely proud of the team and I want to thank our customers and partners for their ongoing support.
With that I'll turn the call over to Deb to discuss the quarterly financial results.
Thank you Luc I'd like to begin with a summary of our financial results for the third quarter on slide five.
Once again, we delivered a strong quarter with our financial results above the high end of both our revenue and earnings expectations and generated a quarterly record cash from operations of $18 million.
Our ability to consistently generate strong cash flows has enabled us to invest in our strategic initiatives and consistently return capital to shareholders.
During the quarter, we initiated a $100 million accelerated share repurchase program, which immediately retired three 1 million shares in.
In addition, we paid a net amount of $54 million to repurchase $39 million aggregated principal amount of our convertible notes.
Let me walk you through our non-GAAP income statement on slide six.
We continue to execute and revenue for the third quarter was $112 $2 million above the high end of expectations.
Royalty revenue was $29 $9 million inline with expectations.
It was down from the prior quarter due to upfront revenue for several license arrangements being included in Q2.
Licensing billings was $62 $2 million.
The difference between licensing billings and royalty revenue primarily relates to timing as we do not always recognize revenue in the same quarter, we bill our customers.
Product revenue was $58.6 million, consisting primarily of memory interface chips.
Maybe the interface chip revenue was a record for the company and we are delighted to see such strong demand from our customers.
Contract and other revenue was $23 $7 million, consisting primarily of silicon IP.
As a reminder, only a portion of our silicon IP revenue.
<unk> did in contract and other revenue and the remaining portion is reported in royalty revenue as well as in licensing billings.
Total operating costs, including cost of goods sold for the quarter with $77 $9 million.
Operating expenses of $54 $6 million were in line with our expectations.
And we ended the quarter with a total headcount of 763 employees.
Under the ASC six so six we recorded $1 $2 million of interest income 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 one $7 million and favorable foreign currency exchanges during the period.
We incurred approximately $100000 of interest expense associated with our convertible notes.
This was offset by incremental interest income associated with our cash and investment portfolio and adjusting for noncash interest expense on our convertible notes. This resulted in non-GAAP interest and other income for the third quarter of $2 $9 million.
<unk> the financing interest income related to ASC 606, this would have been $1.6 million of interest and other income.
Using an assumed flat tax rate of 24% non-GAAP pre tax income.
For the quarter was $28 $3 million with disciplined execution and focus we delivered earnings that were above the high end of our 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 $264 $8 million down from the previous quarter as record cash from operations of $18 million was offset by the $100 million accelerated share repurchase program.
We initiated in the quarter.
And $54 million net payments to repurchase the convertible notes.
At the end of Q3, we now have approximately $10 million in aggregated principal amount remaining of our convertible notes, which are due to mature in February 2023.
As we continue to execute we expect to deliver strong cash from operations in the future.
At the end of Q3, we had contract assets worth $118 million, which 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 and collect for these contracts.
Important to note that this metric does not represent the entire value of an existing licensing agreements either each venue opportunity we restructured a patent agreements in a manner that allows us to recognize revenue each quarter.
Third quarter, Capex was $9 $3 million, while depreciation expense was $6 $7 million we.
We delivered $77 million of free cash flow in the quarter.
Looking forward, we expect capex for the fourth quarter to be approximately $8 million.
As a reminder, the forward looking guidance reflects our current best estimate at this time.
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.
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 our guidance for the fourth quarter on slide eight.
<unk> <unk>, we expect revenue in the fourth quarter between 119 and $125 million.
We expect royalty revenue between 29, and $35 million and licensing billings between 59 and $65 million.
We expect Q4, non-GAAP total operating costs, which includes cogs to be between 86 and $82 million.
Under ASC 606, non-GAAP operating results for the fourth quarter is expected to be between a profit of 33 and $43 million.
For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect approximately $500000 of interest expense.
We expect pro forma tax rate to remain at approximately 24%.
The 24% is higher than the statutory tax rate of 21%, primarily due to higher tax rates and a fall into the stations.
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 eight and $10 million. In Q4, we expect Q4 share count to be 110 million basic and diluted shares outstanding.
Overall, we anticipate our non-GAAP earnings per share range between 22, and 2009 cents for the quarter.
Let me finish with a summary on slide nine.
I am pleased with our excellent results and the team's execution in this macroeconomic environment.
Our strategy is paying off and we have a diversified portfolio fueled by continued product revenue growth in memory interface chips.
Sustained momentum and silicon IP and stable backbone of our licensing business.
We were pleased to announce we extended our licensing agreement with Samsung for an additional 10 years at substantially the same financial terms, which demonstrates the continued strength and relevance of our patent portfolio and innovation engine.
I'm really pleased that this extension comes into effect in Q4 2023, we expect to account for this agreement to be recognized quarterly under ASC 606.
With continued discipline and focus we are now well positioned to execute on our long term strategic plans.
We continue to grow the business profitably with strong cash generation and minimal debt, which has enabled consistent capital returns to our shareholders.
Before I open the call up to Q&A I would like to thank <unk> employees for their continued teamwork and execution.
With that I'll turn the call back to the operator to begin Q&A could we have our first question.
Thank you Sir.
Ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone.
Our first question comes from the line of one Kevin Cassidy with Rosenblatt Securities. Your line is now open.
Thank you very much for taking my question and congratulations on the terrific results.
On the Samsung Samsung contract.
This was a bit of a surprise I thought it was.
Gotta be it seems like it's been pulled in by about a year is there any reason for that or.
Was it a surprise to you.
So have you already been in negotiations.
Hi, Kevin This is Luke thanks for the question it was important for us to engage with them sooner and this renewal earlier rather than later.
So that.
We could secure some stability in our cash flows for the years to come.
We could show more predictability in our results for the long term and visibility into our results.
And it also.
Lays the foundation for further.
Dziedzic relationship with Samsung as we develop technologies and products for the data center for the years to come.
So it was important for us to put this behind us.
And to lay the foundation for.
Long term relationship long term product developments with them. So that's the reason we did it earlier.
Okay great.
Okay.
Are you working with SK Hynix also them.
So of course.
We are in constant negotiation with discussions with.
<unk> partners.
The SK Hynix and yours is scheduled for the second quarter of 'twenty four.
As with Samsung, we have a strong relationship and partnership with SK <unk>.
And we will try to have an early renewal.
But we don't make commitments on this at this point in time.
Some patent renewals can take a lot of time.
But the very fact that Samsung has renewed on the same terms is a strong validation of our patent portfolio. So we're quite confident in re engaging a discussion with SK.
But there's no guarantee that it's going to be done earlier.
Okay great.
Thanks for answering that question and just one other on the CSL.
Yeah.
IP licensing.
Are you seeing an acceleration of that.
I think most are expecting that volume production of <unk> would be 2024, but.
The ICC.
Circuits for that must be in design now are you seeing an acceleration in requests for IP for CFO .
Yes.
<unk> indicated in our prepared remarks.
Our silicon IP business has grown about 20% year over year and a large portion of that was due to.
The introduction of EXL and Pcie IP to our customers. So you know our silicon customers that building products using EXL and we've seen that.
The growth that we've shown on our silicon IP business for us this year over over last year.
When it comes to our Seattle Silicon products, our own products, we're building our products and these products will hit the market in 2024.
Great. Thank you very much.
Thank you Kevin.
Thank you Sir.
Our next line of questions comes from the line of Juan that Mehdi Hosseini with <unk> your.
Your line is now open.
Yes, Sir Thank you for taking my question two follow ups for the team.
Just curious.
Have looked into.
Baidu landscape, especially one competitor in China, and whether increased restriction.
Would change the competitive landscape I don't know the follow up.
Hey, Thank you for your question.
Ultimately 2023.
Those shows.
It will cross currents of both economic and.
Geopolitical situations.
Our business in China is mostly around silicon IP and this is a small portion of our business.
So if there is any impacts to the impact is going to be in the Grand scheme of things minimal these being said.
We are monitoring that situation.
Between the economic slowdown in China.
The.
Possible recession also outside of China, and some restrictions on.
IEP export to China, we may see some headwind for our silicon IP business in China, but again the portion of the China business onto our Silicon IP remains modest.
Sure. Okay, and then just thanks for detail.
Quick follow up as it relates to the.
Political buffer chip.
If I just take the midpoint of your guide for Q4.
Youre on hard to grow that part of our business by almost 58%.
And we haven't even really started volume shipments.
Adoption of DDR five.
And hopefully I'm not mixing the two so.
Are these all the engineering work, you've done or how should I think about it.
What's driving the demand here.
How could we think about the opportunities once.
The deal size.
Crossover happens in early 'twenty four.
Thank you Eddie that's a great question.
I think to some extent 2022 has been an exceptional year for buffer chip we had a combination of those two phenomenons. One is our customers started to build modules for DDR five in anticipation for DDR five ramp.
So that was part of the growth that we saw in 2022.
And secondly, because the DDR for DDR five transition was shifting to the right.
Because of some delays in the market our customers also had to buy more <unk> than they were expecting to see what happened is we had more orders in <unk> four than we were expecting and we are still in a supply constrained environment for our DDR for shipment.
In Q3, we could have shipped more if.
If we had more supply.
In Q4, we still see a.
A gap.
Between what we supply to the market and what the demand is going to be but that demand for <unk> is higher than expected because of the shift of the DDR 40 outside physician.
So we may see some adjustments.
Q4, I think people will have to.
Digest their DDR called backlog over time, and we will work on the supply for that.
And DDR five is going to stop in food production towards the second half of the.
The second probably this first half.
Of the year. So we may see some adjustment of the mixed in the first quarter.
That may you know show some fluctuations both in the revenue mix and the margin mix. So we had an exceptional year in 2022 again people were building in anticipation of DDR five, but <unk> is shifting a bit to the right, but at the same time they have to catch up on <unk> four.
Because I was a bit delayed and that explains why is the market grew we grew much faster than the market in the long run we're going to go through these.
Adjustment period in the first half of next year, but we will continue to outpace the market growth throughout the year.
Do you mind, if I just ask a very quick follow up I think is very important to understand.
DDR five buffer chip carries a higher pricing so even if DDR for buffer chip units were to decline.
The higher price give you a five buffer chip.
I've said that we shouldn't expect this.
Like a pause or a drop off here as we transition from four to five is that a is that a fair characterization.
There is certainly at the beginning or the introduction of new technology and ASP diff.
The difference between the old generation and the new generation, but it also depends on the volume brand and as volume ramps that gap in pricing diminishes.
So.
Yes, I think we're going to have in the first half of the year to work through this transition as you know people are going to consume the backlog on <unk>, we have solid backlogs would it be up or and theyre going to start to.
It will build further their backlog and DDR five we're also going to see some price fluctuations as they do that and we'll monitor that.
It's something that we could pay up for.
Nathan just to add on to.
That detail for certainly does pasta board ESP DDR five does have the higher ASP and that will continue to fall.
More pricing Cogs going forward.
I think we've done a great job of managing the product mix over the last seven quarters, we've been able to deliver record product revenue growth and that's what we hope to continue going forward as Luke mentioned, we are in a dynamic transition here between <unk>, four and <unk> five, but I think we're well positioned going forward.
Okay. Thanks for the detail I appreciate it.
Thank you Mehdi.
Thank you for your question Sir.
Our <unk> line of questions comes from the line and once Sidney Ho with Deutsche Bank.
Line is now open.
Great. Thank you I just wanted to follow up with the last question what the adjustment period, you can expect it in Q1 of the first half of next year that you just mentioned what is your current expectation for products revenue for next year.
Just follow up to that some of the memory companies are commenting that lower DDR five prices in the current environment.
Faster adoption of DDR five are you starting to see that and Conversely are you seeing any price pressure for Ya DDR five products as a result of lower memory prices.
Follow up question.
So many thanks for the question as you know, we only guide one quarter at time. So looking ahead into fiscal year 'twenty to little bit ahead of US just no I think what we have done a fantastic job of exit.
<unk>.
Growth and balancing the mix between DDR four and DDR five.
From there.
Rick mentioned in his prepared remarks, we have seen.
Some lumpiness in demand for DDR, five and we expect that to continue into Q4 and Q1. So we will continue to carefully monitor and manage this product mix dynamic as we go forward.
Pricing perspective.
We continue to see DTI by following our normal pricing curve.
In line with our previous generations from there. So we expect to continue to see the normal sort of place it which isn't going to sort of next year, but overall, we've done a really nice job of managing our ESP as well as the gross margins on the product side. They ended up at 63%.
For Q3, so again that was relatively flat to slightly up versus Q2. So we've done a really nice job in managing both the ESP on both of the margin profile.
Okay. That's helpful. Maybe just one follow up question sorry.
Sorry.
No go ahead sorry.
Sure. So my second question is.
We're starting to see some slowdown in data center build outs, either because of supply constraints are just more cautious spending by customers.
We're certainly seeing some inventory adjustments from a component standpoint are you concerned that there is too much inventory for your parts at these customers and how do you see the demand over the next few quarters anything you would highlight in terms of backlog of orders will be greatly appreciate it. Thanks.
So at a high level and I'll, let derrick comment on the numbers.
At a high level, we still.
See some demand for more bandwidth and more capacity from from our vantage point.
And we're also facing a major technology and platform transition. So we still do see.
Growth in.
In that market from a from a standpoint, what we are seeing however is that as I said earlier.
We have in Q3 and Q4, our backlog that is higher than what we can ship.
What we see is.
<unk>.
The inventory levels are still lean on the DDI for our.
Generation of products.
And what we have to deal with in the first half of next year is to deal with the platform transition.
Supply management.
And the price elasticity as you mentioned between DDR foreign DDR five so we're looking at these three variables, but overall.
Based on what we see with our customers and partners.
When all of these aspects stabilize we will continue to grow our share in that market.
Half of the year is going to be that half of the year, where we'd have to deal with as I said price elasticity supply management.
And the platform transition.
We don't feel we don't see a buildup of inventory at this point in time.
Still see customers in high demand of DDR for us, they're waiting for the ramp up of DDR five and as we said in earlier calls we have a strong position in the RTD off by footprint. When this starts in the market.
Great. Thank you very much.
Thank you Sydney.
Thanks for that.
Thank you for your questions.
Our next final question comes from the line of one Ashley Macquarie What Wells Fargo.
Line is now open.
Hi, This is Ashley mccurry on for Gary Mobley at Wells Fargo on that supply.
Situation I just wanted to ask our customer order lead times for buffer chipsets shrinking as a result of additional supply coming online.
And any additional comments in terms of the supply situation as well as any inventory build.
It's that type of thing.
Hi, Ashley it's Dave Thanks for your question there.
A supply perspective, we are seeing some additional supply coming online, which has enabled us to drive to the higher.
Revenue could also have been able to play in both in Q3 and Q4.
As Luke mentioned.
Mind on DDR for products with higher than what we could actually supply.
What's the customers over the next sort of three six months to minimize that sort of gap going forward from there.
And the inventory buildup perspective, I think <unk> covered it in the last sort of question DDR four continues to surge I mean lean from a customer inventory perspective, and DDR five customers had been building some inventory there and it finds so if the product transition which will take.
Place.
First half and then to sort of second half of next year, but overall I think the supply situation is improving for us we've been able to deliver higher product revenue and overall the inventory levels remain normal to lead Ashland.
There.
Thank you.
Thanks, guys. Thank you asked me.
Thank you for your question.
Again, I would like to remind all participants if you would like to ask your question. It is star one on your touch down keypad. Our next line of questioning comes from the line of one Brian Chen with Jefferies.
Your line is now open.
Hello, asking a question for on behalf of Mark passes. So we got some positive commentary from the Hyperscale, there's in terms of Capex trends.
Were curious if that's manifesting in.
In any way for you and for your product revenues in terms of increased order visibility for next year or are there incremental details on that.
Demand dynamics would be helpful.
Thank you Brian good.
Good question.
This.
Capex from the cloud service providers.
Fleets into the need for more capacity and bandwidth.
On the memory subsystems and the direct impact on us is going to translate into the demand for next generation <unk> five on the memory bus because it actually adds capacity and bandwidth directly on the memory bus compare to <unk> Gen.
Generation of products and as we mentioned earlier, we are also developing <unk> cell products.
Which adds a tier of memory to those systems and allows these cloud service providers to either add more memory for a given compute.
Computing.
That capability.
Or two sure.
Memory resources between processors and this is the whole usage case of EXL products that we are developing so we do see these capex investment from the cloud service providers or providers as you know.
Good thing for US and this is what's driving our roadmap on both the buffer chip <unk> Sip products.
Got it thank you.
Thank you Brian .
Okay.
Thank you for your question.
Our next final question and a follow up from the line of Kevin Cassidy with Rosenblatt Securities. Your line is now open.
Thank you. Thank you for letting me have a follow up.
You had mentioned in your prepared remarks about security IP as part of our Silicon IP can you give us a description of how.
How fast is that growing and whats the opportunity pipeline.
Number of customers just sort of rough estimate.
Yeah, So as we said.
Our silicon IP business is no you know on a stable run rate.
$35 million a quarter.
Approximately approximately half of it is interface IP and half of it is security.
We have.
In these businesses multiple customers and multiple applications in particular for security.
The main market that we're addressing today, our AI and data centers, but we do see growth in government applications.
Automotive as well.
This is an area. We're watching we saw some very nice growth in 2022, we mentioned about 20% growth over the prior year.
We have to watch the potential headwinds.
Headwinds for that business, given the economic environment.
You know a lot of these customers are startups.
The funding for new projects May slow down in the current economic environment.
We'll have to watch.
What's happening in China, and the possible restrictions, we have to address that market. So we will continue to grow we have multiple customers multiple markets.
And we will grow faster than market, but we think the market is going to not grow as fast as last year and I think we're not going to grow as fast as we grew last year, just because of the economic environment.
So thank you very much.
Thank you Kevin.
Thank you for your follow up questions Sir.
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 Saracen.
<unk> remarks.
Thank you everyone, who has joined US today for your continued interest and time.
We look forward to speaking with you again soon have a very good day. Thank you.
Thank you. This now concludes today's conference you may now disconnect.