Q4 2022 Rambus Inc Earnings Call
Speaker 1: Welcome to the Rambis Fourth Quarter and Fiscal Year 22 Earnings Conference Call.
Speaker 2: At this time, all participants are in listening 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 zero on your touch tone pad at any time. As a reminder, this conference call is being recorded.
Speaker 3: I would now like to turn the conference over to Desmond Lynch, Chief Financial Officer. You may begin your conference. Thank you, operator, and welcome to the Rambis fourth quarter 2022 results conference call. I am Desmond Lynch, Chief Financial Officer at Rambis.
Speaker 4: and on the call with me today is Luke Serafin our CEO . The press release for the results that we will be discussing today has been filed with the SEC on Form 8K. A replay of this call will be available for the next week at 866.
Speaker 5: 813 9403. 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.
Speaker 6: A replay of this call can be accessed on our website beginning today at 5pm Pacific Time.
Speaker 7: Our discussions today will contain forward-looking statements, including our expectations regarding projected financial results, financial prospects, market growth, demand for our solutions, the ability to effectively manage any supply chain shortages.
Speaker 8: the effects of ASC 606 on reported revenue amongst other items.
Speaker 9: These statements are subject to risks and uncertainties that may be discussed during this call and are more fully described in the documents we file with the SEC, including our 8Ks, 10Qs and 10Ks. These forward-looking statements may differ materially from our actual results and we are under no obligation to update these statements.
Speaker 10: 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. A reconciliation of these non-GAAP financials to the most directly comparable GAAP measures used earlier.
Speaker 11: had been included in our press release, in our slide presentation and in our website at rambiz.com on the investor relations page under financial releases.
Speaker 12: We adopted ASC 606 in 2018 using the modified retrospective method, which did not restate prior periods, but rather ran the cumulative effect of the adoption through retained earnings as a beginning balance sheet adjustment.
Speaker 13: Any comparison between our results under ASC 606 and prior results under ASC 605 is not an accurate way to track the company's progress.
Speaker 14: We will continue to provide operational metrics such as licensing billings to give our investors better insights into our operational performance.
Speaker 15: The order of our call today will be as follows. Luke will start with an overview of the business, I will discuss our financial results and then we will end with Q&A.
Speaker 16: I'll now turn the call over to Luke to provide an overview of the quarter. Luke?
Speaker 17: Thank you, Dev, and good afternoon, everyone.
Speaker 18: 2022 was an excellent year for the company, capped off by a solid performance in the fourth quarter, with Q4 revenue and earnings in line with guidance.
Speaker 19: Through outstanding execution, we were able to grow the business faster than the market, despite the challenging macroeconomic environment.
Speaker 20: We delivered another record year of product revenue driven by memory interface chips.
Speaker 21: hit our annual revenue target for Silicon IP, and extended our strategic relationship with Samsung, which strengthens our long-term licensing foundation. In addition, we generated a record $230 million in cash-form operations over the course of the year.
Speaker 22: As we have grown the business, we have strengthened our balance sheet and consistently returned value to stockholders who share repurchases, strategic investments and debt retirement.
Speaker 23: We continue our focused investments in the technology and talents critical to our growth initiatives.
Speaker 24: As we take a look at the details of our
Speaker 25: Memory interface chips led the way delivering Q4 product revenue of $67 million up 15% quarter of a quarter.
Speaker 26: This brought the full year to $227 million, setting a new annual record for product revenue and significantly outpacing the market with 58% growth year over year.
Speaker 27: These results were driven by strong execution throughout 2022 with the team expanding our DDR4 qualification footprint and making significant market share gains.
Speaker 28: We are well positioned for the ramp of DDR5 with our industry leading offering.
Speaker 29: and continue our product leadership with last week's announcement of our Gen3 DDR5 RCD.
Speaker 30: This latest generation chip extends the performance of our RCD family to 6400 mega transfers per second and supports the roadmap of future server generations in the years to come. Turning to 2023, we remain vigilant as we navigate through the dynamics of the industry transition to a new generation of memory.
Speaker 31: While we now have improved visibility of supply we are seeing elevated inventory
Speaker 32: This is leading to softness in the first half that is reflected in our guidance, but we expect a stronger second half of the year with next generation memory ramping in earnest.
The industry is still early in the transition to DDR5 with a server memory crossover from DDR4 projected for the first half of 2024 which is consistent with our view from last quarter.
And with that, our memory interface chip product mix will continue to be dynamic as the industry prepares for production shipments of DDR5.
We are actively working with our customers to manage inventory adjustments and the transition to DDR5, and we believe we are well positioned for continued growth in 2023.
As we look to the longer-term evolution of the data center, CXL brings many exciting opportunities.
Multiple applications will see Excel attached memory I emerging, enabling new memory tiers in the Dalat Center.
CFL-enabled architectures promise to deliver higher performance and improve total cost of ownership in server generations to come.
We continue to work in close collaboration with the ecosystem, including Cloud, OEM and DRAM makers.
and are well aligned with the market needs and timing.
Finally, in Silicon IP the team executed very well, achieving over 30% revenue growth year over year.
We continue to lead in our areas of focus for both Interface and Security IP, and while we expect challenging macro conditions, we remain confident in the long-term growth opportunities.
We demonstrated strength with Tier 1 wins throughout the year and are well positioned to address the long-term need for high performance and highly secure IP in advanced SOCs.
In closing, this was a tremendous year for the company. The team executed incredibly well and consistently delivered results.
While we are now navigating cross-carbons in the first half of 2023, standing from the overall economic environment and from a generational industry transition from DDR4 to DDR5, we continue to see solid growth opportunities in the data center.
We remain committed to making focused investments in the resources essential to delivering differentiated high quality products and innovations that address the critical performance bottlenecks between processing and memory.
I'm extremely proud of the team and I'm confident that our strategy puts us in an excellent position for long-term profitable growth.
And as always, I'd like to thank our customers, partners and employees for their ongoing support.
With that, I turn the call over to Des to discuss the quarterly financial results. Des?
Thank you, Luke. I'd like to begin with a summary of her financial results for the fourth quarter and for the full year 2022 on slide 5.
Once again, we delivered a strong quarter with both revenue and earnings in line with our expectations.
We had excellent financial results in 2022 and we ended the year very well positioned as we continue to make progress on our long term growth strategy.
The excellent financial performance was coupled with a continual improvement in our balance sheet which supports our growth initiatives.
For the year, our cash from operations was a record at $230 million up from $209 million in 2021.
Our ability to consistently generate strong cash flows has enabled us to invest in our strategic initiatives and consistently return capital to shareholders.
In 2022, we executed a $100 million accelerated share repurchase program which retired 3.2 million shares.
And we retired 94% of our convertible debt using an existing cash on hand.
As we look to the future, we expect to continue to deliver strong cash from operations and drive shareholder value.
Let me walk you through a non-GAAP income statement on slide 6.
We continue to execute and revenue for the fourth quarter was $122.4 million in line with our expectations. Royalty revenue was start to $1.4 million while licensing bellings was $64.3 million.
The difference between licensing billing 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 $67.2 million, consisting primarily of memory interface chips. And for the full year, we delivered $227.1 million, which was a record for the company.
Contract and other revenue was $23.8 million, consisting primarily of Silicon IP.
As a reminder, only a portion of our Silicon IPE revenue is reflected in contract and other revenue and the remaining portion is reported in royalty revenue as well as in licensing billing.
Total operating costs, including costs of goods sold, for the quarter was towards the high end of our expectations at $85.4 million.
Driven by higher cost of goods all related to record memory interface chip revenue.
Operating expense of $55.8 million were in line with our expectations as we continued to be vigilant in our expense management.
And we ended the quarter with a total headcount of 765 employees.
Under ASC 606 we recorded $1 million of interest income related to the financing component of 6 fee licensing arrangements for which we have recognised revenue but not yet received payment. We incurred approximately $800,000 in adfers for incurring currency exchanges during the period.
After adjusting for non-cash interest expense on the convertible notes, this resulted in non-gap interest and other income to the fourth quarter of $400,000.
Excluding the financing interest income related to ASC 606, this would have been $700,000 of net interest expense. Using an assumed flat tax rate of 24% for non-GAAP pre-tax income, non-GAAP net income for the quarter was $28.3 million.
Now let me turn to the balance sheet details on slide 7. We ended the quarter with cash, cash equivalence and marketable securities totaling $313.2 million up from the previous quarter.
primarily driven by strong cash from operations of $51.3 million. At the end of Q4, we had contract assets worth $150.9 million, which reflects the net present value of unbuilt accounts receivable related to licensing arrangements.
for which the company has no future performance obligation. We expect this number to continue to trend down as we build and collect for these contracts. It is important to note that this metric does not represent the entire value of our existing licensing agreement.
At each renewal opportunity, we restructure our patent agreements in a manner that allows us to recognise revenue each quarter.
Fourth quarter cappets with $8.7 million, but depreciation expense with $7.1 million.
We delivered 42.6 million dollars of free cash flow in the quarter.
As a reminder, the forward-looking guidance reflects our current best estimates at this time, and we continue to actively monitor the macro environment, 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 our guidance for the first quarter on slide 8.
Under ASC 606 we expect revenue in the first quarter between $107 and $113 million.
We expect royalty revenue between $25 and $31 million and licensing billings between $61 and $67 million.
We expect Q1 non-GAAP total operating costs, which includes COGS, to be between $87 and $83 million.
We expect Q1 CapEx to be approximately $9 million. Under ASC 606, non-GAAP operating results for the first quarter is expected to be between a profit of $20 and $30 million.
For non-gap interest and other income and expense, which excludes interest income related to ASC 606, we expect approximately $500,000 of interest expense. We expect the pro-former to take effect to remain approximately 24%.
The 24% is higher than the statutory tax rate of 21%, primarily due to higher tax rates and afforded due restrictions.
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 $5 and $7 million in Q1.
We expect Q1's share count to be 110 million basic and diluted shares outstanding.
Overall, we anticipate a non-gap airlings per share range between 13 and 20 cents for the quarter.
Let me finish with a summary on slide name.
I am pleased with our excellent 2022 results and the company's execution in a challenging microeconomic environment. Our top-line growth was achieved by increasing our profitability and generating record cash from operations.
In 2023, we are focused on execution while maintaining financial discipline.
Our innovation drives a diversified and expanding portfolio, fueling product revenue growth. We continue to deliver value to our shareholders with a robust balance sheet and strong cash generation. We are well positioned to continue executing on our long-term strategic growth plans.
Before I open the call up to Q&A, I would like to thank our employees for their continued teamwork and execution.
With that, I'll turn the call back to our operator to begin Q&E.
Could we have our first question?
Thank you. Ladies and gentlemen, if you have a question, please press star 1 on your touch tone telephone.
And we would also like to ask that you limit yourself to one question and one follow-up. The first question comes from a line of Gary Mobley of Wells Fargo.
And we would also like to ask that you limit yourself to one question and one follow-up. The first question comes from the line of Gary Mobley of Wells Fargo. Your line is open, you may proceed.
Gary, your line is open. You may proceed with your quiche.
I apologize guys.
Appreciate you taking the question.
I wanted to first ask about the different ebbs and flows in your product revenue as we transition through 2023. Luke, you communicated that you're uncertain to paraphrase in terms of how a DDR4 and the transition to DDR5 might impact your business as well as that the cemeteries. Maybe if you can share with us your thoughts on that.
your view and how this transition may shape up because you're guiding for $60 million in product revenue in the first quarter, which doesn't sound too bad. So is the risk really more into the second quarter? It might see some air pocket of weakness in your DDR.
for your question. First of all, we're very pleased with the year we had on the product revenue in 2022. As said in the remarks, you know, $227 million, which was 58% growth over last year. And the last quarter was a good quarter as well, $67 million.
Now let's look at what happened last year. Our customers started to build some inventory in advance for the DDR5 launch in the market. And because of some of the delays of the DR5 platform, they had to pivot very quickly back to some DDR4 procurement.
in a supply constrained environment. And that's what is reflected in our tool for revenue, if you wish, where the weight of DDR4 is higher than what we expected out of the $67 million. Now what's happening is our customers have to digest some of these orders that have placed on us.
We are working with them in scheduling their backlog for the DDR4 orders. They are cautious as they also have to manage that transition to DDR5. And that explains the guidance we are getting for the first quarter of this year. But we are confident to continue to grow throughout the year with the launch of DDR5. And we are very pleased that.
Both AMD and Intel announced the launch of their platform, so DDR5. DDR5 is going to start in earnest, mostly through the second part of the year. So as indicated last quarter, this coming quarter and the second quarter are going to be quarters we're going to adjust. We're going to adjust the backlog of our customers.
and the transition from DDR4 to DDR5. I would like to say that we have backlog in place for DDR4. We don't see order cancellations. We are just negotiating the schedule of shipments of these DDR4 paths.
and we are comfortable with the level of inventory on GDI R5. So we just have to go through the transition. We will grow this year, we will continue to gain share this year, but that will happen mostly in the second half of the year.
I appreciate all the color Luke. It's my follow up. I wanted to ask about the the run rate of the silk and I keep business. If I'm not mistaken last quarter, it was 125 million annualized run rate. Is it still at that level or have we seen some additional growth on top of that?
So, you know, we had very nice growth last year on our Silicon IT business. It grew about 30% over the previous year. I think we will continue to grow that business this year, but I'm at a lower rate given the macroeconomic environment. And we see a growth of that business in 2023.
in the low to mid single digit number as opposed to the growth that we saw last year with a backdrop of the current economic environment.
single digit number as opposed to the growth that we saw last year with a backdrop of the current economic environment. Got it. All right, thank you guys.
Thanks, Gary. Thank you. The next question comes from the line of Kevin Cassidy of Rosenblatt.
Thank you. The next question comes from the line of cabin capacity of rose and black. Please proceed.
Thank you, and congratulations on the good results. And congratulations also for introducing the third generation DDR5. And as you're speaking with your customers, do you have an idea of what the Dell curve or what the distribution will be for each one of those speed ranges, Gen 1 through Gen 3? Yes, I do.
Thank you, Kevin. You know, the quantification cycles for the RCD chips are quite long and complex. And they based on the performance of the chips, the basal interoperability between the memory and the processors and signal integrity. And to give you a little bit of background.
The DDR5 RAM that will happen this year, that is happening this year on the Sapphire Rapids and Genoa platform is based on our Genoa RCD which we announced in September 2017.
The second generation of RCD, we announced it in October 2021, some time ago, and that will address the follow-on products which will be introduced to the market in 2024, and the third generation which we just announced, that announced at 6400 mega-transwars per year.
with our customers so that we continue to grow our share as we move. So this year, generation one of our RCD is going to be the one in production. Generation two will start to be in production next year and generation three, which we just announced, will start to be in production in 2025.
I see very clear. Thank you. Thank you for helping me out with that. And maybe if you could give us a status of your the other chips that are going on to a DDR5, you know, the temperature controller, the SPD hub, just an update on the status of those devices. That's the we have known.
That's where we are at the same status as last quarter. I see. Okay, great. Thank you. Thank you, Kevin. Thank you. The next question comes from the line of Mehdi Hosani of SIG. Please proceed. Yes, sir. Thanks for taking my question. One for Luca and one follow-up for Des. I just want to go back to the silicon IP and want to better understand how the NICs would change, especially as we might play from the first half to the second half. Would there be opportunity with the CXL 2.0…
So when it comes to CXL, we have introduced a last-year series of IP that addresses the CXL market. We announced our CXL 2.0 IP in the January of last year. We announced the CXL 3.0, which was the end of the year, as well as PCIe Gen6. So we continue to have design wins in the CXL space with SOC vendors that build SOC for the CXL market. The CXL market, we'll start to announce it towards the end of next year.
That's where, you know, for us we're going to start to see product revenue. So from an IP standpoint, as we said, the view we have of our IP business this year is that it's going to grow in aggregate low to mid single digits because a lot of the design slots
has been accessed at this point in time. Given the economic environment, we do see a slight slowdown of design stops. But CXL will stop. It's just that the IP business related to this, or the IP business in general, is going to grow at a lower rate this year than it was last year. This being said, we will start to see CXL product revenue towards the end.
calendar year 2022, you had got it to 60 to 65% gross margin, but you exited the year at 58. How should I think about progression of buffer chip, I want product buffer chip gross margin throughout this year.
Hi, Maddy. Thanks for your question. As Luke mentioned, our product revenue execution and growth has been exceptional as we continue to grow the business. I think if you look on the full year basis for 2022, our product gross margins were around 61%.
which was in line with our long-term target of 60 to 65%. When we look as a company, we manage our gross margins for the long term and depending where we are in the product cycle and what products are shipping, you can see our gross margins moving around quarter to quarter.
So that is reflected in Q4. Our product gross margins were below this range which was entirely driven by product mix in the quarter and we do expect to see a similar product mix in Q1. With improvements in product mix and continued manufacturing cost reductions as we go throughout the year we do expect product gross margins for 2020.
Please proceed. Thanks for taking my question. Actually, the first one is just to follow up with a gross margin question. I just want to make sure I understand the product mix that you are specifically talking about. Is it the mix between DDR4 vs. DDR5? Is it...
Just any color around that will be helpful in terms of when, also try to think about when these headwinds going to start going the other way.
Hi Sydney, thanks for your question. You're exactly correct on that one. We did see in Q4 a higher mix of our DDR4 revenue from there and that's what we expect to see going into Q1. I think what we've talked about is that on the product side we do expect to see a
softness in the first half of the year which Luke mentioned in his prepared remarks with recovery in the second half of the year mainly driven by the DDR5 revenue from there. And with that we will see our gross margins improve and come in line with the targeted range of the 60 to 65% that I've mentioned.
Okay, that's clear. Thank you. Maybe the follow-up question is, I think you guys, and to an earlier question, you talk about you expect your product revenue in aggregate for four years to grow year-to-year. But did I also hear directly that you expect you want to be the trough quarter as well and then start growing from there?
And how should I think about the mix as you exit the year, even a range will be helpful between DDR-40, DDR-5 and maybe some companionships?
Hi, Sydney. Thanks for your question again. What we've said is that our visibility beyond Q1 is limited on the product transition. Your customers are digesting the inventory in advance of the product transition from there. But I think overall...
we're not going to really break out the DDR4, DDR5 mix. Again our visibility is limited as the customers work through some of these transitions from here but I think overall for the year we do expect to grow our product revenue.
Okay, maybe if I can speak in one quick one, if I'm looking at your operating expenses excluding the cost of food sold is a bit from the Q4 level in your guidance, how should we think about the rest of the year given the current macro environment?
Thanks. That's a great question, Sydney. Thanks. You know, we'll continue to be disciplined and vigilant in our operating expense management given the macro challenges.
For Q1 we did guide our total operating costs which includes cost of goods sold to be relatively flat to Q4 at $85 million. If you really look specifically at operating expenses in 2022 our quarterly operating expenses were relatively stable.
around the $55 to $56 million per quarter with R&D at $35 to $36 million per quarter and SG&E is roughly $19 to $20 million. In Q1 we will see some seasonal payroll increases which will increase our sort of cost basis from there.
but our expectation is that we will keep our operating expenses relatively flat from Q1 to Q2. And really looking at the sort of back half of the year we'll continue to be prudent in our expense management and really strike the right balance to ensure that we continue to fund the right investments to ensure that we maintain our leadership positions in key programs.
I think you've seen us at the disciplines throughout the years that we've seen nice operating expense leverage from there.
Okay, thank you. Thanks, Mr. Ten.
Thank you. The next question is a follow-up from Gary Mobley.
Thank you. The next question is a follow-up from Gary Mowgli of Wells Fargo. Please proceed.
Hey guys, thanks for taking my follow up. You have shipped VDR5 dim chipsets and so I'm curious to know.
the order of magnitude for the price increase for the RCD specifically in a DDR5 versus a DDR4. Maybe...
in the initial days of DDR5 that maybe as well take a view with more commercial volumes. And then with respect to the companionships, the data buffer, I'm sorry not the data buffer, but the SPD hub and the temperature sensors. How would you calibrate your share in those particular and market?
and we do see a reset of pricing, especially at the very beginning, when the volume is just small. But when we go in production in earnest to see second half of the year, we will see this pricey road over time, starting from a much higher level. This is typical.
in that kind of generation would change. And that's why we believe, as indicated by Des earlier, that our margin should improve throughout the year. We still see us meeting our margin.
targets of 60 to 65 percent for the whole year. So that's how we do see the transition from DVR4 to DVR5.
With respect to the companionship, these companionships are in qualification now with customers. We expect them to be in production with customers towards the end of this year. The qualification cycles for these companionships are much shorter than it is for the RCD. They are much less complex.
So it's easier to gain market share earlier. It's a bit earlier to predict what our market share is, but we have good relationships, good contracts with our customers, so we expect to get some good revenue from these companionships when we introduce them into the market. But the qualification cycles are much, much shorter with the R4 RCD chips, for example.
Thanks, Luke.
Thanks, Luke. Thank you, Gary.
Thank you.
There are currently no additional questions registered at this time, so as a reminder, it is star followed by one on your telephone keypad to ask a question.
OK, so if there's any more questions, I'd like to thank everyone. OK.
Thank you everyone, who's joined us today for your interest and time. We look forward to speaking with you again soon. Have a very good day. Thank you.
That concludes the conference call. Thank you for your participation. You may now disconnect.