Q1 2023 Rambus Inc Earnings Call
Obligation to update these statements.
Speaker 1: We are under no obligation to update these statements.
Speaker 1: In an effort to provide greater clarity in the financials, we are using both GAP and non- GAAP financial presentations in both our press release and on this call. A reconciliation of these non- GAAP financial s to the most directly compatible GAAP measures has been included in our press release.
Speaker 1: in a slight presentation and on our website at rambus.com on the Investor Relations page under financial releases.
Speaker 1: We adopted ASC 646 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. Any compadence between our results on the ASC 646?
Speaker 1: The order of a call today will be as follows.
Speaker 1: Luke will start with an overview of the business. I will discuss her 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?
Speaker 1: Thank you, Dave, and good afternoon, everyone. This was a strong start to the year for the company, with Q1 revenue and earnings at the end of guidance.
Speaker 1: We delivered $39 million in cash from operations and retired the last of our remaining debt further strengthening our balance sheet.
Speaker 1: These results were driven by continued execution and achieved in the context of a challenging macroeconomic environment.
Speaker 1: In addition to our strong financial performance, we were very pleased to extend our strategic relationship with SK Highnecks through the middle of 2034 with the early renewal of our comprehensive patent licensing agreement. Similar to our extension with Samsung announced in Q4, these agreements strengthened South foundations for ongoing investments in product and technology leadership across our portfolio.
Speaker 1: and is a great demonstration of the ongoing value of our innovations to the market. Turning to our business results, memory interface chips performed well, delivering Q1 reported revenue of $64 million, up 33% year over year.
Speaker 1: despite the challenging market conditions.
Speaker 1: In the near term, we remain vigilant as we navigate through the dynamics of the industry transition to a new generation of memory.
Speaker 1: While DDR4 inventories remain high at some end customers, as reflected in our second quarter guidance, we are seeing initial orders come through for DDR5 with shipments starting toward the end of the quarter.
Speaker 1: We remain focused on execution and are actively working with our customers.
Speaker 1: We expect a stronger second half as inventories return to more normal levels and demand for DDR5 continues to ramp.
Speaker 1: As we have said previously, the server memory crossover to DDR5 is projected for the first half of 2024 and we expect our memory interface chip product mix to be lengthy during the transition period.
Speaker 1: Given our strong leadership position in DDR5 and improving market conditions in the second half, we believe we are well positioned for continued annual growth in 2023.
Speaker 1: As we look farther out, advancing the performance of data center memory will be critical to address the growing bandwidth and capacity requirements of GenerityDI and other advanced workloads.
Speaker 1: We are making good progress on the following generations of DDR5, with our Gen2 RCD in qualification across the ecosystem, and our Gen3 RCD sampling to all of our customers and partners. In addition to DDR5, close collaboration and development with the ecosystem continues on CXL, and we are well aligned with the market needs and timing.
Speaker 1: to support the roadmap of future server generations for years to come. Finally, in Silicon IP, our recently announced GDDR6 interface, achieving a best-in-class data rate of 24 gigabit per second is a great illustration of our continued technology leadership.
Speaker 1: It is the latest addition to our market leading portfolio, which also includes the industry's fastest HBM3 memory IT subsystem.
Speaker 1: With these memory solutions, Rambas addresses the needs of both AI training and inference with state-of-the-art offerings.
Speaker 1: We continue to lead in our areas of focus for both interface and security IP. And in spite of current challenging macro conditions, we remain confident in the long-term growth opportunities.
Speaker 1: In closing, this was a strong quarter for the company with results at the high end of guidance and the team executing well.
Speaker 1: While we navigate the dynamic market conditions in a near-term, we continue to see strong secular trends and solid growth opportunities.
Speaker 1: This is a very exciting time for the industry with the broadening availability of generative AI applications like ChatGPT that have captured the public imagination.
Speaker 1: These are perfect examples of the advanced workloads that will drive accelerated growth in computing and the data center with a ever-increasing demand for data.
Speaker 1: And with Memory Bandwidth as the first order enabler, Rambus is well positioned to enable the state of the memory performance required by these advanced applications.
Speaker 1: With our strategic focus in data center, continued execution and diverse portfolio of offerings, we have confidence in the strength of our strategy and ability to drive long-term profitable growth for the company.
Speaker 1: We are making the right focused investments to deliver differentiated, high quality products and innovations that address the critical performance bottlenecks between processing and memory.
Speaker 1: As always, I'd like to thank our customers, partners, and employees for their ongoing support.
Speaker 1: And with that, I turn the call over to Desz to discuss the quarterly financial results. Desz? Thank you, Luke. I'd like to begin with a summary of our financial results for the first quarter and onslaed 5.
Speaker 1: Once again, we delivered a strong quarter and we are very pleased with the company's ongoing execution in a challenging, macroeconomic environment.
Speaker 1: We delivered financial results at the high end of our revenue and earnings expectations, while continuing to strengthen our balance sheet.
Speaker 1: In April , we were delighted to announce we extended our licensing agreement with SK Hynix for an additional 10 years at similar financial terms.
Speaker 1: This extension becomes effective in Q3 2024 and we expect to recognise revenue quarterly under ASC 606.
Speaker 1: In the last six months, we've extended our two largest patent licenses, all for 10-year terms which demonstrate the continued strength and relevance of our patent portfolio and innovation engine.
Speaker 1: Additionally, in Q1 we continued to strengthen our balance sheet. We repaid the final balance of our convertible notes and settled the associated underlying hedge agreements. Our Everite
Speaker 1: We've utilised our existing cash on hand to retire the debt, while continuing to generate strong cash flows and drive shareholder value.
Speaker 1: Let me walk you through our non-GAAP income statement on slide 6.
Speaker 1: With her continued focus on execution, revenue for the first quarter was $113.8 million at the high end of her expectations.
Speaker 1: Royalty revenue was $28.2 million while licensing billings was $63.4 million.
Speaker 1: 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.
Speaker 1: Product revenue was $63.8 million, consisting primarily of memory interface chips.
Speaker 1: Contract and other revenues was $21.8 million, consisting primarily of Silicon IP.
Speaker 1: 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 in licensingets in selling screens.
Speaker 1: Total operating costs, including cost of goods sold for the quarter, was $86.3 million.
Speaker 1: Operating expenses of $68.3 million, wherein line with our expectations as we continue to be vigilant in our expense management. And we ended the quarter with total headcount of 762 employees.
Speaker 1: non-GAAP interest and other income for the first quarter was $1.8 million. This included $900,000 of ASC 606 interest income related to the financing component of fixed fee licensing agreements for which we have recognized revenue but not yet received payment.
Speaker 1: excluding the financing interest income related to ASC 646, this would have been 900,000 dollars of net interest income.
Speaker 2: Using an assumed flat tax rate of 24% for non-GAAP pre-tax income, non-GAAP net income for the quarter was $22.3 million.
Speaker 2: Now let me turn to the balance sheet details on slide 7.
Speaker 2: We ended the quarter with cash, cash equivalents and marketable securities totalling $292.1 million, a decrease from the prior quarter mainly driven by the convertible note repayment and the settlement of the underlying hedge agreements.
Speaker 2: Cash from operations for the quarter was $38.9 million.
Speaker 2: At the end of Q1, we have contract assets worth $113 million, which reflects the net present value of un-billed accounts receivable related to licensing agreements for which the company has no future performance obligations.
Speaker 2: 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. At each renewal opportunity, we restructure our patent agreements in a manner that allows us to recognise revenue each quarter.
Speaker 2: second quarter on slide 8.
Speaker 2: As a reminder, the forward-looking guidance reflects our current best estimates at this time. We continue to actively monitor the macro environment and our actual results could differ materially from what I am about to review. In addition to the financial outlook under ASC 606, we continue to monitor the macro environment and our actual results.
Speaker 2: We also provide 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 have historically reported as royalty revenue under ASC 605. Under ASC 606, we expect revenue...
Speaker 2: $82 and $78 million. We expect Q2 CapEx to be approximately $10 million.
Speaker 2: Under ASC 606 non-GAAP operating results for the second quarter is expected to be between a profit of 29 and 39 million dollars.
Speaker 2: For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect zero interest expense.
Speaker 2: We expect the pro forma tax rate to remain at approximately 24%.
Speaker 2: The 24% is higher than the statutory tax rate of 21%, primarily due to higher tax rates in a foreign jurisdiction.
Speaker 2: 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 $7 and $9 million in Q2. We expect Q2 share time to be...
Speaker 2: 112 million basic and diluted shares outstanding.
Speaker 2: Overall, we anticipate a non-GAAP earnings per share range between 20 and 26 cents for the quarter.
Speaker 2: Let me finish with a summary on slide 9. I am pleased with our strong results in the team's execution in this challenging macroeconomic environment. We have a diversified portfolio with a stable and predictable backbone from our patent licensing business. We remain disciplined in our investments to support a long-term growth strategy.
Speaker 2: We continue to deliver value to our shareholders with our strong innovation, a robust balance sheet and strong cash generation.
Speaker 2: 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&A. 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.
Speaker 3: product revenue.
Speaker 3: revenue. But I appreciate the comments.
Speaker 3: given its colors as to when you could you can see some resurgence in DDR5 related revenue. And related to that I was hoping that maybe you can give us a preview into product revenue for the second half of the year considering the selling price uplift for the registered clock driver and your market share position in DDR5 and the expectation of industry crossover for DDR5 all those different things.
Speaker 1: Is it possible to see a new revenue high in product revenue by the time we exit calendar year 2023? Hi Gary, thank you for your question. Yeah, we had a good first quarter in terms of product revenue with good execution at $64 million dollars, $64 million dollars was actually 33% higher than the same quarter last quarter.
Speaker 1: Given the softness in the data center outlook, there will be a period of inventory digestion for DDR4 in advance for the DDR5 product transition. We are very encouraged by the fact that we have received orders for DDR5.
Speaker 1: which will start to shift in late Q2. And our view is that the second half of the year would be a year, a half of growth compared to the first half of this year. So we expect the second quarter, the second half of this year to be stronger compared to the first half.
Speaker 1: driven precisely by the ramp of DDR5. This being said, as we said, it's lumpy, that transition is lumpy, and we're watching the overall timing and dynamics every week.
Speaker 1: by the ramp of DDR5. This being said, as we said, it's lumpy, that transition is lumpy and we're watching the overall timing and dynamics every week. Okay, appreciate that, Luke.
Speaker 1: I think the second part of your question was the transition between DDR4 and DDR5 with the crossover. We still see this happening in the first half of 2024.
Speaker 1: I think the second part of your question was the transition between DDR4 and DDR5 with the crossover. We still see this happening in the first half of 2024.
Speaker 3: I want to ask about your SK Hynix license renewal. In your AK, you described the average royalty rate at 11 million a quarter, with the first five years being higher than the second five years. So to put that to the form of a question, when you start to recognize revenue from the
Speaker 3: the new license deal in the second half of next year, will you see a step up in your patent licenses specific to SK Hynix?
Speaker 2: Hi Gary, thanks for your question. We were very happy to renew the licensing agreement with SK Hynix for 10 years. You are correct that this is a variable structure that we have with SK Hynix which will allow us to recognise revenue under ASC 606.
Speaker 2: If you look at the way that the contract is written in the first couple of years of the contract we will see a step up, a slight step up on the royalty rate which will then even off on the sort of back end. This will not change our overall estimates on the patent revenue for the year we've consistently talked about.
Speaker 2: really speaks volumes to our patent portfolio and innovation.
Speaker 4: Thanks, Jeff.
Speaker 5: Thank you, Allie. Thank you, Mr. Mobley.
Speaker 5: Our next question is from the line of Mehdi Hosseini with Susquehanna. You may proceed.
Speaker 4: Yes, thanks for taking my question.
Speaker 4: I want to go back to two items.
Speaker 4: back to two items. Can you?
Speaker 4: Give us an update on how we should think about the gross margin traction outside of licensing and royalty. I think in the last earning call, you talked about hitting that 60 to 65% for product margin in the second half of the year. Are you feeling comfortable, especially...
Speaker 4: Given Luke's commentary that second half revenue should be higher than the first half and the same margin question about Silicon IP, would that continue to improve about 92%? Hi, Mehdi. Thanks for your question. On the product gross margins, I think both are revenue growth and gross margin performance.
Speaker 2: shipping in any given quarter you could see some fluctuations in the product gross margin. In Q1 our product gross margins were around 59% for the quarter which was up about 1% compared to Q4 and looking into Q2 we do expect to see a slight improvement in product gross margins mainly driven by favorable product...
Speaker 2: and our ASP management and will continue to drive our product cost reductions maybe and for the full year of 2023 we do expect our product gross margins to be in line with a long-term target of 60 to 65 percent from there. I think the second part of your question related to silicon IP
Speaker 2: or small tune profile on silicon IP.
Speaker 4: And then one question for Luke, talking about referencing parity between DDR4 and DDR5 in the first half of 2014. So that's a 50-50. Did I assume that like...
Speaker 4: Q2 this year, the reference point is like 20, so that over the next three quarters, the mix increases by like around 10 points of incremental increase, or 10 points of increase on a quarterly basis.
Speaker 1: Thank you Milly. Yes, we expect the crossover point to happen in the first half of 2024. As I indicated earlier, we are starting to see orders for DDR5 that will start shipping at the end of this quarter. So this is really encouraging.
Speaker 1: As we said also earlier, the transition between DDR4 and DDR5 is going to be lumpy in nature. So it's difficult to say whether it's going to be linear or not, you know, over the period that stretches from now to the first half of 2024.
Speaker 1: But what we can say is that the trend is that it is going to be in favor of DDR5 over DDR4 as customers digest the inventories of DDR4 and start to run DDR5. But it's going to be lumpy in nature.
Speaker 1: that the trend is that it is going to be in favor of DDR5 over DDR4 as customers digest the inventories of DDR4 and start to run DDR5. But it's going to be lumpy in nature. Thank you.
Speaker 5: Thank you, Mr. Hosseini. The next question is from Kevin Cassidy with Rosenblatt Securities. You may proceed. Thanks for taking my question and congratulations on the good results.
Speaker 5: Thank you, Mr. Hosseini. The next question is from Kevin Cassidy with Rosenblatt Securities. You may proceed. Yeah, thanks for taking my question and congratulations on the good results.
Speaker 5: Maybe just to follow on with that, with DDR4, inventory's getting worked down this quarter. Can you see?
Speaker 1: VDR4 revenue growth in the second half of the year or will that just continue to decline? So as we said, there's still some high level of inventories of VDR4, but these inventories are being digested or burned. I think it's going to take a couple of quarters for these inventories to burn.
Speaker 1: we expect the crossover point to happen in the first half of 2024. We have good backlog, but obviously that backlog doesn't cover us until that period. So at some point in time, you know, our customers are going to replenish their backlog to cover their demand for DDR4 as we move through the transition. So we expect more orders from DDR4 in the second half of the year.
Speaker 5: Okay, great. Thanks. Maybe on a different subject, the market has been, I see a lot of activity around the CXL developments. I think you've said in the past you're expecting the second half of 24. But can you give us any data points or any feel around your licensing activity for CXL?
Speaker 5: Maybe if you could compare it to any other type of licensing ramps that you've seen in the past. Is it an aggressive ramp?
Speaker 1: plenty of customers, maybe just some type of feel of how the CXL licensing activity is. Thank you Kevin. Yes, CXL has been a strong driver to our silicon IP growth last year. On the controller side as well as on the side side a lot of our end applications had to do with PCIe or CXL.
Speaker 1: That explains the record revenue that we reached last year on the silicon IP revenue at $113 million for the year. We do see now some headwinds in the market that are not coming from CXL per se, as just the macroeconomic environment is less favourable.
Speaker 1: but CFL continues to drive some sales for our silicon IP business.
Speaker 1: These silicon IP cells are going into silicon systems that our customers are deploying in the first generation of CXL and that's how we play in that first generation of CXL. Our products are going to reach the market later down the road.
Speaker 1: when CXL 2.0 comes into play in a couple of years from now. Okay, great. Thank you.
Speaker 1: 2.0 comes into play in a couple of years from now. Okay, great. Thank you. Thank you.
Speaker 3: Thank you, Mr. Cassidy. The next question is from Nam Kim with RIT research. You may proceed. Hi, thank you for taking my question. I have a couple of questions. Just curious, I'm just curious to know what you think about the
Speaker 1: Do you expect the DDR5 to carry RCD chip price premium over DDR4? I know chip price are usually very high initially and come down over time.
Speaker 1: and product mature. But I'm just curious if you see DDR5 chip price will continue to carry premium over DDR4 based over lifetime. And then second question about PMIC, I think you are developing PMIC on DDR5 module.
Speaker 6: Are you developing your own chip or you have any partnership with the existing PMIX supplier? And when should we expect the ramp of this product? Thank you. Thank you for watching.
Speaker 1: Hi, Nam, and welcome. The first question for DDR5, yes, you're right. We do see an ASP premium associated with the DDR4 to DDR5 transition. The DDR4 products have been in the market for 6 to 7 years now.
Speaker 1: And as expected, we have seen some erosion over time and I think the pricing is stabilizing as we speak on DDR4. In DDR5, today the ASPs are higher. It is expected in new product launch. They are higher now.
Speaker 1: but we expect to see some erosion over time. But if we take the DDR4 example, it took six to seven years to get the price. Now, price really rose as volume grew, and that's something we're going to monitor quarter over quarter.
Speaker 1: To your question regarding PMIC or PMIC devices, we are developing our own PMIC devices, and we're developing this on our own, not in a partnership. And we expect to hit the market with the PMIC devices next year.
Speaker 6: Okay, one more question. Thank you, if I can. Silicon IP revenue last time you guided low to mid to single digit percent this year, you said as a macro headwind, but in the meantime, there are a lot of activities going on with AI in cloud and some, you know, online courses like AM Denis all I care more Dragonous in one go, but last fall I was reading an audiobook for Englishthink.
Speaker 6: AR, the solution in Edge. Do you still keep your earlier guidance like load to meet the single digit growth this year or any changes?
Speaker 1: Yes, there are a lot of end applications for our controllers, our PHYs as well as our security IP. It's just that the macro environment is a bit challenging these days with a lot of headwinds. We do see a lot of
Speaker 1: the number of designs just slowing down. We see some startups taking a little more time to make decisions. So yes, we maintain our guidance as low single digit growth year over year.
Speaker 1: remembering that last year was an exceptionally high growth year. But in the long run, we expect that business to grow between 10 and 15%. I think we just have to deal with the current headwinds this year.
Speaker 1: that last year was an exceptionally high growth year. But in the long run, we expect that business to grow between 10 and 15%. I think we just have to deal with the current headwinds this year. Okay, thank you.
Speaker 7: Thank you. Thank you, Mr. Kim. Our next question is from Sydney Ho with Deutsche Bank. You may proceed. Tony39Sports has sent me a SmithK
Speaker 7: Thank you. I have two questions. The first question is, in the past you talked about the memory chips that Tam, if somewhere when the last year was $800 to $900 million, can you remind us what the split between DDR4 and DDR5 was? And as you think about the order trends you're seeing here today, DDR4 is still coming down, right?
Speaker 1: if we talk about the RCD chip alone. As we said earlier regarding revenue, the time split between DDR4 and DDR5 is also lumpy. It depends on how fast our customers and our customers' customers are going to go through their own ????????????????????????????????????????????????????????????????????????
Speaker 1: digest their inventory on DDR4 number one and ramp their DDR5 based products. So again, I think we have to be very agile this year for total TAM that would remain about the same. And if we assume that the TAM for RCD remains the same.
Speaker 1: It means that we are expecting to continue to grow our share in the combined time of RCD as we look at 2023. The companionships can add 200 to 300 million dollars of time to that when VDR5 is ramping in earnest on a annual basis.
Speaker 7: Great. Thank you. And then maybe a follow-up question. I know there's a lot of excitement around generative AI, and that uses a lot of memory and form of high bandwidth memory and high-density DRAM modules. Can you walk us through maybe qualitatively or quantitatively how you are benefiting from this, both from an IP and product revenue point of view? Thanks.
Speaker 1: Sure, great question. On the IP side, generative AI and high workload type of applications were a catalyst to IP sales, especially on the memory side. As part of our offering, we do have HBM and GDDR6 memory subsystems.
Speaker 1: that we're going into silicon products from our customers that are addressing those type of applications. And again, that explained the growth that we saw in the silicon IP business last year. On the product side, generative AI does not necessarily increase the time, but it's a proof point.
Speaker 1: that the trends on the line are strategies in terms of need for more capacity and more bandwidth are very strong strengths and I think we are very pleased with that. And we do see the development of GPUs and specialized products around.
Speaker 1: Generally, the high type of applications to be a catalyst for standard modules as well. So I think it affects it in a positive way as silicon IP business and continues to. And it's also a proof point that bandwidth and capacity are critical factors in our strategy. Great, thank you very much.
Speaker 8: Thank you, Sydney. Thank you, Mr. Ho. The next question is a follow-up question from Gary Mobley with Wells Fargo. You may proceed.
Speaker 9: Hi, Carly, are you there?
Speaker 3: Hey guys, sorry about that. I just had a multi-part follow-up question as it relates to the companionship opportunity. Looking specifically at the SPD hub and the two temperature sensors that may be located on each DDR5 DIMM, when would you expect to ship your specific companionship?
Speaker 4: products, is that Gen 2 or Gen 3 of DDR5? And then I have a follow-up related to that. So in the first generation of DDR5, we'll ship modest volumes of those chips as we indicated in earlier calls of the temperature.
Speaker 1: DDR5 is going to be on the market for a long time like we have many generations of DDR4 and therefore we are working on follow-on generations of those products for the follow-on generation of DDR5 on CDHS.
Speaker 3: Okay, I guess related to that, a common question that I get is trying to understand who is shipping SPD hubs and temperature sensors for your products today for your DR5 and what compels your customers to eventually start to take.
Speaker 3: your SPD hub, your temperature sensors, and what do you think the attach rate for those companionships can be for your RCD sales.
Speaker 1: So there are multiple vendors of companion chips, be they the temperature sensor, SPD hubs or power management chips. And our customers are using different combinations of different suppliers and RCD suppliers in the first generation of RCD.
Speaker 1: of products, the goal being to ramp up in the market. I think what's gonna be compelling for future generations is that the quantification and validation process become more and more challenging and difficult as you increase the speed of the RCD.
Speaker 1: and you roll out new generations of DDR5 and that's why we're working on the sort of one generation of those products. And at some point in time it will be compelling for customers to work with the people who will be able to go through the validation process the fastest. So I think the first generation of DDR5 is going to see a lot of suppliers.
Speaker 8: Once again, it is star one to ask a question. 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 the company.
Speaker 1: Thank you to 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.
Speaker 9: Thank you. This now concludes today's conference.