Q2 2023 Rambus Inc Earnings Call
Speaker 1: Welcome to the Rambis second quarter and FY23 earnings conference call. At this time, all participants are on a listening mode.
Speaker 1: At the conclusion of our prepared remarks, we will conduct a question and answer session.
Speaker 1: If you would like to ask a question, you may press star 1 on your touchtone keypad at any time.
Speaker 1: If anyone should require assistance during the coverage, please press the star zero on your touchtone keypad at any time.
Speaker 1: As a reminder, this conference call is being recorded.
Speaker 1: I would now like to turn the conference over to your host, Desmond Lynch, Chief Financial Officer. You may begin with your conference.
Speaker 2: Thank you operator and welcome to the Rambis second quarter 2023 results conference call. I am Desmond Blinch Chief Financial Officer at Rambis and on the call with me today is Luke Seddison our CEO .
Speaker 2: 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 866-813-9403.
Speaker 2: 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 5pm Pacific time.
Speaker 2: Our discussions today will contain forward-looking statements including our expectations regarding projected financial results, financial prospects, market growth, demand for our solutions, the team's ability to effectively manage, supply chain and other market challenges.
Speaker 2: and the effects of ASC 606 on reported revenue, amongst other items.
Speaker 2: These statements are subject to risks and uncertainties that may be discussed during this call and are more freely described in the documents we file with the SEC including our 8Ks, 10Qs and 10Ks.
Speaker 2: These forward-looking statements may differ materially from our actual results and we are under no obligation to update these statements.
Speaker 2: 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 in the world.
Speaker 2: has been included in our press release, in our slide presentation and on our website at rambus.com on the investor relations page under financial releases.
Speaker 2: 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 at a beginning balance sheet adjustment.
Speaker 2: 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 2: We will continue to provide operational metrics such as licensing billings to give our investors better insight into their operational performance.
Speaker 2: The author of our call today will be as follows. Luke will start with an overview of the business. I will discuss the financial results and then we will end with CUNY.
Speaker 2: I'll now turn the call over to Luke to provide an overview of the quarter. Luke?
Speaker 3: Thank you, Des, and good afternoon, everyone.
Speaker 3: We delivered another strong quarter with revenue in-line and earnings at a high end of guidance.
Speaker 3: We also generated $50 million in cash from operations as we continue to successfully navigate through challenging macroeconomic conditions.
Speaker 3: As generative AI and other advanced workloads accelerate demand for performance in the data center, requirements for greater memory bandwidth and capacity are growing at a rapid pace.
Speaker 3: Generative AI is expected to simultaneously boost demand for general purpose servers that utilize DDR DIMMs for data preprocessing, as well as specialized accelerators with dedicated memory such as HBM.
Speaker 3: The systems that run these advanced workloads will typically be high-end servers populated with substantially more memory than traditional servers.
Speaker 3: This is a strong catalyst for demand for multiple types of memory and a very positive long-term growth driver for the company.
Speaker 3: RamBus continues to lead in our areas of focus, providing chips and IPs that deliver the performance, reliability, and security to feed the AI data pipeline.
Speaker 3: We just took an important step in the strategic evolution of the company to continue to intercept the long-term needs of the market.
Speaker 3: We signed a definitive agreement to sell our PHY IP business to Cadence, while retaining our digital IP business, including industry leading control solutions for HBM, CXL, and PCIe, as well as state-of-the-art security IP critical to data center and AI.
Speaker 3: With that, we have maintained the scale and diversity of the business, while strengthening our focus on the development of differentiated chips and digital IP that expand our opportunities in the data center market. In concert with the increased focus on our competitive digital IP offerings, we have
Speaker 3: as well as the emerging clients space.
Speaker 3: Data center memory subsystems will require higher bandwidth memory modules and more complex companionships.
Speaker 3: and the client space, with its increasing performance requirements, will gradually adopt technologies and solutions only used in data center service thus far.
Speaker 3: These new investments will expand our product offering to support the continued evolution of high performance computing systems for years to come.
Speaker 3: Turning now to our quarterly results, all of our businesses continue to execute well.
Speaker 3: For memory interface chips, we delivered strong results at the high end of expectations with product revenue of $55 million.
Speaker 3: As we have highlighted in past quarters, the transition to DDR5 continues to be dynamic.
Speaker 3: In Q2, we were very pleased to see DDR5 volume production ran faster than projected, but this was offset by a deeper than anticipated DDR4 inventory correction.
Speaker 3: In line with the broader ecosystem, we expect DDR4 headwinds to continue through the remainder of the year, but remain very positive on the long-term outlook for DDR5, which represented our predominant unit shipments this quarter and tripled in volume over Q1. Going forward, we expect DDR4 headwinds to continue through the remainder of the year, but remain very positive on the long-term outlook for DDR5,
Speaker 3: We expect continued lumpiness in our product business in the short run while the DDR5 RAM continues, as the industry works through the challenges of platform migration and continues to face DDR4 inventory headwinds.
Speaker 3: With this, we remain focused on execution and are actively working with customers and partners.
Speaker 3: At the first generation of DDR5 RAMPS, we continue our leadership position in 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.
Speaker 3: In addition to DDR5, close collaboration and development with the ecosystem continues on novel memory solutions to support the roadmap of future server generations.
Speaker 3: In closing, this was a strong quarter for the company with solid results and continued execution from the team.
Speaker 3: We continue to see excellent long-term growth opportunities driven by increasing demand in the data center fueled by AI.
Speaker 3: While we navigate dynamic market conditions in the near term, our focused investments position as well to expand our leadership and deliver the critical solutions for high performance computing systems. As always, I'd like to thank our customers, partners, and employees for their ongoing support.
Speaker 3: And with that, I turn the call over to Dev to discuss the quarterly financial results. Dev? Thank you, Luke. I'd like to begin with a summary of our financial results for the second quarter and slide five.
Speaker 2: Once again, we delivered a strong quarter and we are very pleased with the company's ongoing execution and focus on addressing key trends in the market.
Speaker 2: or Q2 financial results, where in line with our revenue expectations and at the high end of our earnings expectation as we further shredded our balance sheet with continued strong cash generation in the quarter.
Speaker 2: As Luke discussed, we announced that we entered into a definitive agreement with Cadence to divest our Fi IP business and we expect the transaction to close in Q3.
Speaker 2: We are pleased with this transaction as it will allow us to redeploy our investments into higher growth areas of digital IP and products.
Speaker 2: Let me walk you through a non-depth income statement on slide six.
Speaker 2: Revenue for the second quarter was $119.8 million in line with our expectations.
Speaker 2: Royalty revenue was $40.7 million, but licensing bellings was $60.2 million.
Speaker 2: 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.
Speaker 2: Product revenue was $55 million, consisting primarily of memory interface chips.
Speaker 2: Contracts another resin youth with $24.1 million consisting primarily of silicon IP.
Speaker 2: 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 licensing billings.
Speaker 2: Total operating cost, including cost of goods sold for the quarter, was $75.7 million.
Speaker 2: Operating expenses of $55.9 million were more than our expectations as we continue to be vigilant in our expense management and we ended the quarter with a total head count of 724.
Speaker 2: Non-GAP interest and other income for the second quarter was $1.9 million.
Speaker 2: This included $600,000 of ASE, 606 interest income related to the financing component of 60 licensing arrangements for which we have recognised revenue, but not yet received payment.
Speaker 2: excluding the financing interest income related to ASC 606, this would have been $1.2 million 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 $34.9 million.
Speaker 2: Now let me turn to the balance sheet details on slide 7.
We ended the quarter with cash, cash equivalents, and marketable securities totaling $362.6 million. Up from the previous quarter, primarily through cash from operations of $60.4 million.
At the end of Q2, we had contract assets worth 97.9 million dollars, which reflects the net present value of unbuild, account 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 agreements. As at each renewal opportunity, we work to restructure our patent agreements in a manner that allows us to recognise revenues.
expense with $7.8 million. We delivered $39 million of free cash low in the quarter.
Now let me turn to our guidance for the subquarter on slide 8.
As a reminder, the forward-looking guidance reflects her current best estimates at this time.
We continue to actively monitor the macro environment and our actual results could differ materially from what I'm about to the view.
In addition to the financial outlook under ASC 606, we also provide information on licensing billing, which is an operational metric that reflects an invoice 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 loyalty revenue under ASE 6.05.
Our guidance for the quarter includes a five IP business.
On a quarterly basis, the business is running, breakeven as approximately six million in revenue is offset with six million in cost.
under AFC 636.
We expect revenue in the stock water between 96 and 102 million dollars.
We expect royalty revenue between $26.32 million and licensing billings between $59.65 million.
We've made a lot of progress with our product business and we are well positioned in the market to deliver long-term profitable growth, well maintaining a competitive position in share game.
As Luke mentioned earlier, the DDR5 product transition is underway. However, our product revenue guidance continues to be impacted by DDR4 inventory digestion.
We expect this transition to continue to impact us through the remainder of the year.
We expect Q3, non-gap total operating costs, which includes cost to be between $75 and $71 million. We expect Q3 capex to be approximately $10 million.
Under ASE-606, non-GAP operating results for the subquarter is expected to be between a profit of 21 and $31 million!
For non-gap interest and other income and expense, which excludes interest income related to ASC, 6 or 6 we expect $1 million of interest income.
We expect to perform a tax rate to remain approximately 24%. The 24% is higher than the statutory tax rate of 21%, primarily due to higher tax rates in our foreign jurisdiction.
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-gap taxes to be between an expense of $5.8 million in Q3.
We expect you to be share count to be 112 million basic and a dealing of data on how manufacturers compare premium questions and ??
Overall, we anticipate a non-gap earnings per share range between 15 and 21 cents for the quarter.
Let me finish with a Summary and Flight 9.
I am pleased with how strong results and the teams continued execution in this challenging and unpredictable macroeconomic environment as we continue to make progress against their strategic initiatives.
We have a diversified portfolio with a stable and predictable backbone from our patent licensing business.
A product portfolio is well positioned to capture growing opportunities in the data center fueled by AI.
We continue to deliver values to our shareholders with our strong innovation, a robust balance sheet and strong cash generation.
Before I open up the call to CUNY, I would like to thank early 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 a first question?
The first question comes from the line of cabin capacity with Rosenblum securities. Please proceed.
Yes, thanks for taking the questions. Congratulations on the good results. Maybe the questions will be around the shipping of the DDR4. Is the inventory at one customer more than another? Or do you have higher exposure to one customer or another?
Maybe you have a split of what DDR5 versus DDR4 was.
Thank you, Kevin. We don't have exactly the same routine every customer, but I would say that the DDF4 inventory situation is common to all customers at this point in time. The inventory levels in the channels, the still.
You know, we see our customers being very slow in placing new orders for DDR4. We're working with them and on the backlog, typically, you know, they don't cancel backlog, but they try to push out backlog, which is a reflection of the slow burn. We expect, you know, eventually.
You know, the DDR4 inventory to be consumed, but it's gonna take more time that we anticipated and it's across the customer base.
I see. Okay. You know you made an interesting comment about applications from the...
client and PCs or will there be PC CPUs that support that? In the long run, as the speed of transfers between the processes and memory increased, some of the challenges that were faced in the data center are going to expand into the client space.
So in the long run, we expect signal integrity problems, thermal problems to appear on the client space. And that will lead the developmental chips that are similar to what we had in the data center.
So that will hit the market probably in a couple of years from now, but we are investing in those technologies today because we believe that some of the challenges that the data center faced in over the last few years are going to be faced by the Cyan space. Let's say that's an area of focus for us.
Okay, great. Thanks. Thank you. The next question comes from a lot of Mary Huzzyny with FIG. Please proceed.
Yes, thanks for taking my question. Look, maybe you can help us all and better understand how your buffer chip is driven by a server. I think someone in the street may have confused.
DDR5's best shipment with the buffer chip. Can you please just remind us that your buffer chip is driven by units of server or them and not so much bits of DDR5 unless I'm just thinking about this the wrong way.
Thank you, Mady. The main drivers for buffer cheap sales are number one, the number of channels that you have on each of the processors from Intel and AMD.
And number two, how many slots you can put on each one of the channels. So, you know, what's happening in the market with the emergence of DDR5 is that, you know, we do see more channels per processor compared to the DDR4 generations. That means that people will have an opportunity to put more deems per channel.
And therefore, there's going to be a higher number potentially of RCD per channel. So the move to DDR5 gives that opportunity to augment the number of teams per channel. This has to be combined with higher density on DDR5 and these kind of things.
That's correct. You know, we, that. Yeah, that's correct, Mide. I, you know, what, what's happening is that, you know, that long show of DDR5 technology in the market, you know, involves, you know, new processors, new memories, new bufferships, new companionships. So there are a lot of key issues, which makes the ramp, you know, challenging as we've seen over the past few quarters. the
Hi, Tim Markle, and that's a really good question. The pricing environment we're in just now is in line with our expectations and also normal pricing vehicles. Given the competitive environment we're in with three customers and three suppliers, we do not break out the individual ASPs of the individual products of DDR4 and DDR5. However, as we've talked about previously, the transition to DDR5 is positive for us and we do see the ESP.
reset driven by the generational change from DDR4 to DDR5. From a pricing environment, what we see just now is relatively stable pricing on DDR4. From a DDR5 perspective with the volume production ramp taking place just now, we will see some erosion in the second half of the year. This was anticipated and in line with normal pricing cycles for us. And we do expect...
does. And then I have a quick follow up on the FIDAV. So if I understand correctly, you're exiting this office heavy business, right, to focus on segments where you see faster growth. So the first question is, is your long term target of 10 to 15% for Silicon City still valid?
or is there enough word buys to that? And then if you can walk us through sort of how would you expect to deploy the cash from this transaction given that your balance sheet will be even stronger after that? Thanks.
With AI, we do see the emergence of chips specific to AI that we need to connect to other chips. So it's really, really important that we invest into these communication IP, especially on the controller side where we have differentiation. I think there's going to be a proliferation of chips that will create an environment where security is going to be more important. And finally, the bandwidth of communication between those chips is going to be more important.
And for those reasons that are driven by AI, you know, we believe that investing in that portfolio is really, really good. We have a strong position in the market. The market is growing and we expect to grow in the wrong ground 10 to 15% a year. If we look at the five business.
The five business is a business that is based on analog IP or mixed signal IP. And it's a business that is different in terms of its ability to scale because it's processed no dependent and found really dependent.
and Des if you want to address the other question. Yes and thanks Luke and Ngin and Marco. The sale of the FIIP business does not change its approach or posture towards capital allocation. As a company we are fortunate to have a robust balance sheet with a strong cash generation which has enabled us to consistently return 40 to 50% of free cash flow back to shareholders. Our approach to capital allocation will remain consistent which focuses on the detailers.
of firstly organic investments, we will continue to fund the high growth opportunities ahead of us. I think Luke just gave you some additional color and also in his prepared remarks talked about the growing opportunities in the data center. So by freeing up investment from the Fi IP business, this will enable us to invest at a faster rate into the growing opportunities ahead of us from there. Secondly, in organic investments, we have been acquisitive with five acquisitions over the last three years. We do have a strong funnel and pipeline of targets. However, we'll continue to remain.
you know we've consistently returned that free cash flow back to shareholders and that's something we'll continue to review and evaluate but overall I would say that the Sales Defy IP business does not change our approach to capital allocation and we'll continue using the playbook that I've outlined to you here today.
Thanks, that's great, Colin.
Thanks, Jen. Thank you. We have a follow up question from the line of Kevin Cassidy with Rosenblatt Securities. Please proceed.
Yeah, thanks. Maybe it's just along the lines of what you're just explaining, Des, but maybe if it was $6 million in investments.
Yeah Kevin I think over time you know we'll certainly increase our products and the product space to continue to capture the product growth that Luke sort of talked about. You know we've been fairly consistent on our sort of OPEX you know in that $55 to $56 million but we'll continue you know investing in the right areas to make sure that we can capture the growing opportunities ahead of us. But I think you know in the Q2, Q3 time frame you know you're looking at OPEX being in that.
55 to 56 million and will gradually increase the OPEX going forward from there. Kevin. Okay, great. Thank you.
56 million and will gradually increase the OPEX going forward from there. Okay, great. Thank you. Thanks, Kevin.
Thank you.
Ladies and gentlemen, if you have a question, please press star 1 on your touch-tone telephone.
We'll pause here briefly to allow questions to generate in queue. At this time, there are no further questions. This concludes the question and answer session.
I would like to thank everyone for your interest and your time today and wish you a very good day. Thank you. Thank you. This now concludes today's conference. Thank you. Thank you. Okay.