Q2 2019 Earnings 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.
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As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Toronto Mathur, Chief Financial Officer, You May begin your conference.
Thank you Philip and welcome to the Rambus second quarter 2019 results conference call.
I'm <unk> CFO and on the call with me today is Luc Serafin our CEO .
Press release for the results that we will be discussing today have been furnished to the FCC on form eight k. a replay of this call will be available for the next week at eight Fivefive 8592, 056, you can hear the replay by dialing the toll free number and then entering I'd number 347, Onenine Onesix when you hear the prompt.
In addition, we are simultaneously webcasting this call and along with the audio we're webcasting slides that we will reference during portions of todays call. So even if you're joining US via conference call. You may want to access the webcast with a slide presentation. A replay of this call can be accessed on our website beginning today at five PM Pacific time.
Our discussion today will contain forward looking statements regarding our financial guidance for future periods, including Q3, 2019, and beyond prospects product and investment strategies timing of expected product launches demand for existing and newly acquired technologies.
The growth opportunities with the various markets, we serve and the expected benefits of our merger acquisition and divestiture activity, including the expected timing of transaction completion.
And the effects of AC six effects on reported revenue amongst other things. These statements are subject to risks and uncertainties that are discussed during this call and may be more fully described in the documents, we file with the SEC, including our eight Ks 10, Qs and 10-K's.
These forward looking statements may differ materially from 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 also on this call.
We've posted on our website a reconciliation of these non-GAAP financials to the most directly comparable GAAP measures in our press release and our slide presentation. You can see this on our website at rabbit Satcom on the Investor Relations page under financial releases.
The order of our call today will be as follows.
Let's start with an overview of the business I will discuss our financial results, including our guidance for future period, and then we'll end with Q and a.
I will now turn the call over to Luke to provide an overview of the quarter.
Thank you Rahul and good afternoon, everyone.
At the beginning of this year, we laid out a set of strategic priorities that are critical to our company's success that included refocusing our product portfolio and the R&D around our core strength in semiconductor optimizing the company for operational efficiency.
And leveraging our strong cash generation to reinvest for amplified growth.
With that Rambus made great progress toward our strategic priorities and executed well in the second quarter.
We delivered total revenue of $58.3 million in line with guidance and strengthened our balance sheet.
Generating $38.7 million in cash from operations.
We continue to meet or exceed our commitments to the market as a company and our product revenue continues to show strong growth.
The most notable recent events that took place to demonstrate our progress to strategy. Our last month's announcement of our agreement to sell our payments in ticketing business to visa.
And today's announcement of our agreement to acquire northwest logic to augment our interface IP offerings with best in class digital controllers.
First.
The transaction with visa simplifies our portfolio of offerings to redefine our perimeter in the semiconductor market, which is a critical step in moving the company forward.
With visa we are excited that the payments and ticketing group, we don't have an opportunity to develop and deliver reach new solutions to the global market.
And make an industry leader like visa, even better we don't tremendous product and talents.
Second.
As we complete the necessary steps to simplify we also continue to seek out opportunities to amplify our marketing and technology positions through new investments that fits within our areas of focus.
In line with that strategy, we have signed an agreement to acquire the digital contorted company northwest logic.
And we will be integrating the offerings and design team in our IP core business.
As a market leader in memory, and Nippy digital controllers northwest logic would expand our solutions by creating a complementary product portfolio of five and confirmed orders.
The data center, AI communications and automotive.
Every SSD design that uses a memory also defy also needs to use an associated controller.
The combination of digital and physical IP portfolios from northwest logic and around this will create a one stop shop for customers and improve the competitive positioning for the IP core team.
The northwest logic acquisition is expected to close in Q3 of this year.
Due to the timing of the close this transaction will not materially impact 2019 results, but we expect it to have an immediate positive impact on the business and to be accretive to revenue and earnings in 2020 .
In addition to the inorganic changes to drive growth.
Run this business units continued to execute with overall product revenue for server DIMM cheats and silicon IP systematically increasing.
Q2 was a record quarter for our server DIMM chipset business, we first half revenue up significantly year over year and on track for 50% growth on the year as a whole.
This growth continues to be driven by increased OEM and data center qualifications.
Leading to steady gains in our Ddrfour buffer chip market share.
We believe our growing market position will continue to outweigh any softness in the memory market.
And we remain confident in our revenue target for the buffer chip in 2019.
We also well positioned as the first mover for next generation DDR five server DIMM chips shipping samples at the top end speeds for both the LCD and DB chips.
We are engaged in the early bring up and validation of DDR five designs and continue to have strong collaboration with the memory vendors as well as the broader ecosystem.
Our high speed IP core business also performed extremely well.
Bringing record revenue for the second consecutive quarter.
We announced the addition of our 120 635 for 400 gig an 800 gig networking when Fourg DDR six at a chronic.
And continue to close new tier one SNC design wins for data center networking anyway.
The team remains on the trajectory of approximately 50% compounded annual growth rate that has been set over the past few years and expects to further accelerate this growth with the addition of a digital IP from northwest logic.
Over the course of the first half of the year, our cryptography business has refined its strategy with a simplified go to market around secure city can IP and provisioning.
We are focused on creating the most resilient and deployable embedded security on the markets.
We are building the right portfolio mix to accelerate growth for the business, while managing costs to optimize profitability.
The team is delivering on an application driven product roadmap incorporating the direct requirements from our focus markets and customers.
We expanded our family of Cryptomanager would've Trust course can include a comprehensive suite of secure processors.
Tailored for AI data center automotive and government.
This makes the family of course readily available to the market and easy to integrate for our customers.
As a result.
We are seeing increased traction in the market, including a security design win at a leading provider of AI accelerators for the large scale state of the art data Center chips.
In closing Q2 was another solid quarter with continued execution on strategy delivery on revenue and strong cash generation from operations.
Despite a challenging macroeconomic and industry environment, we met our numbers in the first half and maintain our profit expectations for the year to operational execution and gains in market share.
We remain focused on our core strengths of moving and securing data we will continue to leverage our technology expertise and strong IP portfolio to deliver first to market the high quality memory, Thirtys and embedded security solutions for our chip and system customers.
With that I'll turn the call back to Rahul to discuss the quarterly financial results Rahul.
Thanks, Lou I'd like to begin with our financial results for the second quarter.
Let me start with some highlights on slide six.
As Louis mentioned, we continue to execute in our product businesses and delivered solid financial results in line with our revenue and our earnings expectations.
As you know we've chosen to adopt it see 66, using the modified retrospective method, which has not restate prior periods, but rather runs the cumulative effect of the adoption through retained earnings as a beginning balance sheet adjustment.
Our reported revenue amounts discussed herein are reflected under 86 or six.
As a result any comparison between solid second quarter 2019 results under its see successes and prior results under 86 or five is not the best way to track our company's progress.
Now that we're through our transition period, we will no longer be presenting results as if we continue to recognize revenue under the gold standard. However, we will continue to provide additional operational metrics such as licensing billings to give our investors better insight into our operational performance.
We delivered revenue of $58.3 million and licensing billings of $64.9 million in line with our expectations. We ended the quarter with cash cash equivalents and marketable securities of $337.7 million up 31.8 million from the previous quarter due primarily to cash from operations of $38.7 million.
We delivered solid financial results.
While continuing to leverage our high margin historic businesses to fuel growth in adjacent areas, where we have strong technical and market expertise with a focus on memory and security.
Now let me talk you through some revenue details on slide seven.
Revenue for the second quarter was $58.3 million inline with our expected range of $57 million to $63 million driven by execution in our product businesses.
As we've mentioned previously it see six ACICS has a material difference in the timing of revenue recognition for our fixed fee licensing arrangements. Our licensing business continues to perform well. It's the foundation of our success and remains core to our initiatives in both our memory and interface and security businesses and we'll continue to generate cash in years.
Royalty revenue for the second quarter was $27.1 million, while licensing billings was $64.9 million.
The difference between licensing billings and royalty revenue primarily relates to timing as we don't always recognize revenue in the same quarter, we bill our customers.
Going into additional detail.
Our memory and interface revenue was $45.5 million in our security business revenue was 12.8 million.
On payments and ticketing business.
We expect to close our transaction with visa in the coming months as we complete regulatory approvals and other customary closing conditions.
While this business is currently reflected in our operating results to help minimize any confusion about the performance of our main businesses, we've removed approximately $11 million of revenue from payments and tickling from the quarterly guidance, we issued today.
For Q2 revenue for payments and ticketing was roughly $6 million for the quarter. This was approximately $2 million lower than our initial expectations for the quarter at certain partners pause at the end of the quarter to Digest the news that visa will be acquiring this business.
We continue to expect this business to grow to $35 million to $40 million in 2019 and be roughly breakeven.
Let me walk you through our non-GAAP income statement on slide eight along with our solid revenue performance in Q2, we met our profitability targets on a non-GAAP basis.
Cost of revenue plus operating expenses or what we refer to as total operating expenses for the quarter came in at $64.1 million.
Below our expectations due to our cost containment actions because certain expenses related to the sale of our payments and ticketing business will be accounted for as part of the transaction.
We ended the quarter with head count of 772 down slightly from 785 in the previous quarter.
We recorded $5.3 million of interest income related to the significant financing component from our fixed fee patented technology licensing arrangement for which we have not yet received payment, but recognize revenue under the new accounting standard.
We incurred zero point $6 million of interest expense related to the convertible notes. We issued in Q4 2017. This was offset by incremental interest income related to the return on our cash portfolio.
After adjusting for noncash interest expense on our convertible notes. This resulted in non-GAAP interest and other income for the second quarter of $6.1 million.
Excluding the interest income related to the significant financing component related to Seksix. This would have been 0.8 million.
Nothing assumed flat rate of 24% for non-GAAP pre tax income non-GAAP net income for the quarter was zero point $2 million or to diluted net income of zero cents a share.
Now, let me turn to the balance sheet details on slide nine.
We're very pleased with the strength of our balance sheet cash cash equivalents and marketable securities totaled $337.7 million up $31.8 million from the previous quarter due primarily to cash from operations of $38.7 million.
We expect to maintain our ability to generate substantial cash from operations in 2019 and beyond this will be an important metric to monitor under a six a six.
Given our strong performance in the first half of the year, we expect to over 100 million of cash from operations. This year, while continuing to invest strategically in our patent portfolio and our growing product.
We also expect to collect roughly $70 million from the sale of our payments and ticketing business in the coming months net of expenses, our cash balance positions us very nicely to take advantage of current opportunities in our industry.
Let me spend a few minutes to discuss our capital allocation strategy.
As we've discussed previously our capital allocation priorities, our organic growth inorganic growth and return of capital to shareholders.
First in terms of organic growth our primary focus is to invest in our patent portfolio and our product programs.
Rambus has a long legacy investing in R&D throughout our history and our patents are foundational to our industry.
As part of our strategic planning cycle, we have renewed our focus and investment on patent generation with an emphasis on key technology challenges facing the industry in the years to come.
Our patents provide a strong platform for our investment in product development and innovation and we believe that investing strategically in this area positions us to deliver long term profitable growth.
As we look ahead to our significant patent renewals in the future. We should note that while our typical licensing agreements last five to 10 years. Our patents are valid for 20 years based on our strong track record we remain confident in our ability to continue to renew with our partners at favorable economic terms in the future.
Our organic product programs also continue to grow nicely our buffer chip revenue of $16 million was a quarterly record as was our IP core revenue for the quarter, we've been disappointed with the performance of our security business over the past year. Nevertheless, based on our current customer engagements. We continue to believe in the market for embedded silicon and are confident our investments in that area more central to our core strengths will pay off in our future.
Second in terms of inorganic growth, we were pleased to announce the acquisition of northwest logic.
Our purchase price, including retention agreements this approximately $30 million.
This is highly synergistic and will integrate seamlessly into our existing IP cores business.
This transaction will not materially impact 2019 results due to the expected timing of close an acquisition accounting.
We do expect this acquisition to add roughly $10 million of creative revenue and 2020 .
We continue to be very active in evaluating M&A opportunities in our focus areas of high speed interface, IP and chips and embedded security solutions.
We will target complementary businesses are strategic financial and operational targets.
Third we have been very active in returning capital to our stockholders.
Since 2015, we are considering $200 million to our stockholders through accelerated share repurchase programs.
While we are currently exploring several exciting M&A opportunities to drive long term growth, we will continue to consider share repurchase at the appropriate times.
Let me now provide additional details about our balance sheet.
At the end of Q2, we had contract assets worth $597.4 million, which reflects the net present value of Unbilled AR related licensing arrangements for which the company has no future performance obligations.
I expect this number to continue to trend down as we bill and collect for these contracts.
It's important to note that this metric doesn't represent the entire value of our existing licensing agreements as several customers have royalty base agreements that allow us to recognize revenue each quarter under 86 or six.
As I mentioned previously we entered into a share purchase agreement with visa last month to acquire a payments business for $75 million in cash.
We expect to close in the coming months pending regulatory approvals and other customary closing conditions.
We classified the assets and liabilities for our payments and ticketing business as held for sale until the transaction is completed.
The net carrying amount at this business as of the second quarter was $88.5 million considering assets and liabilities.
After considering the 75 million dollar purchase price and approximately $3.5 million in transaction costs, we recorded an impairment charge of $17 million in our GAAP results. In Q2 of course. These numbers are subject to final working capital amounts once the transaction closes.
Second quarter, Capex was $3.3 million and depreciation was $3.1 million looking forward I expect roughly $3 million of Capex for the third quarter and roughly $11 million for the full year of 2019.
I would also expect depreciation of roughly $3 million for the third quarter and roughly $12 million for the full year of 2019.
Overall, we have a strong balance sheet with limited debt and expect to continue to generate strong cash from operations in the future.
Now, let me turn to our guidance for the third quarter on slide 10.
As a reminder, our forward looking guidance reflects our current best estimates and our actual results could differ materially from what im about to review.
Going forward, we will only provide financial outlook under AC six or six future revenue under AC success, six will be volatile from financial period to period due to the timing and structure of our loans.
We will continue to focus on leveraging our vast patent portfolio to maximize the value for our business as well as to provide the best economic structure.
To offer additional transparency, 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 you see in the supplemental information we provided on slide 17 of our earnings deck licensing billings closely correlate with what we've historically reported as royalty revenue under 86 or five we'll continue to provide licensing billings as another operational metric to help our investors understanding the underlying performance of our company.
As I mentioned previously because we expect to close the sale of our payments and ticketing business in the coming months, we excluded that business and the guidance we have provided today.
Similarly, due to purchase accounting and the timing of close I do not expect northwest logic to have a material impact on our guidance for the third quarter.
With that said under 86 or six we expect revenue in the third quarter between 41 and $47 million. We expect royalty revenue between 13 and 19 million. We also expect licensing billings between 58 and $64 million.
Excluding the payments in ticketing business, we expect Q3, non-GAAP total operating expenses, which includes cogs to be between 54 and $58 million.
Over the remainder of 2019, we expect to keep operating expenses, roughly flat and provide leverage to our financial model.
We continue to expect that our buffer chip business will grow nicely in 2019, as we're executing at that run rate required for the $50 million to $70 million range. We have discussed previously.
While we cannot control the macroeconomic environment, we remain focused on our execution and are very pleased with our continued market share gain in our buffer chip business.
Under 86 or six non-GAAP operating results for the third quarter is expected to be between a loss of $16 million and $6 million for non-GAAP interest and other income and expense, which excludes interest income related to assay six effects. We would have expected zero point $8 million in income, which includes zero point $6 million of interest expense related to the notes due in 2023.
Based on the new tax legislation passed at the end of 2017, we expect a pro forma tax rate in 2019 to remain consistent with our 2018 pro forma tax rate of roughly 24%, 24% is higher than the new statutory rate of 21% primarily due to higher taxes in our foreign jurisdictions.
As a reminder, we pay roughly $20 million with cash taxes, each year, driven primarily by our licensing arrangements with our partners in Korea.
We expect non-GAAP taxes to be between a benefit of four and $1 million in Q3, we expect our Q3 share count to be roughly a 113 million basic and diluted shares outstanding.
This leads you to between a non-GAAP loss per share of 11 cents and four cents for the quarter.
While we do not issue annual guidance as we have discussed previously this year, we have structural step downs in several of our long term licensing agreements that impact our 2019 revenue.
Imbalance that we've executed on growth in our product programs to offset these structural step downs.
Therefore, we remain comfortable.
Current consensus analysts expectations on the bottom line for the fourth quarter.
I mean, we will provide more detail about our business business outlook at our analyst day on September 17th at NASDAQ In New York, We hope to see you there.
Let me finish with a summary on slide 11, we are proud of the solid performance by our team and the progress we continue to make against our strategic initiatives to drive long term profitable growth. We're very pleased with the announcement of the sale of our payments and ticketing business.
And our pending acquisition of northwest logic.
While we understand that AMC six Sussex added a level of complexity to our financial reporting it's important to reiterate that the underlying financial strength of our business remains strong reflected in our demonstrated ability to generate cash.
In closing, we drove refocused our product portfolio around Reemphasis core strengths in the semiconductor industry.
Improved our operational efficiency and profitability generated solid cash from operation and leveraged our strong balance sheet to support our strategic initiatives.
We continue to focus on our growth drivers and are well positioned for long term profitable growth.
With that I'll turn the call back to Philip to begin QNX could we have our first question.
Thank you ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone.
Your first question is from the line of Gary Mobley.
Hey, guys. Thanks for taking my question.
Bear with me for a minute.
Sort of walk through all the different moving pieces and if you could help me reconcile some some of these numbers.
So the midpoint of your license billing is $61 million, if I add in the what is implied.
In terms of.
In terms of the product revenue in the contract and other revenue it gets too.
$91 million Mark is that is that correct.
Gary I'm, sorry, which quarter you're referring.
For your Q3 guide.
So for Q3.
I think what you're referring to that we gave a guidance on revenue between 41 and $47 million.
Included in that guidance was well see revenue $13 million to $19 million.
And what we assumed operationally as we'd have licensing billings of $58 million to $64 million.
Okay.
In our licensing billings and royalty revenue is roughly $45 million for Q3.
Okay.
And so to get to what was considered a one point.
Comparable metric to AC six so five accounting, it's roughly $91 million correct.
I think if you were to take the midpoint of our revenue between 41, and 47, which is about $44 million.
And add that that delta from the licensing Bill and I think you have us a something a little closer to about $89 million if I understand the math that you are.
Okay.
And so if it were not for the exclusion of SCS for the revenue generated from the.
Payments business, you could close for $100 million right.
Yes, I understand the math that you are doing as I discussed in our prepared remarks, we took about $11 million of revenue out of our guidance for Q3 related to payments integrity business and since that this business is breakeven no impact either way on the op margin correct.
Well, there will be improvement on op margin.
But no impact in terms of operating.
Net profit.
Okay.
All right and could you give us a little more detail on sort of the.
Evolution of northwest logic, I know the company has been around for 25 years or so I think it's been part of Altira and how.
How does that stand today as an independent company employee count and maybe some particular type of customer or.
Hi, Eric.
Concentration.
Hi, Gary this is that this management so.
You're right has been around for some time they were founded in 1995.
One point in time, they were part of Altura at that time, there were more of a design house than a company designing IP per se.
And after some time when the market was a little soft.
Tara spun them off again, and we decided to do development of clinical IP for the communication network and specifically the holiday being developing controllers for.
Pciethree interfaces for high speed memory interfaces and for MIPI interfaces and Thats, how we get to know them.
We've actually worked with northwest logic for many many years because in every US we'll see designed for communication every time, you have a psi, which we provide.
You have to interface that fight will come for so we've known these guys for a long time, because we have many of our customers we.
We are designing and supporting the customers together.
So they provide.
Hi, sorry, a quarter is as I said.
What's majority memory Comscores about 50% PCIA controllers and the components. That's that's what they do.
So we have a large common set of customers.
But they are also adding customers to our customer sets because when you have come towards you typically have a broader broader channels.
This is a profitable company.
They will add about $10 million of accretive revenue to our business in 2020.
The group.
It's been very stable, it's about 30 people.
As a base in Hillsboro in Oregon.
Same time zone.
Same type of culture. So the integration is going to be very easy for us.
If I say so so.
So it's a great acquisition for us.
Eight.
It gives additional potential for our fies.
It will mean to us faster growth.
Driven by channel synergies.
And the rollout of GRC SAPIEN three MPCI Gen five and its a.
Accretive revenue for us in 2020 so.
We we really excited with this acquisition.
Okay last question I'll hop in the queue.
Yes, I think your message is clear on the on the buffer chip business growth.
Mostly be via market share gains.
But could you give us an update on how you see the inventory situation.
As it relates to data center inventory digestion and sure the order lending area of order patterns in the buffer chip business.
Yes, we have a quarter, where we had a record quarter in buffer chip since we've been in that business through Q2 was really really good for us.
As Roger said, we are.
Went on a trajectory to grow that business, 50% compared to last year.
Which was also 50% when compared to year to the year before so we meet meet making steady gains there.
The inventory situation that we faced in Q1 in particular in the beginning Q2 seems to ease up a bit now.
We start to see orders coming our way.
And as we said earlier the strength of our design win footprint.
Compensates for any inventory concerns that we had earlier in the year.
So you are we confident about the rest of the year, we're very confident about the rest of the year for this business and again, it's based on the strength of our designed footprint.
Your next question is from the line of Suji de Silva.
Hi, Luke IRA Hello, Congratulations on the transaction. So I was going to say, Matt Gary I, just wanted to make sure I did deteriorate as well. So for Q2. It was as if six centsfive per hole I got 96 million roughly of revenues and 22 cents is that roughly where that when it came out at six centsfive that sound ballpark.
So today, we can't provide six or five numbers, but I think I understand the math you are trying to do and if I were to do the same math I think I would have gotten the same result.
Okay, and I guess just to follow up on that with the Threeq Guide just want to use the same Matt obviously and I got a midpoint 89 million 86 to 92 million and EPS of 23 cents does that all sound ballpark as at the same math, which is.
Yes, again I mean, that's that's math, we can't do but if I were to follow your your math and how you laid out in your model I just the same numbers.
Excellent and then also on the memory buffer business question there.
DRAM prices being so volatile does that impact favorable for you guys neutral or is it a headwind just understand.
How the 200 Plano your guys are gaining share more than.
In fact by the market, but maybe any color there would be helpful.
Yes, there were two thanks Suji there are two main reasons for the.
Volatility in the DRAM market, one was volume based with the.
Inventory build up at the end of last year in the beginning of this year.
And I think that.
We've gone through the worst part of it now and people are starting to.
Place orders again, the second factor was there was pressure on DRAM pricing.
Which does not really affect us.
At all.
We more dependent on the.
Volume impact and the price impact on what's happening in the DRAM. So we see the current environment as being better than the environment, we were facing a quarter ago.
What we also see is the market is transitioning from.
The stated platform to the Cascade Lake processor and as we go through that transition because our footprint is twice what it used to be in skylake, we see a nice flow of orders coming our way.
And nice growth for that business.
Okay and my last question is on the acquisition northwest.
I just wanted to say that the term digital controller as an applications versus you guys, having a good comps in mixed signal analog whether that's just semantics.
And also what kind of growth rate can we expect to the northwest business long term.
Thanks.
So the growth rate is typically what we expect to be double digit growth and thats, what weve done historically.
And it's a profitable business, we saw a nice piece of business in terms of.
You know the role of the controller every time, a processor has to transfer data over a nimbly boss or a pciethree interface. It needs a controller that comscore actually since the data to the Psi. So we do the five which is analog technology. We didn't have the controller, but every interface with it's a memory interface or a.
Your interface needs, both at Phi and account for and that's why it makes so much sense for us.
Your next question is from the line of Sidney Ho.
Hi, Thanks for taking my questions and I'll add my congrats to the antidote to the two transactions.
My first question is I think last quarter, you talked about in the near term things are things a little challenging visibilities low inventory is a little high I think we can you reiterate that the challenging parts and the answers to your previous two questions.
Mostly relate to buffer chip said can you talk about maybe outside of Buffy chipsets is just any update on visibility is it getting better that are getting worse any color on specific end market maybe helpful.
Thanks, Hi, Sidney I understand where are you asking about the other business and buffer trait right. So.
On the IP core business, we continue to have very good traction that business has grown over the last four years at a CAGR of 50% per year.
That was based on the strength of the technology and the design wins and we had very good traction this quarter again, I think as I said earlier in my notes.
This is the second largest.
Second time, we have the largest revenue from that business in IP cores and the fact that we are acquiring northwest logic will accelerate that growth I will also give us access to more customers number one and number two we will accelerate our design because the the Fi has to be designed in the SNC. We'd look on floor. If you don't own the country or you have to haul a three way three way relationship between your partner your customer and yourself. So this whole process is going to accelerate as we do that so IP costs.
Very good results I would say more and more on the strategic side on IP cores. One of the reasons, we see that growth is that over the past few years, we have.
Invested.
In all the foundries in particular in TSMC has the largest market share historically where weve.
The other two foundries, which continued to be booked by investing in TSMC will have a larger customer.
Pool to go after.
And we also focusing our development to markets that matter.
In the past we used to do all sorts of interface developments for all sorts of customers.
Bespoke developments I would say no developments are really focused on applications that we think are going to generate demand. So for example, PCIA Gen. Four and Gen. Five are going to be a large agreeing to create lost demand in particular in Fiveg network. We are developing a 112 gig.
Five in TSMC seven nanometer.
That will be critical to 400 gig networks on eight on Greek networks.
And for the high speed memory side.
We are.
I think we are betting on our ability to develop high speed high bandwidth memory.
Not only for the graphics space, but also for spaces that need these high bandwidth and high speed and specifically AI and and automotive. So we refocused our product portfolio, we expanded into TSMC, we targeting markets that are going to create demand we adding.
Content with the digital controller, we expanding our segments.
Because digital controllers address more segments. So with all of that we expect to continue to see growth with the IP business.
On the.
Cryptography business, we've done a lot in terms of simplifying the business and creating growth we started a bit later than the other two businesses, but we see very good traction.
Remember that.
What the two things we did is we refocused on embedded security for the semiconductor ecosystem.
So we developed secure silicon IP.
For AI.
Data Center defense, our LTM automotive segments.
They based on programmable processors. So we have an approach again, which is not a an approach of creating bespoke solution for customers.
But we are creating programmable solutions based on the platform and the realities for different markets.
And the second part of our offerings the secure provisioning for the general semiconductor market. So we've simplified our offering we've refocused on semiconductors, and we started to see traction. If you remember our first customer was Qualcomm in the mobile space in Q4 of last year, we announced the winning loyalty with micron.
In this quarter.
We got a major design win with a.
AI acceleration chip.
Our four major data center provider. So in terms of design win we see that traction we see the attractiveness of the product portfolio and we started to see growth in the business as well.
That summarizes would we do outside of buffer chip.
That's great wonderful that's a good segue for my next question.
Now that you have sold your software to limitation ticketing business.
Which obviously have to get the growth rate in last year as well how do you think about the overall growth trajectory for the remaining of the business on an organic basis and specifically if you back out of memory related revenues.
This is chip set revenues I want to see how we should think about the remaining of that.
Okay.
Jason its rivals I'm, having a little difficulty. Following your question just in terms of growth rate, we continue to target growing faster than our overall industry.
As as we've talked about we have several patent license agreements, which have structural step downs just in the way that our partners schedule their payments and we've been able to offset that through very attractive growth rates in our product programs. As Lucas has laid out I think what I would say that does give us an opportunity to talk to you more holistically about our overall growth rate when we have our analyst day coming up in.
September .
Okay. That's fair maybe last question they squeeze one in.
Related to northwest logic can you help us understand what training expenses needed to support that business and thats pretty much a 100% licensing model with a 100% alter.
So it that's a great question.
That business doesn't require.
A bunch of additional overhead beyond what it already has it will assimilate fairly clean into our existing business.
It's an accretive transaction for us.
So there is a strong engineering team that we are delighted to welcome into to Rambus.
One of the many things that we like about this business is that I I thought we did a very nice job of integrating our team from snowbush several years ago, and it's going into that same organization under the same general manager.
So.
Our confidence that we will continue to be able to execute on double digit or high growth is very high.
In terms of expenses you know there's expenses associated with the folks there. The model there is similar to our existing IP cores revenue model. So the margins are the same.
So there is a combination of both licensing as well as work that we would put into kind of the contract. Another from a a deal structure perspective, but I think that margin profile is very similar to our existing IP cores business and we expect it to be again about $10 million revenue for us next year and be accretive.
Great. Thank you very much.
Thank you Sir thank you.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question is from the line of John Pitzer.
Yeah. Good afternoon, guys. Thanks, So let me ask the question well just going back to the settlement.
So the payment and ticketing that Lisa.
I think you said it would have been $11 million in the September quarter.
In Q1, it ended up doing about $6 million for us in Q2.
That's 6 million was about 2 million less than we anticipated because as I mentioned, we had several partners who just took a little pause once we announce that we had a transaction just as they were evaluating that for their business. So that shift is about $2 million of revenue. We would have expected in Q2, most likely into into Q3. So what we had targeted for that business. In 2019 is to do between $35 million to $40 million so that.
Ram could easily have been something like a 789 11 and you have about 2 million shift from Q2 to Q3. So that you could look at a portfolio that would be closer to kind of a seven 611, 11 and still be in that $35 million to $40 million range.
That business I think still has an opportunity to grow very nicely in terms of 2020. So we had talked about $35 million to $40 million for us in 2019 could it be in the $45 million to $50 million range in 2020, I think it certainly could have been.
But as I mentioned earlier there are several changes that we're going to have to our model.
Just simply going to look differently.
With no longer having payments and ticketing, but haven't northwest logic and so we'll provide more data about how we'll look and what it will look like in 2020, our analyst day in September .
That's a good segue to my second question just on the northwest Logic, you said $10 million of revenue for next year I'm kind of curious as to how we think about the 2019 sort of revenue run rate for that business and just given the big discrepancy in your organic business between six so five and six so six is there a similar discrepancy can talk about with north northwest logic or not.
Yes, I don't expect that same discrepancy in northwest watching because those are more specifically related to the agreements that we have with customers. So we don't see that same level of discrepancy for example in our IP cores business as we do in our patent licensing business. So I wouldn't expect that much of a change. So if it was 10 million of revenue under.
When I say 10 million revenue I think it's going to be about $10 million revenue under it so six right for us in 2020.
Does that help answer your question.
It does what sort of base should we think of for 2019 for northwest project sure. So for 2019 for Q3, I don't expect it to have a material impact to our Q3 results.
The reason is that it will still take a little time for that to close.
So we're already about a month into the quarter in terms of Q4.
A little bit of revenue that we get in Q4, as John you're well aware because of purchase accounting, we don't get to count anything that comes over as an assumed contract as revenue.
But I would expect that we would still get to recognize some of the the expense that comes over in Q4. So I think it's going to have a relatively neutral impact to our earnings in Q4 and as I mentioned in prepared remarks, we were comfortable with.
Consensus earnings estimates that the folks have for Q4, obviously revenue would probably come down by say that 11 $12 million associated payments and ticketing business, which we wouldn't expect to be with us any longer.
That's helpful. Then my last question for Luca you talked about the revenue synergy between the core business and northwest logic and it makes a lot of centsfive versus controller I'm kind of curious as to what that you could help us quantify if any where you've got to fight today, you could get a controller with northwest logic, what what's the revenue opportunity and vice versa everywhere, where they have their controller. If you can bring a follow on to that what's the revenue up to how do we think about the revenue synergies here.
Yes. So good question was also a difficult question to answer.
We have.
Different sets of customers. So we do have customers where.
The used today, both our Fi and northwest logic revenue, so that revenue is going to come to us naturally.
The our customers were.
Northwest logic is selling the controller.
But the customers using a different fly and our strategy will be to continue to support those customers, who will continue to benefit from that revenue where customers are using the controller, but not using our file using a competitive supply.
So thats.
Thats a revenue that we've taken on board as well and then all of these customers that are using our size, but are using a different controller in which case, we are going to try to win those customers. So overall it was a fact that we have the team solutions and the fact that we are flexible with our customers in terms of what part of the solution. They want to use will create.
Higher demand for the for the combined the other thing that we should not underestimate is designing a psi the interface with the controller takes time when you have both in house that time is being reduced so time to revenue is being reduced as well so whatever the Tom in our speed of access to that time is over we're going to increase because we're going to have two solutions in house.
Thank you.
Thank you Jay Thank you John .
At this time there are no further questions. This concludes the question and answer session.
I would now like to turn the conference over to the CEO Mr. Luke Serafin.
As you can see we remain confident in our strategy and ability to execute with demonstrations of success across the company.
So thank you for your continued interest and time and have a good day. Thank you.
Okay.
Thank you. This now concludes today's conference. Thank you for participating you may now disconnect.