Rambus Inc (RMBS) 2022 Q1 法說會逐字稿

Welcome to the Rambus First Quarter and Fiscal Year 2022 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Des Lynch, Vice President of Finance and Investor Relations. You may begin your conference.

Thank you, operator, and welcome to the Rambus First Quarter 2022 Results Conference Call. I am Desmond Lynch, VP of Finance and Investor Relations. And on the call with me today is Luc Seraphin, our CEO; and Keith Jones, our interim CFO. The press release for the results that we will be discussing today has been filed with the SEC on Form 8-K. A replay of this call will be available for the next week at (855) 859-2056. You can hear the replay by dialing the toll-free number and then entering ID #6285426 when you hear the prompt.

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. So even if you're joining us via conference call, you may want to access the webcast with the slide presentation. A replay of this call can be accessed on our website beginning today at 5:00 p.m. Pacific Time.

Our discussions today will contain forward-looking statements, including our expectations regarding business opportunities, industry growth rates, product and investment strategies; timing of expected product launches; demand for existing and newly acquired technologies; the growth opportunities of the various markets we serve; the expected benefits of our merger, acquisition and divestiture activity, including the success of our integration efforts; the company's ability to deliver long-term profitable growth; the long-term sustainability of the company to increase product revenue and cash generated from operating activities; the company's outlook and financial guidance for the second quarter of 2022 and related drivers; the company's ability to effectively manage supply chain shortages, risks and the potential adverse impacts related to or arising from COVID-19 and its variants; and the effects of ASC 606 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 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may differ materially from our actual results, and we are under no obligation to update these statements.

In an effort to provide data 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 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.

We adopted ASC 606 in 2018 using the modified retrospective method, which did not restate prior periods, but rather ran the cumulative effect of the adoption through retained earnings as a beginning balance sheet adjustment. 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. We will continue to provide operational metrics such as license billings to give our investors better insight into our operational performance.

The order of the call today will be as follows: Luc will start with an overview of the business, Keith will discuss our financial results, and then we will end with Q&A.

I'll now turn the call over to Luc to provide an overview of the quarter. Luc?

Thank you, Des, and good afternoon, everyone. The company had a strong start to the year with Q1 revenue exceeding guidance at $99 million and earnings at the high end of expectations. We generated solid cash from operations at $42.6 million and continue to grow the business profitably. We expect the company's growth trajectory to continue into Q2 with strong demand in the data center driving our results even as the industry continues to be supply constrained.

Rambus has a balanced and diverse portfolio across chips, silicon IP and patent licensing that are all contributing at scale, and we are investing strategically in new and exciting programs to accelerate our growth. As we continue to execute on our strategy, we are confident in the long-term trajectory of the company and chose to strengthen our balance sheet by retiring a significant portion of our debt.

Turning to memory interface chips. We continue to perform well even in a very challenging industry-wide supply chain environment. We delivered another quarter of record product revenue at $48 million and expect to continue to grow. The team continues to work very closely and proactively with our supply chain partners to help minimize the impact to our customers as demand continues to outstrip supply. We are a leader in DDR5 memory interface chips, and the transition to DDR5 provides us great opportunity for growth and some expansion. Our DDR5 RCDs in volume production with a growing qualification footprint, but DDR5 is still in the early stages of its product life-cycle. As our customers continue to build in earnest ahead of next-generation server volume shipments later this year, we expect the demand ramp for DDR5 to be somewhat lumpy in nature.

With that, our memory interface chip product mix may shift as we march toward the projected DDR4, DDR5 crossover late in 2023, while strong overall data center demand drives top line growth.

Let's turn now to silicon IP, where we had a solid performance. We are leading in our chosen focus areas, including HBM, CXL, PCI Express and security IP. Our biggest markets continue to be data center and AI and over the course of the quarter, we augmented our silicon IP portfolio with certified solutions to expand our footprint in automotive and government.

Moving to ESG. We published our first comprehensive report for Rambus, outlining our strategy and commitment to responsible operations and sustainable development. This report is a great next step to qualify and advance our programs around supplier sustainability, product stewardship and environmental responsibility.

In closing, this was another very strong quarter for the company and a great start to the year as we continue to execute on our long-term strategy and deliver on our commitments. We exceeded our targets for revenue, earnings were at the high end of guidance, and we expect our growth trajectory to continue in Q2.

While supply remains tight, strong data center demand is driving results with record revenue from memory interface chips and sustained momentum in silicon IP. We have a solid foundation from licensing and multiple revenue streams and remain at the forefront of next-generation data center architectures. This unique combination positions us well for continued growth in 2022 and beyond.

With that, I'll turn the call over to Keith to discuss the quarterly financial results. Keith?

Thanks, Luc. I'd like to begin with a summary of our financial results for the first quarter on Slide 5. Once again, we delivered a solid quarter, and we are very pleased with the ongoing execution of our growth initiatives. We delivered financial results above guidance for revenue and at the high end of our earnings expectations. As a company, we are focused on strategic execution, which we believe will drive further shareholder value. With this goal in mind, we elected to retire our convertible notes early in light of future increases in the value of the notes. Doing so, we elected to utilize our on-hand cash and investments to pay down such amounts as we did not elect to refinance the notes. Our decision to do so speaks to our strong belief in our continued ability to generate strong cash flows and profitably grow the company.

Let me walk you through our non-GAAP income statement on Slide 6. Revenue for the first quarter was $99 million, exceeding our expectations. Royalty revenue was $30.4 million while licensing billings was $64.1 million. The difference between licensing billings and royalty revenue primarily relates to timing as we don't always recognize revenue in the same quarter as we bill our customers.

Product revenue was $48 million, consisting primarily of our memory interface chip business. As Luc mentioned, memory interface chip revenue was a record for the company despite supply chain challenges seen in our industry, and we are delighted to see such strong demand from our customers. Contract and other revenue was $20.6 million, consisting primarily of the Silicon IP business.

Total operating costs, including cost of goods sold for the quarter, came in at $74.9 million. Operating expenses of $56 million were slightly above expectations as a result of incremental payable taxes associated with employee stock vestings and other variable payroll expenses. We ended the quarter with total head count of 715 employees, an increase of 25 employees from the prior quarter.

Under ASC 606, we recorded $1.8 million of interest income related to the financing component of fixed fee licensing arrangements for which we have recognized revenue but not yet received payment. We incurred $0.5 million of interest expense, primarily associated with our convertible notes. This was offset by incremental interest income associated with our cash and investment portfolio.

After adjusting for noncash interest expense on the convertible notes, this resulted in non-GAAP interest and other expense for the quarter of $900,000. Excluding the financing interest income related to ASC 606, this would have been around $300,000 of interest and other expense. Using an assumed flat tax rate of 24% for non-GAAP pretax income, non-GAAP net income for the quarter was $19.6 million. With disciplined execution and focus, we again delivered earnings that were above expectations.

Now let me turn to the balance sheet details on Slide 7. We ended the quarter with cash, cash equivalents and marketable securities totaling $343.7 million, a decrease from the prior quarter, primarily as a result of payments made to repurchase a large portion of our convertible notes. This decrease was partially offset by generating $42.6 million in cash flows from operations during the quarter.

During Q1, as I mentioned earlier, we entered some privately negotiated transactions to purchase a significant portion of our convertible notes, which are due to mature in February 2023. At the end of Q1, we had paid a net amount of $157.2 million in cash to repurchase $107.9 million of the principal amount of the notes and settle the underlying hedge agreements.

In Q2, we completed the scheduled repurchases as we paid $24.7 million in cash to repurchase $15.3 million of the principal amount of such notes. At the completion of the repurchase process, we retired 71.4% of the original debt of $49.4 million of the convertible notes remaining.

At the end of Q1, we had contract assets worth $225.1 million, which reflects the net present value of unbilled accounts receivable related to the licensing arrangements for which the company has no future performance obligations. We expect this number to continue to trend down as we bill and collect for these contracts. 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 restructure our patent agreements in a manner that allows us to recognize revenue each quarter.

First quarter CapEx was $4.9 million, while depreciation expense was $6 million. We delivered $37.7 million of free cash flow in the quarter. Looking forward, we expect CapEx for the second quarter to be roughly $7 million.

As a reminder, the forward-looking guidance reflects our current best estimates at this time, and our actual results could differ materially from what I'm about to review. In addition to the financial outlook under ASC 606, we'll also be providing information on licensing billings, which is an operational metric that reflects amounts invoiced to our licensing customers during the period adjusted for certain differences. As we have reported historically, licensing billings closely correlates with what we had historically reported as royalty revenue under ASC 605.

Now let me turn to our guidance for the second quarter on Slide 8. Under ASC 606, we expect revenue in the second quarter between $115 million and $121 million. We expect royalty revenue between $42 million and $48 million and licensing billings between $61 million and $67 million. Due to the timing of revenue recognition on certain patent licensing agreements, there is a onetime benefit to ASC 606 revenue reflected in our guidance. We expect Q2 non-GAAP total operating costs, which includes cost of goods sold, to be between $75 million and $79 million. Under ASC 606, non-GAAP operating results for the second quarter is expected to be seeing a profit of $27 million and $35 million.

For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect approximately $0.5 million of expense, which includes approximately $100,000 of interest expense related to the convertible notes due in 2023.

We expect pro forma tax rate to remain consistent at roughly 24%. The 24% is higher than the statutory tax rate of 21%, primarily due to higher taxes in foreign jurisdictions. As a reminder, we paid roughly $20 million of cash tax each year, driven primarily by licensing agreements with our partners in Korea. We expect non-GAAP taxes to be between an expense of $9 million and $11 million in Q2. We expect Q2 share count to be roughly 114 million basic and diluted shares outstanding. Overall, we anticipate a non-GAAP earnings per share range between $0.24 and $0.30 for the quarter.

Let me finish with a summary on Slide 9. Our financial results show continued investment in our long-term growth strategies. I am very pleased with our results for the quarter and the trajectory that we are setting for long-term growth. We continue to execute on our strategic objectives, both operationally and financially. Our product portfolio leaves us well positioned to capture growing opportunities in the data center and cloud markets. We are consistently improving our profitability, investing in growth opportunities and delivering value to our shareholders.

Before I open the call up to Q&A, I would like to thank our employees for their continued teamwork, execution and resilience through these uncertain times. Everyone, please stay safe and take care of yourself and your families.

With that, I'll turn the call back to our operator to begin Q&A. Do we have our first question?

(Operator Instructions)

Your first question comes from the line of Sidney Ho with Deutsche Bank.

Congrats on good quarter and guide. First question I have is more a clarification. If I look at the Q1 numbers, the strength came from contract and other. And obviously, the big impact at gross margin was north of 90%. What drove the upside? Is it just that more of the licensing billing is included in contract and other this year?

Sidney, great question. So this quarter, we really saw continued strength from our silicon IP business. So that trajectory of that business we had talked about before, including the acquisitions. We had exited the year in Q4 with a $100 million run rate. Now what we're seeing that those businesses performing and scaling, that run rate is a lot closer to $120 million to $130 million per year. So we're very pleased with the growth rate of that Silicon IP business.

But also, as you note, we had good growth from our product business. We see a $2 million increase in that as well. So those are the 2 biggest drivers for our growth period over period. And then we're also happy to say that our patent business remains relatively stable. It's been very consistent for us.

Great. That's helpful. Maybe a follow-up to that product revenue. Obviously, very strong first quarter and second quarter guidance is good. But Luc, I know you just mentioned that the product revenue could be lumpy. Can you give us an update on your forecast for the product revenue for the full year? If I just kind of flat line second quarter for the remainder of the year, I get somewhere close to 40% growth in 2022. Is that the right way to think about it?

Thanks, Sidney. So just as a reminder, if we take the midpoint of guidance for the current quarter, Q2 is going to be about 9% higher than Q1. And if you compare this to last year, we are about 69% growth over the same quarter last year. So we are continuing to grow our business in the buffer chip. I think we've done that in a very challenging supply environment and also during the DDR4, DDR5 product transition. So I think we need prudent -- we need to be prudent for the second half of the year.

If you look first half of last year compared to the first half of this year, taking the midpoint for Q2, we still are above 60% growth. So I think what's happening is that the ecosystem starting to buy DDR5 chips early. That's why we had a very strong fourth quarter as well last year. But it's going to be lumpy for the rest of the year because of the transition from DDR4 to DDR5 in the ecosystem and the ecosystem partners having to absorb that transition, but also because of the supply constraints.

So I would be prudent for the second half of the year. We don't have visibility on our supply beyond the second quarter. That situation has not changed. The supply situation has not improved. And there will be [more finesse] in the transition from DDR4 to DDR5. So we can give you guidance for the second quarter. I think we should just be prudent for the second half.

This being said, if you look across quarters, we're growing much faster than the market in the first half of this year compared to first half of last year, and there is momentum for the launch of DDR5. We're just going to have a few lumpy quarters ahead of us.

Great. And maybe I can squeeze one more in. Go ahead.

No, I was going to add, to Luc's point, we are absolutely thrilled with what we're seeing in terms of demand. It has been a really compelling story, as Luc kind of articulated, in terms of the growth rates that we're seeing and particularly on a year-over-year basis and the (inaudible) in the market. But your outlook of what you noted in terms of the back half of the year, that's more of an indication of what we're really seeing from a supply perspective. So the amounts that you're talking about are relatively consistent what we see from a supply case scenario. The demand is much greater than that. But once again, we have to manage our business within our supply constraints.

Great. That's helpful. Maybe one more for me. There has been a lot of concerns on the macro environment, not talking about supply side, but more on the demand side, whether it's inflation, whether it's geopolitical. That eventually will hurt consumer spending and enterprise spending. On top of that, there seems to be elevated inventory in the supply chain. Curious how you guys handicap this kind of environment in your forecast and more importantly, your operations. And which part of the business do you think is most at risk to this kind of environment?

That's a great question. Our business is mostly directed to the data center. So that data center business is not as much affected by inflation as, I would say, consumer markets. We do see a continued demand for having access to more data faster and great activities in terms of new architectures in the data center. So although we're prudent with the economic environment, we do continue to see very high demand, as Keith said, in the data center space. We're not really affected by what's happening in the consumer space, just given the portfolio that we have.

The other thing that is working in the favor of Rambus is that we have a balanced portfolio of offering. So above and beyond our product offering that goes into the data center, we have the patent licensing business, which remains stable year-over-year as strong generator of cash. And we also have a very solid silicon IP business that builds products that will be in the market in a few years from now. So this balanced portfolio makes us pretty strong against the economic environment.

Your next question comes from the line of Gary Mobley with Wells Fargo.

Congrats to a strong start to the year. I wanted to ask a few questions about DDR5. I know Intel said recently that their Sapphire Rapids platform is ramping with select customers currently with a more meaningful ramp in the second half of the year, AMD's Genoa is, I guess, set to ramp later this year. And so should we think about the DDR5 shipments you are shipping into the channel today? Is that just priming the channel for these eventual launches? And therefore, when and if we do see these 2 different platforms ramp from AMD and Intel, that maybe there's not so much of a step-up in your DDR5-related revenue?

Gary, thanks. You are right. I think the market first is transitioning from DDR4 to DDR5. So in the long run, that's a good thing for us. Our footprint continues to be much stronger in DDR5 than it is in DDR4. We are -- we introduced our first generation of DDR5 a few quarters ago. We are introducing our second generation of DDR5. So we believe in the momentum in that market. With the announcements of AMD and Intel we will see demand increase. So we will see some lumpiness quarter-over-quarter. If we integrate over 1-year basis, 2-year basis, the growth is there and our share is going to continue to grow, we might see some lumpiness from quarter-to-quarter. That's all what we're seeing now.

Okay. Okay. You mentioned Gen 2 of your DDR5 solution. Is that the generation that includes the companion chips, the sensor timing and the related power management? And specifically, when would you expect to launch that? And then I also noticed that the gross margin on the product line was down a bit. Was that more a function of a high DDR4 mix in the quarter?

So a couple of questions. The first one regarding the companion chips. The companion chips are independent from the generations of DDR5. We always put the emphasis on the RCD chip itself, the buffer chip itself, because this is where most of the value is. So when I mention Generation 1 to Generation 2, I mean that we are introducing our generation to a buffer chip to our customers.

The companion chips are going to be used both for Generation 1 and Generation 2. And for the companion chips, as we said last quarter, we are on track with our programs. We should make some announcements in the second half. And we should start sampling and ramping those products to our customers in the second half of the year, at the full production next year. So nothing that's changed there. But they will support both Generation 1 and Generation 2 of buffer chips.

With respect to margin, as we said last quarter, we had an exceptional good quarter with respect to product gross margins in Q4 of last year because this was the initial purchase of DDR5. So the mix of products that we had between DDR5 and DDR4 was very favorable for DDR5.

Going into Q1, the mix has changed between DDR4 and DDR5, but it's still within the range of what we previously communicated. And we continue to maintain our gross margins outlook for the total year. We will see some lumpiness from quarter-to-quarter, as I said earlier.

(Operator Instructions) Your next question comes from the line of Kevin Cassidy with Rosenblatt.

Congratulations on the great results. Just to understand your Gen 1 to Gen 2 for the RCD. Are you going to run those products in parallel? Or are they -- or does DDR or this Gen 2 replace Gen 1?

Kevin, great question. What we see in the DDR5 generation of products is exactly what we saw in the DDR4 generation of products. Every new generation of processor in that generation will offer higher speeds on the memory bus. So every time a higher speed is offered as a memory bus, you do have to have a higher speed buffer chip. So that's what we mean by second generation. So they will not cannibalize themselves. It's just that we're going to have a sequence of generations of DDR5 buffer chips within the DDR5 generation of memory. This is what happened in previous generations of DDR technologies, DDR3 and DDR4.

Okay. Great. And then also in your prepared remarks, you mentioned expanding into the automotive and government businesses. Can you explain that a little further?

Yes, absolutely. We're making very good progress with our security technology as part of our IP programs. And the demand for embedded security in the automotive market and the government market is just increasing. And what this group is doing is that they precertify our offering for these specific markets. So as much as a year ago, the vast majority of our business was with the data center type of applications, we're starting to see inroads into 5G, IoT, automotive and government starting with the -- mostly the security IP.

Okay. So if I understand that, that's more of a pulse, like the automotive companies are telling their suppliers that they want to use your embedded security.

Yes. And if you look at this in the longer run, there's going to be more and more electronics in cars as we know. There's going to be more and more of a mini data center type of applications in the cars themselves. So you want to make sure that all the data that is being transmitted within your car electronic system is being secured. And in the longer run, this is what's driving the interest of -- for security technologies in automotive.

In government, it's just obvious that people are just requiring harder and harder security in all of their systems. So these two trends in the market are favorable to our silicon IP business of security.

And your next question comes from the line of Mehdi Hosseini with SIG.

Yes. A couple of follow-ups. This is for Keith. What should I assume for the private gross margin for calendar year '22? I believe for last year, you guided to 60% to 65% and you came in at slightly above that. And I'm just wondering if there's an update looking to '22. And I have a follow-up.

Okay, Mehdi. So we're still anticipating that gross margin range to be 60% to 65%. Luc had talked about that we see a little bit of mix between DDR4 and DDR5 and then -- but overall, what we see is us staying within that range between 60% to 65%.

Great. And then for Luc, I want to better understand what's driving the silicon IP. In the past, we have highlighted opportunities in bandwidth memory, CXL -- actually CXL is pushed out and the security that you have highlighted. But what is the biggest driver in revenue? What is the biggest incremental revenue contribution in your silicon IP business in '22 compared to '21?

That's a great question. So first of all, we have a very focused approach to silicon IP offering. We focus on high-speed memory interface, GDDR and HBM. And then we focus on high-speed series or high-speed serial interfaces, PCIE and CXL. And on the security side, we focus on Root of Trust. So this is a very, very focused strategy. And we're having traction with all of them.

I would say that the emergence of new connectivity requirements in the data center is driving growth for our CXL and PCIE offering in the silicon IP business. So people are buying from us either [device] or controllers that go into chips that feature CXL or PCIe interfaces. And the acquisition of AnalogX and PLDA last year are contributing quite a lot to that growth in demand. So there's -- we see a lot of growth there. We see a lot of growth in GDDR, high-speed interfaces.

And on the security side, we continue to see growth in our traditional markets. But as I said earlier, there are emerging markets that are really interested in security, automotive and government in particular. So it's really across the board, I would say, that the vast majority of our growth in 2022 is driven by PCIe and CXL designs.

If I may just follow up to that. I'm under impression that the (inaudible) CXL is more of a next year CXL 2.0. So when you talk about opportunities in '22 related to PCIe 4.0 or CXL, are these more R&D related? And then once 2.0 comes out, CXL 2.0, then those R&D projects will scale into production? Is that the right way of thinking about it?

Yes. The right way to think about it is this. As Rambus, we have our own CXL product initiative. We are in full speed development of our CXL chips, and they will hit the market something next year and being in production in 2024. But we are also selling building blocks, silicon IP to people who build their own chips that feature CXL or PCIe. And that's a silicon IP sale. So we do sell the IP today. It's an IP sale, a license that we sell today that creates revenue and revenue growth as an IP sales today for our customer products that will hit the market in '22, 2023 and 2024.

So this kind of phasing approach to CXL. We can sell the silicon IP today to people who develop CXL and PCIe-capable chips, but we're also developing our own chips that will hit the market in the same timeframe.

At this time, there are no further questions. This concludes the question-and-answer session. I would now like to turn the conference back to Luc Seraphin.

Thank you, everyone, who has joined us today for your continued interest and time in Rambus. We look forward to speaking with you again soon, and have a great day.

Thank you. This now concludes today's conference.