Welcome to the Rambus Second Quarter and FY '19 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Rahul Mathur, Chief Financial Officer. You may begin your conference.

Thank you, Philip, and welcome to the Rambus Second Quarter 2019 Results Conference Call. I am Rahul Mathur, CFO; and on the call with me today is Luc Seraphin, our CEO. The press release for the results that we will be discussing today have been furnished to 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 number 3471916 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 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 discussion today will contain forward-looking statements regarding our financial guidance for future periods including Q3 2019 and beyond, prospects, products 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 expected timing of transaction completions, 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're 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 have 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 rambus.com on the Investor Relations page under Financial Releases. The order of our call today will be as follows: Luc will start with an overview of the business; I will discuss our financial results, including our guidance for future periods; and then we'll end with Q&A. I'll now turn the call over to Luc to provide an overview of the quarter. Luc?

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 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 towards 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 commitment 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 are last month's announcement of our agreement to sell our Payments and Ticketing business to Visa and today's announcement of our agreement to acquire Northwest Logic to augment our interface IT 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 will have an opportunity to develop and deliver rich new solutions to the global market and make an industry leader like Visa even better with our tremendous product and talents. Second, as we complete the necessary steps to simplify, we also continue to seek out opportunities to amplify our market and technology positions with new investments that fit within our areas of focus. In line with that strategy, we have signed an agreement to acquire the digital controller company, Northwest Logic, and we will be integrating their offerings and…

Thanks, Luc. I'd like to begin with our financial results for the second quarter. Let me start with some highlights on Slide 6. As Luc mentioned, we continue to execute on 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 ASC 606 using the modified retrospective method, which does not restate prior periods but rather runs the cumulative effect of the adoption through retained earnings as the beginning balance sheet adjustment. Our reported revenue amounts discussed herein are reflected under ASC 606. As a result, any comparison between second quarter 2019 results under ASC 606 and prior results under ASC 605 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 old 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 7. Revenue for the second quarter was $58.3 million, in line with our expected range of $57 million to $63 million, driven by execution in our product businesses. As we've mentioned previously, ASC 606…

[Operator Instructions]. Your first question is from the line of Gary Mobley.

Bear with me for a minute just as I sort of walk through all the different moving pieces, and if you could help me reconcile 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 the product revenue in the contract and other revenue, it gets to the $91 million mark. Is that correct?

Gary, I'm sorry which quarter are you referring to?

For your Q3 guide.

So for Q3, I think what you're referring to is that we gave a guidance on revenue between $41 million and $47 million of revenue. Included in that guidance was royalty revenue of $13 million to $19 million. And what we assumed operationally is we'd have licensing billings of $58 million to $64 million. Our licensing billings and royalty revenue is roughly $45 million for Q3.

Okay. And so to get to what was considered at one point a comparable metric to ASC 605 accounting is roughly $91 million, correct?

I think if you were to take the midpoint of our revenue between $41 million and $47 million, which is about $44 million, and add that delta from the licensing billings, I think you'd have us at something a little closer to about $89 million, if I understand the math that you're trying to do.

Okay. And so if it were not for the exclusion of that CS or the revenue generated from the payment business, you'd be closer to $100 million, right?

Yes. I understand the math that you're doing. As I discussed in our prepared remarks, we took about $11 million of revenue out of our guidance for Q3 related to Payments and Ticketing business.

And since that business breakeven, no impact either way on the op margin, correct?

Well, there will be an improvement in op margin, but no impact in terms of operating or 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's been around for, what, 25 years or so. I think it's been part of Altera and Intel. How does this stand today as an independent company? Employee count? And maybe some particular type of customer or ASIC concentration?

Gary, this is Luc. So you're right, they've been around for some time. They were founded in 1995. At some point in time, they were part of Altera. At that time, they were more of a design house than a company designing IP per se. And after some time when the market was a little soft, Altera [indiscernible] again. And they decided to do development of critical IP for the communication network. And specifically, they have been developing controllers for PCIe, interfaces for high-speed memory interfaces and for MIPI interfaces. And that's how we got to know them. We've actually worked with Northwest Logic for many, many years, because in every SoC design for communication, every time you have a PHY, which we provide, you have to interface that PHY to a controller. So we've known these guys for a long time because with many of our customers, we are designing and supporting the customers together. So they provide controllers. As I said, the vast majority, memory controllers, about 50%, PCIe controllers and MIPI controllers. That's what they do. So we have a large, common set of customers. But they're also adding customers to our customer set because when you have controllers, you typically have broader channels. This is a profitable company. They will add about $10 million of accretive revenue to our business in 2020. The group has been very stable. It's about 30 people. They're based in Hillsboro in Oregon. Same time zone, same type of cultures, so the integration is going to be very easy for us, if I say so. So it's a great acquisition for us. It gives additional potential for our PHYs. It will mean to us faster growth, driven by channel synergies and the rollout of GDDR6, HBM3, and PCIe Gen 5. And it's an accretive revenue for us in 2020. So we're really excited with this acquisition.

Okay. Last question, I'll hop into queue. I think your message is clear on the buffer chip business of growth mostly 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 sort of the order, linear order patterns in the buffer chip business?

Yes. We had a record quarter in buffer chips since we began the business. Q2 was really, really good for us. As Rahul said, we are well on our trajectory to grow that business 50% compared to last year, which was also 50% compared to the year before. So we're making steady gains there. The inventory situation that we faced in Q1 in particular in the beginning of 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 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 design win footprint.

Your next question is from the line of Suji Desilva.

Congratulations on the transaction. So I was doing the same math Gary was. I just want to make sure I did it right as well. So for Q2, it was ASC 605, Rahul, I got $96 million roughly of revenues and $0.22. Is that roughly where that would have come out in 605? Does that sound ballpark?

So Suji, we can't provide 605 numbers. But I think I understand the math you're trying to do. And if I were to do the same math, I think I would've gotten the same result.

Okay. And I guess just to follow-up on that, with the 3Q guide, I just want to use the same math, obviously, and I got a midpoint of $89 million, $86 million to $92 million, and EPS of $0.23. Does that all sound ballpark as with the same math was used?

Yes, again, I mean, that's math we can't do. But if I were to follow your math and how you laid out your model, I'll get the same numbers.

Excellent. And then also on the memory buffer business, just a question there. With DRAM prices being so volatile, is that impact favorable for you guys? Neutral? Or is it a headwind? Just to understand how the two are interplaying. I know you guys are gaining share more than impacted by the market, but maybe any color there would be helpful.

Yes, there were two reasons -- thanks, Suji. There were 2 main reasons for the volatility in the DRAM market. One was a volume-based with the inventory buildup at the end of last year and 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're more dependent on the volume impact than the price impact on what's happening on 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 Skylake 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. Then my last question is on the acquisition of Northwest. I just want to understand if the term digital controller has any implications versus you guys having a good competency in mixed signal analog, whether that's just semantics. And also what kind of growth rate can we expect for the Northwest business long term?

So the growth rate is, typically, we expect to be double-digit growth, and that's what we've done historically. And it's a profitable business with some nice piece of business. In terms of the role of the controller, every time a processor has to transfer data over a memory bus or a PCIe interface, it needs a controller. And that controller actually sends the data to the PHY. So we do the PHY, which is analog technology. We didn't have the controller. But every interface, whether it's a memory interface or a serial interface, is both a PHY and a controller, and that's why it makes so much sense for us.

Your next question is from the line of Sidney Ho.

I'll add my congrats to the two transactions. My first question is, I think the last quarter, you talked about in the near term, things are a little challenging, visibility is low, inventory is a little high. I think you kind of reiterated that, the challenging part. And the answers to your previous two questions mostly relate to buffer chipsets. Can you talk about maybe outside of buffer chipsets, any update on visibility? Is it getting better or getting worse? Any color on specific end market may be helpful.

Right. So Sidney, if I understand, you're asking about the other business and buffer chip, right? So on the IP Cores business, we continue to have very good traction. That business has grown over the last 4 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 -- this the 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. And will also give us access to more customers, #1. And #2, it will accelerate our design. Because the PHY has to be designed in the SoC with the controller. If you don't own the controller, you have to have a 3-way relationship between your partner, your customer and yourself. So this whole process is going to accelerate as we do that. So IP Cores, very good results. I would say more on the strategic side than 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, who has the largest market share. Historically, we were with the other 2 foundries, which we continue to be. But by investing in TSMC, we have a larger customer pool to go after. And we're 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. Now our developments are really focused on applications that we think are going to generate demand. For example, PCIe Gen…

Sounds great. Wonderful. That's a good segue for my next question. Now that you have sold your software to an organization ticketing business, which obviously, have pretty good growth rate in the 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 the memory of related revenues whether it's licensing or chipset revenues, I want to see how we should think about the remaining of that business going forward.

Sidney, it's Rahul. So I'm having a little difficulty following your question just in terms of overall growth rate. We continue to target growing faster than our overall industry. As we've talked about, we have several patent license agreements, which have structural stepdown shift 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 Luc has laid out. I think what I would suggest is 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, if I could squeeze one in. Related to Northwest Logic, can you help us understand what kind of expenses are needed to support that business? And is that pretty much a 100% licensing model with a 100% fall-through?

So that's a great question. No, 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 Rambus. One of the many things that we like about this business is that 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'll continue to be able to execute on double-digit or higher growth is very high. In terms of expenses, 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 and other from 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 of revenue for us next year and be accretive.

[Operator Instructions]. Your next question is from the line of John Pitzer.

Rahul, just going back to the settlement -- the sale of Payments and Ticketing to Visa. I think you said it would have been $11 million in the September quarter guide. I thought you said $6 million in the June. I'm just kind of curious, how do we think about kind of a full year revenue for that business as we think about truing up our 2020 estimates?

Yes. Absolutely. That's a great question, John. And you got it exactly right. So that business is about $7 million for us in Q1. It ended up doing about $6 million for us in Q2. That $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 announced that we had a transaction just as they were evaluating that for their business. So that shifted about $2 million of revenue we would have expected in Q2 most likely into Q3. So what we had targeted for that business in 2019 is to do between $35 million to $40 million. So that ramp could easily have been something like a $7 million, $8 million, $9 million, $11 million, and you have about $2 million shift from Q2 to Q3. So then you can look at a portfolio that would be closer to kind of a $7 million, $6 million, $11 million and $11 million, 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've 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's several changes that we're going to have to remodel. We're just simply going to look differently with no longer having Payments and Ticketing but having Northwest Logic. And so we'll provide more data about how we'll look and what it will look like in 2020 at 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 605 and 606, is there a similar discrepancy you can talk about with Northwest Logic or not?

Yes. I don't expect that same discrepancy at Northwest Logic 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 and 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 of revenue, I think it's going to be about $10 million of revenue every ASC 606, 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 Logic?

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 and so we're already about a month into the quarter. In terms of Q4, I remind you a little bit of revenue that we get in Q4, as John, you're well aware, because of purchase accountings, 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 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 the consensus earnings estimates that the folks had for Q4. Obviously, revenue would probably come down by, say, that $11 million, $12 million associated to Payments and Ticketing business, which we wouldn't expect to be with us longer.

That's helpful. Then my last question for Luc. Luc, you talked about the revenue synergy between the core business and Northwest Logic, and it makes a lot of sense, PHY versus controller. I'm kind of curious as to whether or not you can help us to quantify, if everywhere you had a PHY today, you could get a controller with Northwest Logic. What's the revenue opportunity? And vice versa, everywhere they have their controller, if you could bring a PHY into that, what's the revenue opportunity? How do I think about the revenue synergies here?

Yes. That's a good question. That's also a difficult question to answer. We have different sets of customers. So we do have customers where they use today both our PHY and Northwest Logic revenue. So that revenue is going to come to us naturally. There are customers where Northwest Logic is selling the controller, but the customer is using a different PHY. And our strategy will be to continue to support those customers, so we will continue to benefit from that revenue where customers are using the controller, but not using our PHY, using a competitor's PHY. So that's a revenue that we'll take on board as well. And then all of these customers that are using our PHY but are using a different controller, in which case, we're going to try to win those customers. So overall, the fact that we have the two solutions and the fact that we are flexible with our customers in terms of what positive solutions they're going to use, they create higher demand for the combined. The other thing that we should not underestimate is designing a PHY that 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 TAM is, our speed of access to that TAM is overall going to increase because we're going to have two solutions in-house.

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. Luc Seraphin.

As you can see, we remain confident in our strategy and ability to execute with demonstrations of success across the company. We thank you for your continued interest and time, and have a good day. Thank you.

Thank you. This now concludes today's conference. Thank you for participating. You may now disconnect.