Good afternoon. Thank you for attending the Rambus Second Quarter 2022 Earnings Call. My name is Matt, and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call and opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our host Desmond Lynch, Chief Financial Officer of Rambus. Desmond, please go ahead.

Thank you, Operator. And welcome to the Rambus second quarter 2022 results conference call. I am Desmond Lynch, Chief Financial Officer at Rambus and on the call with me today is Luc Seraphin, our CEO. 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 866-813-9403. You can hear the replay by dialing the toll-free number and then entering ID number 092440 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 are 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 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’s increased product revenue and cash generated from operating activities, the company’s outlook and financial guidance for the third 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 and reported revenue amongst other things. These statements are subject to risks and uncertainties that are discussed during…

Thank you, Des, and congratulations on your newly announced role as CFO. I know many on the call already know you, but I’d like to take a moment to introduce you before we dive into our results. Des brings over 20 years of finance experience to the table, including leadership roles at the major players like Renesas, IDT, Atmel and National Semiconductor. His deep understanding of Rambus and demonstrated success of the company make him an ideal choice as CFO. I am very pleased to have him in his expanded role on the senior management team and we will now turn to our results for the quarter. The company delivered a strong performance in Q2, with revenue and earnings at the high end of guidance and generated $56.5 million in cash from operations. In Q3, we expect strong demand in the data center to drive our results, even as the industry continues to be supply constrained. We are addressing the needs of the data center with our diverse portfolio of chips, silicon IP and patents, each of which is contributing at scale and fueling the company’s long-term profitable growth. Memory interface chips delivered another record performance, driving $53.3 million in product revenue even in the face of a very challenging industry-wide supply chain environment. The situation remains dynamic and the team continues to work very closely and proactively with our supply chain partners to help minimize the impact to our customers. As a leader in DDR5 memory interface chips, Rambus has a great opportunity for growth and some expansion as the industry transitions to DDR5. Our DDR5 RCD in volume production with a growing qualification footprint. And just a few weeks ago, we expanded our DDR5 chipset offering with the introduction of our new companion chips, the SPD Hub and…

Thank you, Luc, and thank you to Keith as well for his support. I’d like to begin with a summary of our financial results in the second quarter on slide five. Once again, we delivered a strong quarter and we are very pleased with the ongoing execution of our growth initiatives. We delivered financial results at the high end of our revenue and earnings expectations. During the quarter, we successfully completed the acquisition of Hardent, Inc. We are very excited about the acquisition as it adds an extremely talented group of engineers which will bolster our CXL initiative. Let me walk you through our non-GAAP income statement on slide six. Revenue for the second quarter was $121.1 million at the high end of our expectations. Loyalty revenue was $48 million, up from Q1 and in line with our expectation, driven by additional upfront revenue from several license agreements. Licensing billings were $66.1 million. The difference between licensing billings and royalty revenue primarily relates to timing, as we do not always recognize revenue in the same quarter as we bill our customers. Product revenue was $53.3 million consisting primarily of our memory interface chip business. Memory interface chip revenue was a record for the company despite the supply chain challenges seen in other industry. We are delighted to see such strong demand from our customers. Contract and other revenue was $19.8 million consisting primarily of silicon IP. As a reminder, only a portion of our silicon IP revenue is reflected in contract and other revenue, and the remaining portion is reported in royalty revenue, as well as licensing billings. Total operating costs including cost of goods sold for the quarter came in at $76.1 million. Operating expense of $54.9 million were in line with our expectations. We ended the quarter with…

Certainly. The first question is from the line of Gary Mobley with Wells Fargo. Your line is now open.

Hey guys. Good afternoon. Des, let me extend my congratulations on the appointment. I am most curious to start out asking about your buffer chip revenue, your memory interface revenue on the chipset side specifically. And I am curious if you were able to grow your backlog considering the deferred shifting trends in the demand dynamics, as well as incremental supply and presumably you are getting more supply coming on is, maybe there is some fungible capacity with your foundry partner, maybe you can just share some additional details there?

Hi, Gary. I will start and then Des can comment. We have seen an environment where demand is much higher than supply. In the first half of this year, we had a meaningful gap between supply and demand and that was -- that’s the case again for Q3. We are working on a weekly basis with our suppliers and our customers to manage our backlog and our orders. We have large orders on the books. We have not seen any cancellations on these orders. What’s happening is in the supply-constrained environment, we are shifting the backlog in out quarters as we work with our suppliers. We have a little more visibility into the front-end capacity for Q4, but it remains very, very tight because we are still in a technology node that is quite tight, so we turn also our attention to the back-end. And at this point in time between managing the backlogs, managing our suppliers, the shift of crossover between DDR4 and DDR5, we still believe the street estimates that we have for Q4 as well for Q3 the right assumptions. Des?

Thanks, Luc. And I should mention, we have been delighted with the growth of our product revenue in Q2 was another quarterly record at $53 million. We were able to gain up slightly for the Q3 midpoint. And when we look at the sort of back half of the year, Gary, I think most analysts have it modeled somewhere between $200 million to $210 million for product revenue, which is I think relatively flat Q3 and Q4 revenue number. Given the ongoing supply challenges and the uncertainty of the DDR5 ramp, I think that’s a reasonable assumption and that would assume our growth rate year-over-year being about 40% versus fiscal year 2021. Demand remained strong and we remain very optimistic about our product business.

Well, thank you for all the detail both of you. I want to extend the conversation and ask about your view on the substantial ramp of DDR5, and so I think your Intel and Sapphire Rapids was official last week that that is delayed to the very end of the year I think best case and more so into next year. Is that kind of how you view your official DDR5 ramp?

Yes. Gary, as you know, we started to ship our DDR5 chips in the second half of last year, in the second half of 2021, because the module makers go into production ahead of the initial product builds. So we are monitoring what both Intel and AMD are doing. We think that the crossover between DDR4 and DDR5 in volume might be slightly shifting from the end of 2023 to the beginning of 2024. But we are shipping to the first queues. We are getting orders from our customers. And I think we are just monitoring this very, very closely. It’s going to be lumpy in nature, the transition between DDR4 and DDR5. But the market is going to be there and we are confident in our position in that market. It’s just going to be lumpy.

Okay. Thank you, guys. Appreciate it.

Yeah.

Thank you for your question. The next question is from the line of Mehdi Hosseini with SIG. Your line is now open.

Yes. Thank you for taking my question. Luc, you had a very strong product revenue in Q2, up 70% year-over-year and up almost 12% on a sequential basis and this is despite the fact that DDR5 is somewhat pushed up because of Sapphire Rapids. So can you please help us understand the dynamics behind this strength and why shouldn’t it go through like a some sort of a pause before DDR5 adoption accelerates when Sapphire Rapids is available? And I have a follow-up.

Thanks, Mehdi. One of the main reasons we continue to post a growth that is much higher than the market growth is, because we had a very strong design win footprint in the last generation of DDR4. Many times on this call we explained that the footprint that we have in qualification translates a few quarters later into market share. And this is what happened with the DDR4 Ice Lake platform. We had a very strong footprint with our three customers, that platform Ice Lake, is lasting a bit longer than expected precisely because of the delay of DDR5 and that explains why we see this growth year-over-year and quarter-over-quarter. The other thing is, we have literally worked very, very closely with our supply chain partners on a weekly basis and with our customers on a weekly basis to make sure that we optimize supply and backlog management through that period of supply constrained environment. Regarding DDR5, as we said, we believe it’s going to be lumpy in nature. But DDR5 is going to ramp. We have received orders from the end of last year we continue to see orders. But I think the transition may take a little longer than we expected earlier. But the demand that is not going to be fulfilled by the Sapphire Rapids platform is going to be fulfilled by the Ice Lake platform. So we are just monitoring that transition every week.

Got you. And then one quick follow-up, based on ASC 605, your revenue growth for Q3 implies that $1 million incremental increase, but your total cost is going up by $3 million to $4 million. How should I think about this dynamic and would your cost moderate after Q3 or cost increase will moderate after Q3?

Hi, Mehdi. This is Des. Looking at the Q3 guidance, we guided total operating costs and expense which includes costs of goods sold at $79 million at the midpoint. This was up a few million dollars versus Q2, mainly driven by the timing of some favorable R&D expense. If we look at the back half of the year for OpEx, we would expect SG&A to remain relatively flat with what you saw in this sort of first half of the year. But we will from time to time see some increases in variable R&D to support some of our R&D programs are expected to ramp in the back half of the year.

Okay. Thank you.

Thanks.

Thank you for your question. The next question is from the line of Sidney Ho with Deutsche Bank. Your line is now open.

Thank you. Congrats on the solid results and Des also on your CFO appointment. My first question is on the supply constrained side. You talked about supply constraints impacting last quarter and probably going forward as well. Is there any way you can help us understand the impact in the past quarter in terms of revenue and margins, and what’s your expectations going forward? And Des, what kind of flexibility in terms of supply constraints do you have beyond 90 days?

If you are talking about the last couple of quarters, the impact on supply constraint is that we could have had higher revenue, had we had this supply to support that revenue. We had a meaningful gap between our supply and our demand as a result of that. We had to shift some of our customers backlog into Q3 and Q4. So that’s the main impact. We are trying to maintain our cost of goods to the right level. So we are posting the margins that we said we would make despite this supply environment. As I said, we were working week after week with our suppliers and customers to optimize that equation until we get out of that situation.

Sidney, maybe, I would just add to the gross margin question as well. We have consistently talked about a blended product gross margin being between 60% to 65%. If you look at our gross margin for Q2 on the product side, we were around 62%, which was relatively flat to sort of Q1. So we have been operating in the first half of the year in the middle of this sort of product range that we mentioned. We will continue to watch the underlying sort of product mix, but on a sort of a long-term basis, we remain committed to the 60% to 65% product gross margins.

That’s very helpful. And the follow-up question is on the extreme interest that you have in major services. So you announced the SPD Hubs and the temperature sensor. Can you just remind us the timing of when you recognize revenues from these opportunities? What is the revenue potential versus your existing RCD chips? And what do you expect the attach rate with the RCD products and how you expect that over time?

Yes, Sidney. So, as we say, we are sampling customers as we speak, these two companion chips are added to the DDR5 memory modules. So the ramp of those companion chips also going to depend on the DDR4, DDR5 transition. What I mean by this is, at the time on these parts, when DDR5 starts in the market. We are not expecting any meaningful revenue this year. This will ramp next year and there are several suppliers for these types of products. So we don’t expect either a one-to-one attach rate to the RCD. But the RCD remains the main component on these memory modules for DDR5. We believe the companion chips could add some TAM to the buffer chip. When we look at the market size for companion chips in 2024, when DDR5 is going to be out there, that adds a TAM of about above $100 million in total to the TAM and we are going to compete for a share of that TAM.

Okay. That’s fair. Do you mind if I ask one more question?

Absolutely. Yeah. Please go.

Yeah. Just on the Hardent acquisition, what does it bring to the table that you don’t already have and how does that change the timeline for your own CXL chips? Thanks.

Thanks, Sidney. So the Hardent acquisition brings a couple of advantages to our CXL program. The first one is that they are very knowledgeable in some specific technologies like ECC and these kind of things. And secondly, and probably more importantly for us, they have a long experience as complex SOC design. Rambus is known for buffer chips, buffer chips is a small chip with signal integrity being the most important aspect of those. CXL chips are going to be much larger chips, SOC chips and this is something that we didn’t have in-house. So we are bringing a team that had many years of experience building large SOCs together as a team and that’s going to help us in the back-end design of our CXL chips.

Thank you.

Thank you, Sidney.

Thank you for your question. The next question is from the line of Kevin Cassidy with Rosenblatt Securities. Your line is now open.

Hi. This is McClain Culver on for Kevin Cassidy. Thanks for taking my question and congratulations, Des, on your appointment. I know you touched on it in the remarks, but have you experienced any slowdown in licensing activity and is that activity more weighted to memory interface, CXL or security? Thanks.

I will start and let Des comment. The silicon IP business can be lumpy in nature, because we are going after a lot of customers and a lot of designs. But as Des said, we are on track to deliver $120 million to $130 million from that business and if you look back to last year, that’s about $20 million to $30 million more. So the trajectory is a trajectory of growth, but we do see some I’d say variation from quarter-to-quarter depending on the timing of the designs that we win. We are winning designs across the board between interface IP and security. In the security IP, we address market beyond data centers and AI. This is with the security IP that we have our first wins with automotive or government types of applications.

And just to add, like, we have been very happy with the momentum in pricing in the silicon IP business. We did reconfirm the $120 million to $140 million range for silicon IP in the prepared remarks. It’s really great to see this business growing and approaching scale. And as you mentioned, this comes from the combination of interface IP and the security offerings that we have.

Great. Thank you.

Thank you for your question. There are currently no further questions registered. [Operator Instructions]

Okay. So if there is no more question.

Yeah.

Thank you. I’d like to thank you to everyone who has joined the call today for your continued interest and time, and we look forward to speaking with you again soon. Have a great day. Thank you.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.