Earnings Labs

Rambus Inc. (RMBS)

Q3 2022 Earnings Call· Mon, Oct 31, 2022

$110.76

-21.51%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.

Same-Day

+8.85%

1 Week

+20.32%

1 Month

+26.03%

vs S&P

+24.23%

Transcript

Operator

Operator

Welcome to the Rambus Third Quarter and Fiscal Year 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to pass the conference over to Desmond Lynch, Chief Financial Officer. You may begin, sir.

Desmond Lynch

Analyst

Thank you, operator and welcome to the Rambus third 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. In addition, we are simultaneously webcasting this call and along with the audio, we are webcasting slides that we will reference during portions of today's call. A replay of this call can be accessed on our website beginning today at 5:00 p.m. Pacific Time. Our discussions today will contain forward-looking statements, including our expectations regarding projected financial results, financial prospects, market growth, demand for our solutions, the company's ability to effectively manage any supply chain shortages and the effects of ASC 606 on reported revenue amongst other items. These statements are subject to risks and uncertainties that may be discussed during this call and are 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 greater clarity in the financials, we are using both GAAP and non-GAAP financial presentations in both our press release and on this call. A reconciliation of these non-GAAP financials to the most directly comparable GAAP measures 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 a modified retrospective method which did not restate prior periods but rather than 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 licensing billings to give our investors better insight into our operational performance. 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 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?

Luc Seraphin

Analyst

Thank you, Dave. The company delivered an excellent performance in Q3. We exceeded our guidance for both revenue and earnings and delivered a record $80 million in cash from operations. These strong results were achieved in the context of a challenging macroeconomic environment. Our strategic focus in data center, strength of execution and diverse portfolio of offerings are driving the continued profitable growth of the company and give us confidence in our outlook for a strong Q4. In addition, we are able to consistently return value to our stockholders most recently with the initiation of a $100 million accelerated share repurchase program and further debt retirement. And just this morning, we announced that we have extended our comprehensive patent license agreement with Samsung for an additional 10 years. With this extension, we have solidified a sustained foundation of cash generation from our licensing program that allows us to continue to return value to our stockholders and build our growing product businesses. Samsung has been a trusted partner for many years and we are very pleased to strengthen our strategic relationship. This extension enables deeper collaboration on the products and is a testament to the continued value of our innovations for the ongoing advancement of the industry. Turning to our detailed results, memory interface chips drove another record quarter of product revenue at $58.6 million, up 10% sequentially and 60% year-over-year. This was a great performance from the team but we remain vigilant as we navigate through dynamic macroeconomic conditions. We continue to focus on execution and are actively managing through a rapidly evolving supply-demand environment. Visibility is improving the supply chain and we expect continued growth in Q4. Demand for our DDR4 RCD remains strong and DDR5 continues to ship as our customers prepare for the ramp of the next-generation…

Desmond Lynch

Analyst

Thank you, Luc. I'd like to begin with a summary of our financial results for the third quarter on Slide 5. Once again, we delivered a strong quarter with our financial results above the high end of both our revenue and earnings expectations and generated a quarterly record cash from operations of $80 million. Our ability to consistently generate strong cash flows has enabled us to invest in our strategic initiatives and consistently return capital to shareholders. During the quarter, we initiated a $100 million accelerated share repurchase program which immediately retired 3.1 million shares. In addition, we paid a net amount of $54 million to repurchase $39 million aggregated principal amount of our convertible notes. Let me walk you through our non-GAAP income statement on Slide 6. We continue to execute and revenue for the third quarter was $112.2 million, above the high end of our expectations. Royalty revenue was $29.9 million, in line with our expectations. It was down from the prior quarter due to upfront revenue for several license arrangements being included in Q2. Licensing billings was $62.2 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 $58.6 million, consisting primarily of memory interface chips. Memory interface chip revenue was a record for the company and we are delighted to see such strong demand from our customers. Contract and other revenue was $23.7 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 in licensing billings. Total operating costs, including cost of goods sold for the quarter was…

Operator

Operator

[Operator Instructions] Our first question comes from the line of one Kevin Cassidy with Rosenblatt Securities.

Kevin Cassidy

Analyst

Congratulations on the terrific results. On the Samsung contract, this was a bit of a surprise. I thought it was going to be – it seems like it’s been pulled in by about a year. Is there any reason for that? Or was it a surprise for you? I guess, have you already been in negotiations?

Luc Seraphin

Analyst

Kevin, this is Luke. Thanks for the question. It was important for us to engage with Samsung in this renewal earlier rather than later so that we could secure some stability in our cash flows for the years to come. We could show more predictability in our results for the long term and visibility in our results. And it also lays the foundation for further strategic relationship with Samsung as we develop technologies and products for the data center for the years to come. So it was important for us to put this behind us and to lay the foundation for long-term relationship, long-term product development with them. So that's the reason we did it earlier.

Kevin Cassidy

Analyst

Okay, great. And are you working with SK Hynix also then?

Luc Seraphin

Analyst

So of course, we are in constant negotiation or discussions with our partners. The SK Hynix is scheduled for the second quarter of '24. As with Samsung, we have a strong relationship and partnership with SK. And we will try to have an early renewal but we don't make commitment on this at this point in time. Some patent renewals can take a lot of time. But the very fact that Samsung has renewed on the same terms, is a strong validation of our patent portfolio. So we're quite confident in reengaging a discussion with SK but there's no guarantee that it's going to be done earlier.

Kevin Cassidy

Analyst

Okay, great. And just one other on the CXL IP licensing -- are you seeing an acceleration of that is -- I think most are expecting that volume production of CXL would be 2024 but the ICs, the circuits for that must be in design now. Are you seeing an acceleration in request for IP for CXL?

Luc Seraphin

Analyst

Yes. So as indicated in our prepared remarks, our silicon IP business has grown about 20% year-over-year. And a large portion of that was due to the introduction of CXL and PCIe IP to our customers. So our silicon customers are building products using CXL. And we’ve seen that in the growth that we’ve shown in our silicon IP business for this year over last year. When it comes to our CXL silicon products, our own products, we’re building our products and these products will hit the market in 2024.

Operator

Operator

Our next line of questions comes from the line of one Mehdi Hosseini with SIG.

Mehdi Hosseini

Analyst

Yes, two follow-ups for the team. I'm just curious if you have looked into the competitive landscape, especially 1 competitor in China and whether increased restrictions would change the competitive landscape? And I have a follow-up.

Luc Seraphin

Analyst

Thank you, Mehdi, for your question. Certainly, 2023 will show some cross currents of both economic and geopolitical situations. Our business in China is mostly around silicon IP and this is a small portion of our business. So if there is any impact, the impact is going to be in the ground scheme of things, minimal. This being said, we are monitoring that situation between the economic slowdown in China, the possible recession outside of China and some restrictions on IP export to China, we may see some headwind for our silicon IP business in China. But again, the portion of the China business on to our silicon IP remains modest.

Mehdi Hosseini

Analyst

Sure. Okay. And one quick follow-up as it relates to the product of buffer chip. If I just take the midpoint of your guide for Q4, you’re on par to grow that part of the business by almost 58%. And we haven’t even really started volume shipment for adoption of DDR5. And hopefully, I’m not mixing the two. So are these all engineering work you’ve done? Or how should I think about what’s driving the demand here? And how could we think about the opportunities once the DDR5 crossover happens in early ‘24.

Luc Seraphin

Analyst

Thank you, Mehdi. That's a great question. I think, to some extent, 2022 has been an exceptional year for buffer chip. We had a combination of 2 phenomenons; one is, our customers started to build modules for DDR5 in anticipation for the DDR5 ramp. So that was part of the growth that we saw in 2022. And secondly, because the DDR4, DDR5 transition was shifting to the right because of some delays in the market, our customers also had to buy more DDR4 than they were expecting to. So what happened is we had more orders in DDR4 than we were expecting and we're still in a supply-constrained environment for our DDR4 shipments. In Q3, we could have shipped more if we had more supply. In Q4, we still see a gap between what we supply to the market and what the demand is going to be. But that demand for DDR4 is higher than expected because of the shift of the DDR4, DDR5 transition. So we may see some adjustments beyond Q4. I think people will have to digest their DDR4 backlog over time and we'll work on the supply for that. And DDR5 is going to start in full production towards the second half of -- the second part of the first half of the year. So we may see some adjustments on the mix in the first quarter that may show some fluctuations, both in the revenue mix and the margin mix. So we had an exceptional year in 2022. Again, people were building in anticipation of DDR5 but now DDR5 is shifting a bit to the right. But at the same time, they had to catch up on DDR4 because DDR5 was a bit delayed. And that explains why the market grew, we grew much faster than the market. In the long run, we're going to go through this adjustment period in the first half of next year but we will continue to outpace the market growth throughout the year.

Mehdi Hosseini

Analyst

Do you mind if I just ask a very quick follow-up? I think it’s very important to understand. Your DDR5 buffer chip carries a higher pricing. So even if DDR4 buffer chip units were to decline, the higher price DDR5 buffer chip could offset that. We shouldn’t expect this like a pause or a drop off here as we transition from 4% to 5%. Is that a fair characterization?

Luc Seraphin

Analyst

There's certainly at the beginning of the introduction of new technology in ASP, difference between the old generation and the new generation but it also depends on the volume ramp. And as volume ramps, that gap in pricing diminishes. So it's -- I think we're going to have in the first half of the year to work through this transition as people are going to consume their backlog on DDR4. We have 30 backlogs for DDR4 and are going to start to -- or build further their backlog in DDR5. We're also going to see some price fluctuations as they do that. And when we monitor that. It's something that we we're looking up for.

Desmond Lynch

Analyst

Maybe just to add on to what Luc said, DDR4 certainly does have more ASP, DDR5 does have the higher ASP and now can tell you to form the normal pricing curves going forward. I think we’ve done a great job of managing the product mix over the last 7 quarters where we’ve been able to deliver record product revenue growth and that’s what we hope to continue going forward. But as Luc mentioned, we are in a dynamic transition here between DDR4 and DDR5 but I think we’re well positioned going forward.

Operator

Operator

Our next question comes from the line of Sidney Ho with Deutsche Bank.

Sidney Ho

Analyst · Deutsche Bank.

I just want to follow up with the last question. With the adjustment period you kind of expect in Q1 or the first half of next year that you just mentioned, what is your current expectation of products revenue for next year? And maybe just a follow-up to that. Some of the memory companies are commenting that lower DDR5 prices in the current environment can lead to faster adoption of DDR5. Are you starting to see that? And conversely, are you seeing any price pressure for your DDR5 products as a result of lower memory prices? And then a follow-up question.

Desmond Lynch

Analyst · Deutsche Bank.

Sidney, thanks for the question. As you know, we only guide one quarter at a time. So looking ahead into fiscal year '23, it's a little bit ahead of us just now. I think what we have done is a fantastic job of executing on our sort of product growth in balancing the mix between DDR4 and DDR5 from there. As Luc mentioned in his prepared remarks, we have seen some lumpiness in demand for DDR5 and we expect that sort of to continue into sort of Q4 and Q1. So we'll continue to carefully monitor and manage this product mix dynamic as we go forward. From a pricing perspective, we continue to see DDR5 following a normal sort of pricing curves in line with previous generations from there. So we expect to continue to see the normal sort of pricing which is to go into sort of next year. But overall, we've done a really nice job of managing our ASPs as well as our sort of gross margin on the product side, we ended up at 63% for Q3. So again, that was relatively flat to slightly up versus Q2. So we've done a really nice job in managing both the ASP and also the margin profile.

Sidney Ho

Analyst · Deutsche Bank.

Okay, that's helpful. Just a follow-up question -- go ahead, sorry.

Desmond Lynch

Analyst · Deutsche Bank.

No, go ahead, Sidney. Sorry.

Sidney Ho

Analyst · Deutsche Bank.

Sure. So my second question is, we’ve started to see some slowdown in data center build-out, either because of supply constraints or just more cautious spending by customers. We’re certainly seeing some inventory adjustments from a component standpoint. Are you concerned that there’s too much inventory for your parts at these customers? And how do you see the demand over the next few quarters? Anything you would highlight in terms of backlog orders will be appreciated.

Luc Seraphin

Analyst · Deutsche Bank.

So at a high level and I'll let Des comment on the numbers. At a high level, we still see some demand for more bandwidth and more capacity from our vantage point. And we're also facing a major technology and platform transition. So we still do see growth in that market from our standpoint. What we're seeing, however, is that, as I said earlier, we have in Q3 and Q4 a backlog that is higher than what we can ship. What we see is the inventory levels are still lean on DDR4 generation of products. And what we have to deal with in the first half of next year is to deal with the platform transition, supply management and the price elasticity, as you mentioned, between DDR4 and DDR5. So we’re looking at these 3 variables. But overall, based on what we see with our customers and partners, when all of these aspects stabilize, we will continue to grow our share in that market. The first half of the year is going to be that half of the year where we’ll have to deal with, as I said, price elasticity, supply management and the platform transition. But we don’t see a buildup of inventory at this point in time. We still see customers in high demand of DDR4 as they’re waiting for the ramp-up of DDR5. And as we said in earlier calls, we have a strong position in our DDR5 footprint when this starts in the market.

Operator

Operator

Our next line of question comes from the line of Ashley McCurry with Wells Fargo.

Ashley McCurry

Analyst

This is Ash McCurry on for Gary Mobley at Wells Fargo. On that supply situation, I just want to ask our customer order lead times for buffer chips is that shrinking as a result of additional supply coming online? And any additional comments in terms of the supply situation as well as any inventory build on the buffer chip side of things.

Desmond Lynch

Analyst

Ashley, it's Des. Thanks for your question there. From a supply perspective, we are seeing some additional supply coming online which has enabled us to drive to the higher revenue growth that we've been able to trend both in Q3 and Q4. As Luc mentioned though, our demand on DDR4 products was higher than what we could actually supply. And we'll work with the customers over the next sort of 3, 6 months to minimize that sort of gap going forward from there. From an inventory sort of buildup perspective, I think, Luc covered a bit in the last sort of question. DDR4 continues to sort of remain lean from a customer inventory perspective. And DDR5, the customers have been building some inventory there an advance of the sort of product transition which will take place in the sort of first half and into sort of second half of next year. But overall, I think the supply situation is improving for us. We’ve been able to deliver higher product revenue. And overall, the inventory levels remain sort of normal to lead from there.

Operator

Operator

[Operator Instructions] Our next line of questioning comes from the line of Brian Chan [ph] with Jefferies.

Unidentified Analyst

Analyst

Asking a question for -- on behalf of Mark Lipacis. So we got some positive commentary from the hyperscalers in terms of CapEx trends. We're curious if that's manifesting in any way for you -- for your product revenues in terms of increased order visibility for next year or any incremental details on demand dynamics would be helpful.

Luc Seraphin

Analyst

Thank you, Brian. Good question. This CapEx from the cloud service providers translates into the need for more capacity and bandwidth on the memory subsystems. And the direct impact on us is going to translate into the demand for next-generation of DDR5 on the memory bus because it actually adds capacity and bandwidth directly on the memory bus compared to the DDR4 generation of products. And as we mentioned earlier, we're also developing CXL products which adds a tier of memory to those systems and allows these cloud service providers to either add more memory or a given computing capability or to share memory resources between processors. And this is the whole usage case of the CXL products that we are developing. So we do see this CapEx investment from the cloud service providers as a good thing for us and this is what's driving our road map on both the buffer chip and the CXL products.

Operator

Operator

Our next final question is a follow-up from the line of Kevin Cassidy with Rosenblatt Securities.

Kevin Cassidy

Analyst

You’ve mentioned in your prepared remarks about security IP as part of silicon IP. Can you give us a description of how fast is that growing? And what’s the opportunity pipeline in number of customers, just a rough estimate?

Desmond Lynch

Analyst

So as we said, the -- our silicon IP business is now on a stable run rate of $30 million to $35 million a quarter, approximately half of it is interface IP and half of it is security. We have, in these businesses, multiple customers and multiple applications, in particular, for security IP. The main markets that we're addressing today are AI and data centers but we do see growth in government applications and automotive as well. This is an area we're watching. We saw some very nice growth in 2022. We mentioned about 20% growth over the prior year. We have to watch the potential headwinds for that business given the economic environment. A lot of these customers are start-ups and the funding for new projects may slowdown in the current economic environment. We also have to watch what’s happening in China and the possible restrictions we have to address that market. So we will continue to grow. We have multiple customers, multiple markets and will grow faster than market but we think the market is going to not grow as fast as last year. And I think we’re not going to grow as fast as we do last year just because of the economic environment.

Operator

Operator

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

Luc Seraphin

Analyst

Thank you, everyone, who has joined us today for your continued interest and time. We look forward to speaking with you again soon. Have a very good day. Thank you.

Operator

Operator

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