Welcome to the Rambus Fourth Quarter and Fiscal Year '22 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Desmond Lynch, Chief Financial Officer. You may begin your conference.

Thank you, operator, and welcome to the Rambus fourth 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 have 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 the modified retrospective method which did not restate prior periods but rather run 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 insights 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?

Thank you, Dave, and good afternoon, everyone. 2022 was an excellent year for the company, capped off by a solid performance in the fourth quarter, with Q4 revenue and earnings in line with guidance. Through outstanding execution, we were able to grow the business faster than the market despite a challenging macroeconomic environment. We delivered another record year of product revenue driven by memory interface chips, hit our annual revenue target for silicon IP and extended our strategic relationship with Samsung, which strengthens our long-term licensing foundation. In addition, we generated a record $230 million in cash from operations over the course of the year. As we have grown the business, we have strengthened our balance sheet and consistently returned value to stockholders through share repurchases, strategic investments and debt retirement. We continue our focused investments in the technology and talents critical to our growth initiatives. As we take a look at the details of our performance, memory interface chips led the way, delivering Q4 product revenue of $67 million, up 15% quarter-over-quarter. This brought the full year to $227 million, setting a new annual record for product revenue and significantly outpacing the market with 58% growth year-over-year. These results were driven by strong execution throughout 2022, with the team expanding our DDR4 qualification footprint and making significant market share gains. We are well positioned for the ramp of DDR5 with our industry-leading offering and continue our product leadership with last week's announcement of our Gen 3 DDR5 RCD. This latest generation chip extends the performance of our RCD family to 6,400 mega transfers per second and supports the road map of future server generations in the years to come. Turning to 2023. We remain vigilant as we navigate through the dynamics of the industry transition to a new generation…

Thank you, Luc. I'd like to begin with a summary of our financial results for the fourth quarter and for the full year 2022 on Slide 5. Once again, we delivered a strong quarter with both revenue and earnings in line with our expectations. We had excellent financial results in 2022, and we ended the year very well positioned as we continue to make progress on our long-term growth strategy. The excellent financial performance was coupled with a continual improvement in our balance sheet, which supports our growth initiatives. For the year, our cash from operations was a record at $230 million, up from $209 million in 2021. Our ability to consistently generate strong cash flows has enabled us to invest in our strategic initiatives and consistently return capital to shareholders. In 2022, we executed a $100 million accelerated share repurchase program, which retired 3.2 million shares and we retired 94% of our convertible debt using our existing cash on hand. As we look to the future, we expect to continue to deliver strong cash from operations and drive shareholder value. Let me walk you through our non-GAAP income statement on Slide 6. We continue to execute and revenue for the fourth quarter was $122.4 million, in line with our expectations. Royalty revenue was $31.4 million, while licensing billings was $64.3 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 $67.2 million, consisting primarily of memory interface chips and for the full year, we delivered $227.1 million, which was a record for the company. Contract and other revenue was $23.8 million, consisting primarily of silicon IP. As a reminder, only a portion of our silicon IP revenue…

[Operator Instructions] The first question comes from the line of Gary Mobley of Wells Fargo.

I appreciate you taking the question. I wanted to first ask about the different ebbs and flows in your product revenue as we transition through 2023. Luc, you communicated that you're uncertain, to paraphrase, in terms of how DDR4 and the transition to DDR5 might impact your business as well as excess inventories. Maybe if you can share with us sort of your view and how this transition may shape up because you're guiding for $60 million in product revenue in the first quarter, which doesn't sound too bad. So is the risk really more into the second quarter that you might see some air pocket of weakness in your DDR5 product revenue? And then related to DDR5, have you started to see customers pick up their order trends, perhaps after they burn through some inventory that was built last year?

Thank you, Gary, for your question. First of all, we're very pleased with the year we had on the product revenue in 2022. As said in the remarks, $227 million, which was 58% growth over last year. And the last quarter was a good quarter as well, $67 million. Now let's look at what happened last year. Our customers started to build some inventory in advance for the DDR5 launch in the market. And because of some of the delays of the DDR5 platform, they had to pivot very quickly back to some DDR4 procurement in a supply-constrained environment. And that's what is reflected in our Q4 revenue, if you wish, where the weight of DDR4 is higher than what we expected out of the $67 million. Now what's happening is our customers have to digest some of these orders that they have placed on us. We are working with them in scheduling their backlog for these DDR4 orders. They are cautious as they also have to manage that transition to DDR5. And that explains the guidance we're giving for the first quarter of this year. But we're confident to continue to grow throughout the year with the launch of DDR5. We very pleased that both AMD and Intel announced the launch of their platforms to DDR5. DDR5 is going to start in earnest, mostly through the second part of the year. So as indicated last quarter, this coming quarter and the second quarter are going to be quarters we're going to adjust. We're going to adjust the backlog of our customers and the transition from DDR4 to DDR5. I would like to say that we have backlog in place for DDR4. We don't see order cancellations. We're just negotiating the schedule of shipments of these DDR4 parts, and we are comfortable with the level of inventories on DDR5. So we just have to go through the transition. We will grow this year. We will continue to gain share this year, but that will happen mostly in the second half of the year.

Got it. Appreciate all the color, Luc. As my follow-up, I wanted to ask about the run rate at the silicon IP business. If I'm not mistaken, last quarter, it was $125 million annualized run rate. Is it still at that level? Or have we seen some additional growth on top of that?

So we had very nice growth last year on our silicon IP business. It grew about 30% over the previous year. I think we will continue to grow that business this year, but at a lower rate given the macroeconomic environment. And we see a growth of that business in 2023 in the low to mid-single-digit number as opposed to the growth that we saw last year with the backdrop of the current economic environment.

The next question comes from the line of Kevin Cassidy of Rosenblatt.

Congratulations on the good results and congratulations also for introducing the third generation DDR5. And as you're speaking with your customers, do you have an idea of what the bell curve or what the distribution will be for each one of those speed ranges, Gen 1 through Gen 3?

Thank you, Kevin. The qualification cycles for the RCD chips are quite long and complex, and they're based on the performance of the chips, they are based on interoperability between the memory and the processors and signal integrity. And to give you a little bit of background, the DDR5 ramp that will happen this year -- that is happening this year on the Sapphire Rapids and general platform is based on our Gen 1 RCD, which we announced in September of '17. The second generation of RCD, we announced it in October '21, some time ago, and that will address the follow-on products, which will be introduced to the market in 2024. And the third generation, which we just announced right now on 5,400 mega transfers per second is going to address, again, the following generation that will be introduced in the market of 2025. It's always very important for us to be ahead of the market to engage with the ecosystem to go through these very complex qualification processes with our customers so that we continue to grow our share as we move. So this year, Generation 1 of our RCD is going to be the one in production, Generation 2 will start to be in production next year and Generation 3, which we just announced, will start to be in production in 2025.

I see. Very clear. And maybe if you could give us the status of your -- the other chips that are going on to a DDR5, the temperature controller, the SPD hub, just an update on the status of those devices.

Yes. So we announced the SPD hub and the temperature sensor in July of last year. We're well ahead with the qualification with our customers, as we speak, and we expect those products to start generating revenue towards the end of this year. That's where we are, at the same status as last quarter.

The next question comes from the line of Mehdi Hosseini of SIG.

One for Luc and one follow-up for Des. I just want to go back to the silicon IP and I wanted to understand how the mix would change, especially as we migrate from the first half to the second half. Would there be opportunity with the CXL 2.0, where you can actually use the existing DIMM slot to -- as a DDR4? Would that create kind of opportunity for you, especially with the CXL 2.0 and memory controller? And I have a follow-up.

Thank you, Mehdi. So when it comes to CXL, we have introduced last year a series of IPs that address the CXL market. We announced our CXL 2.0 IP in January of last year. We announced CXL 3.0 towards the end of the year as well as PCIe Gen 6. So we continue to have design wins in the CXL space with SoC vendors that build SoCs for the CXL market. The CXL market will start in earnest towards the end of next year. That's where, for us, we're going to start to see product revenue. So from an IP standpoint, as we said, the view we have on our IP business this year is that it's going to grow in aggregate low to mid-single digits because a lot of the design slots has been accessed at this point in time. Given the economic environment, we do see a slight slowdown of design starts, but CXL will start. It's just that the IP business related to this, or the IP business in general, is going to grow at a lower rate this year than it was last year. This being said, we will start to see CXL product revenue towards the end of next year.

Okay. Thanks for the clarification with that.

Thank you, Mehdi.

And the follow-up question for Des is the buffer chip gross margin had a dip. Should I -- and I remember for calendar year 2022, you had guided to 60% to 65% gross margin, but you exited the year at 58%. How should we think about progression of buffer chip -- of our product buffer chip gross margin throughout this year?

Thanks for your question. As Luc mentioned, our product revenue execution and growth has been exceptional as we continue to grow the business. I think if you look on the full year basis for 2022, our product gross margins were around 61%, which was in line with our long-term target of 60% to 65%. When we look as a company, we manage our gross margins to long term. And depending where we are in the product cycle and what products are shipping, you can see our gross margins moving around quarter-to-quarter. So that is reflected in Q4. Our product gross margins were below this range, which was entirely driven by product mix in the quarter. And we do expect to see a similar product mix in Q1. With improvements in product mix and continued manufacturing cost reductions as we go throughout the year, we do expect product gross margins for 2023 to be within the long-term range of 60% to 65%, Mehdi.

And the next question comes from Sidney Ho of Deutsche Bank.

Just first one is just to follow up with the gross margin question. Just want to make sure I understand the product mix that you're specifically talking about, is it the mix between DDR4 versus DDR5? Is it -- just any color around that will be helpful in terms of when -- also try to think about when these headwinds are going to start going the other way.

Thanks for your question. You're exactly correct on that one. We did see in Q4 a higher mix of our DDR4 revenue from there. And that's what we expect to see going into sort of Q1. I think what we've talked about is that on the product side, we do expect to see softness in the first half of the year, which Luc mentioned in his prepared remarks with the recovery in the second half of the year, mainly driven by the DDR5 sort of revenue from there. And with that, we will see our sort of gross margins improve and come in line with the targeted range of the 60% to 65% that I've mentioned.

Okay. That's clear. Maybe a follow-up question is, I think you guys -- and in reference to an earlier question, you talked about you expect your product revenue in aggregate for the full year to grow year-over-year. But did I also hear correctly that you expect Q1 to be the trough quarter as well and then start growing from there? And how should I think about the mix as you exit the year? Even a range will be helpful between DDR4, DDR5 and maybe some companion chips.

Sidney, thanks for your question again. What we've said is our visibility beyond sort of Q1, it's limited on the sort product transition. Your customers are digesting the inventory in advance of the product transition from there. But I think, overall, we do expect to grow our sort of product revenue with growth in the sort of back half of the year is the way that I would describe it from there. I think overall, our execution and growth in the product side has been exceptional from there. I think we're not going to really break out the DDR4, DDR5 mix. Again, our visibility is sort of limited as the customers work through some of these transitions from here. But I think overall, for the year, we do expect to grow our product revenue.

Okay. Maybe if I could sneak in one quick one. If I -- looking at your operating expenses, excluding the cost of goods sold, it's up a bit from the Q4 level in your guidance, how should we think about the rest of the year given the current macro environment?

That's a great question, Sidney. Thanks. We'll continue to be disciplined and vigilant in our operating expense management given the macro challenges. For Q1, we did guide our total operating costs, which includes cost of goods sold to be relatively flat to Q4 at $85 million. If you really look specifically our operating expenses in 2022, our quarterly operating expenses were relatively stable, around the $55 million to $56 million per quarter, with R&D at $35 million to $36 million per quarter and SG&A is roughly $19 million to $20 million. In Q1, we will see some seasonal payroll increases, which will increase our sort of cost basis from there. But our expectation is that we will keep our operating expenses relatively flat from Q1 to Q2. And really looking at the sort of back half of the year, we'll continue to be prudent in our expense management and really strike the right balance to ensure that we continue to fund the right investments to ensure that we maintain our leadership positions in key programs. And I think you've seen us, the discipline throughout the year, so it was a nice operating expense leverage from there.

The next question is a follow-up from Gary Mobley of Wells Fargo.

You have shipped DDR5, again, chipsets. And so I'm curious to know the order of magnitude for the price increase for the RCD specifically in a DDR5 versus a DDR4, maybe in the initial days of DDR5 and maybe as well taking a view with more commercial volumes. And then with respect to the companion chips, the data buffer -- I'm sorry, not the data buffer, but the SPD hub and the temperature sensors. How would you calibrate your share in those particular end markets vis-a-vis your RCD share knowing that you have a broader set of customers in those companion chips?

Thanks, Gary, for your question. Regarding DDR5 pricing, typically, when there's a change of generation, we do see a reset of pricing especially at the very beginning when the volumes are small. But when we go in production in earnest towards the second half of the year, we will see this price erode over time, starting from a much higher level. This is typical in that kind of generation would change. And that's why we believe, as indicated by Des earlier that our margin should improve throughout the year. And we still see us meeting our margin targets of 60% to 65% for the whole year. So that's how we do see the transition from DDR4 to DDR5. With respect to the companion chips, these companionships are in qualification now with customers. We expect them to be in production with customers towards the end of this year. The qualification cycles for these companion chips are much shorter than it is for RCDs, they are much less complex. So it's easier to gain market share earlier. It's a bit earlier to predict what our market share is, but we have good relationships, good contracts with our customers. So we expect to get some good revenue from these companion chips when we introduce them into the market. But the qualification cycles are much, much shorter than what they are for RCD chips, for example.

There are currently no additional questions registered at this time. [Operator Instructions]

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

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