Rambus Inc. (NASDAQ:RMBS) Q3 2023 Earnings Call Transcript

Rambus Inc. (NASDAQ:RMBS) Q3 2023 Earnings Call Transcript October 30, 2023

Rambus Inc. misses on earnings expectations. Reported EPS is $0.24 EPS, expectations were $0.41.

Operator: Welcome to the Rambus Third Quarter Fiscal Year 2023 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.

Desmond Lynch: Thank you, operator, and welcome to the Rambus third quarter 2023 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 supply chain shortages and other market challenges 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 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: Thank you, Des, and good afternoon, everyone. We delivered another strong quarter with revenue and earnings above the midpoint of guidance as we continue to execute on our strategy and successfully navigate the complexities of the industry transition to DDR5 in a challenging macro environment. The company generated $52 million in cash from operations, enabling consistent return of value to our stockholders, most recently with the completion of a $100 million accelerated share repurchase program. We also closed the sale of our IP business strengthening our focus on the development of differentiated chips and digital IP that expand our opportunities in the data center market. Generative AI and other data-intensive workloads continue to drive increasing requirements for memory performance and capacity across the computing landscape.

This is a very positive long-term trend for Rambus. Currently, the training of large language models is boosting the demand for AI servers with the most advanced multi-core CPUs provisioned with DDR5 rams to maximize main memory bandwidth alongside server GPUs with dedicated HBM memory. In addition, high-performance general purpose servers enabled with DDR5 are seeing increasing demand to meet the growing computing infrastructure requirements of the AI data pipeline. With increases the opportunity for our expanding family of memory interface chips. As the industry builds out the infrastructure for the broadening adoption of AI, we look forward to continued innovation and growth in server CPUs as well as workload optimized accelerators. This trend also creates opportunities for our silicon IP business.

The ongoing specialization of computing systems makes our high-performance CXL, PCIe, HBM and GVR IP controller increasingly critical. In addition, the move to application-specific silicon driven by AI and other advanced workloads, creates increased vulnerabilities to attack as data is distributed across systems. This trend increases the need for advanced security IP an area where we lead the industry. With that, AI is a strong catalyst for demand and a very positive long-term growth driver for the company. As I mentioned last quarter, we are investing in initiatives to broaden our portfolio of offerings. Just last week, we announced our HBM3 memory controller IP is now supporting operations at 9.6 giga transfers per second, which is 50% higher than current top-end data rates.

We are also working in close collaboration with the ecosystem and continue to make good progress on expanding our chip offering to support the ongoing evolution of high-performance server and client systems for years to come. Turning now to our quarterly results. We continue to lead and invest in our areas of focus. In Q3, memory interface chips delivered strong results with quarterly product revenue above the midpoint of guidance at $52 million. By executing well in a challenging environment with year-to-date results up 7% over the same period last year. As we have highlighted in past quarters, the industry transition to DDR5 continues to be dynamic. In Q3, we were very pleased to continue volume shipments of DDR5 solutions, which again are the predominant unit shipments this quarter.

We continue to work with customers to manage through the ongoing DDR4 inventory correction. As we have said previously, we expect DDR4 headwinds to continue through the remainder of the year, in line with the broader ecosystem, but look forward to inventories normalizing in the early part of 2024. We remain positive on the outlook for DDR5 as we focus on execution and actively work with customers and partners through the transition. With the accelerated pace of DDR5 platform rollout we are poised to offer our customers and partners a range of solutions with multiple generations of our memory interface chips, shipping in volume, qualification of sampling. In addition, our close collaboration with the ecosystem continues on novel memory, advanced clocking and power management solutions to support the road map of future computing platforms, including developments for CXL attached memory, which we look forward to demonstrating publicly later this year.

In closing, this was a strong quarter for the company with solid results. While we navigate dynamic market conditions in the near term, our focused execution and strategic investments position us well for long-term profitable growth. As always, I’d like to thank our customers, partners and employees for their ongoing support. And with that, I’ll turn the call over to Des to discuss the quarterly financial results. Des?

Desmond Lynch: 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, and we are very pleased with the company’s continued execution on our strategic initiatives to drive long-term profitable growth. We delivered strong financial results with both revenue and earnings above our expectations. In Q3, we executed a $100 million accelerated share repurchase program, which retired approximately 1.85 million shares. Our continued strong cash generation allows us to consistently return cash to shareholders. As Luc discussed in Q3, we completed the divestiture of our PHY IP business, which will enable us to redeploy our investments into higher growth areas of products and digital IP.

Let me walk you through our non-GAAP income statement on Slide 6. Revenue for the third quarter was $105.3 million, above our expectations, driven by higher product revenue in the quarter. Third quarter revenue included approximately $5 million in revenue by IP business that we divested in early September. Royalty revenue was $28.9 million, while licensing billings was $57.9 million. The difference between licensing billings and royalty revenue mainly relates to timing as we do not always recognize revenue in the same quarter as we bill our customers. Product revenue was $52.2 million, consisting primarily of memory interface chips. Contract and other revenue was $24.2 million, consisting predominantly 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 were $72.9 million. Operating expenses of $52.4 million were in line with our expectations and down $3.5 million versus Q2 as we continue to be disciplined in our expense management. And we ended the quarter with a total headcount of 624, down from Q2, which is a result of the FYP divestiture. GAAP interest and other income for the third quarter was $2.3 million. This included $400,000 of ASC 606 interest income related to the financing component of fixed fee licensing arrangements, for which, we have recognized revenue but not yet received payment. Excluding the financing interest income related to ASC 606, this would have been $1.9 million of net interest income. Using an assumed flat tax rate of 24% for non-GAAP pretax income, non-GAAP net income for the quarter was $26.4 million.

Now let me turn to the balance sheet details on Slide 7. We ended the quarter with cash and cash equivalents in marketable securities totaling $375.5 million. This is up from Q2 through a combination of continued strong cash generation from operations of $51.6 million the net proceeds from the IP divestiture of $106.3 million, partly offset by the $100 million accelerated share repurchase program, which we completed in the quarter. At the end of Q3, we had contract assets worth $67.7 million, which reflects the net present value of unveiled accounts receivable related to licensing agreements 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 each renewal opportunity, we work to restructure our patent agreements in a manner that allows us to recognize revenue each quarter during the life of each agreement. Third quarter CapEx was $11.4 million, while depreciation expense was $7 million. We delivered $40.2 million of free cash flow in the quarter. Now let me turn to our guidance for the fourth quarter on Slide 8. As a reminder, the forward-looking guidance reflects our current best estimates at this time. We continue to actively monitor the macro environment and our actual results could differ materially from what I’m about to review. In addition to the financial outlook under ASC 606, we also provide 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. As a reminder, in Q3, we divested our PHY IP business, which on a full quarter basis, the business has been breakeven at approximately $6 million in revenue, offset with $6 million in cost. Under ASC 606, we expect revenue for the fourth quarter to be between $117 million and $123 million. We expect royalty revenue to be between $42 million and $48 million and licensing billings between $56 million and $62 million. The quarterly increase in royalty revenue reflects the Samsung patent licensing extension that was signed last year, which will be recognized as a variable contract under ASC 606 on a go-forward basis.

We are pleased with our continued execution and progression on our memory interface chip business, and we are well positioned in the market to deliver long-term profitable growth. As Luc mentioned earlier, the transition to DDR5 continues to be dynamic. While we are pleased with our execution on DDR5 shipments, we continue to be impacted by the DDR4 inventory digestion, which will continue through the remainder of the year. We expect Q4 non-GAAP total operating costs, which includes COGS, to be between $73 million and $69 million. We expect Q4 CapEx to be approximately $8 million. Under ASC 606, non-GAAP operating results for the fourth quarter is expected to be between a profit of $44 million and $54 million. For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect $2 million of interest income.

We expect the pro forma tax rate to remain at approximately 24%. The 24% is higher than the statutory tax rate of 21%, primarily due to higher tax rates in our foreign jurisdictions. As a reminder, we pay approximately $20 million of cash taxes each year driven primarily by licensing agreements with our partners in Korea. We expect non-GAAP taxes to be between an expense of $11 million and $13 million in Q4. We expect Q4 share count to be 110 million diluted shares outstanding. Overall, we anticipate a non-GAAP earnings per share range between $0.32 and $0.39 for the quarter. Let me finish with a summary on Slide 9. I am pleased with our strong results and the team’s ongoing execution in this challenging and unpredictable macroeconomic environment as we continue to make progress against our strategic initiatives.

Our portfolio is well positioned to address growing opportunities in the data center fueled by AI. We continue to grow the business profitably with strong cash generation and a robust balance sheet, which has enabled consistent capital return to shareholders. Before I open the call up to Q&A, I would like to thank our employees for their continued teamwork and execution. With that, I’ll turn the call back to our operator to begin Q&A. Could we have our first question?

See also 13 Most Undervalued Pharma Stocks To Buy According To Analysts and 11 Undervalued Mid Cap Stocks To Buy According to Analysts.

Q&A Session

Operator: Our first question comes from Gary Mobley with Wells Fargo. [Operator Instructions]

Gary Mobley: I want to start out by gaining an appreciation of the undercurrents in the product revenue between DDR4 and DDR5. Can you verify if your DDR5 DIMM chipset sales grew sequentially in the third quarter? And how low the R4 related revenue may have trended for the quarter? And contrast that against what you think would be a normalized quarterly shipment number for DDR4 that may eventually layer on top of the growth in DDR5?

Desmond Lynch: Gary, I’ll take the answer. I think Des — thanks for the question. We’ve been very pleased with our execution in 2023. And as Luc mentioned in his prepared remarks, product revenue is up 7% on a year-to-date basis through in a market which was down double digits. So we’ve successfully navigated a dynamic environment by posting solid results, which will result in year-over-year share gains versus our competitors. Looking at our product mix in Q3, the shipments were predominantly DDR5. And for the second quarter in a row, we shipped out minimal DDR4 products in the quarter. I really comparing Q3 versus Q2, DDR4 shipments were down which was offset by modest growth in the DDR5 shipments from there. Going into Q4, we do expect to see a similar product mix with continued growth in DDR5 in minimal DDR4 shipments in the quarter as customers continue to take a conservative posture towards inventory management at year-end.

So overall, we’ve been very pleased with our execution in this sort of challenging environment, and we’re really pleased to see the continuation of growth in DDR5 shipments, which is positive for us.

Gary Mobley: Okay. A follow-up to the product sales mix. I noticed that the product gross margin was well off of the strong performance you had in the second quarter despite the higher mix of DDR5. Maybe if you could just speak to why the negative variance relative to that long-term view, what, 60%, 65% or relative to the prior quarter? And maybe if you could just give us a sense of the different moving pieces there between DDR4 and DDR5?

Desmond Lynch: Yes, Gary, great question. We are very pleased at how we continue to manage our product gross margins as a company. And if you look at our year-to-date product gross margins again through Q3, our gross margins in the products are around 63%, which is in line with the midpoint of the communicated long-term product gross margins of 60% to 65%. If you look at specifically in Q3, our product gross margins were 63%, which were down from the high of 66% in Q2, mainly driven by ASP erosion as the DDR5 products are now shipping in volume production. The ASP erosion was anticipated and in line with our expectations. And as a company, we’ll continue to be disciplined in our ASP management, and will continue to drive product cost savings to offset any ASP erosion from there.

Again, with the similar product mix going into Q4, as I mentioned earlier, we would expect product gross margins to be relatively flat at the 63% in Q4. And we’re very pleased at how we’ve been able to execute on the gross margin performance, which will be roughly in line with the midpoint of our long-term gross margin range of 60% to 65%.

Operator: Our next question is from Mehdi Hosseini with SIG.

Mehdi Hosseini: Yes. Can you please provide us an update where we are with companionship. I believe last time we’re expecting qualification with a high-volume manufacturing by mid-24, and is that correct? Can you give us an update? And I have a follow-up.

Luc Seraphin: Thanks, Mehdi. Yes, we’re pleased with the investments we’re making in our companionship rollout. We are actually currently shipping in small volumes, our SPD hub and temperature sensor to the market. And as you say, we believe to have more contribution from these products towards the second half of 2024. We have also sampled our customers with our initial power management chips and the initial feedback from our customers is really, really good. And you should expect some announcement next quarter around these products. And again, I think they will contribute to our revenue starting in the second half of 2024 and into 2025. And finally, although these are not companionships to the data center, we’re also working with our customers on a set of client products in the clock space or the power management space.