Rambus Inc. (NASDAQ:RMBS) Q4 2022 Earnings Call Transcript

Rambus Inc. (NASDAQ:RMBS) Q4 2022 Earnings Call Transcript February 6, 2023

Operator: Welcome to the Rambus Fourth Quarter and Fiscal Year ’22 Earnings Conference Call. 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 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?

Luc Seraphin: 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 of memory. While we now have improved visibility of supply, we are seeing elevated inventory levels at some end customers. This is leading to softness in the first half that is reflected in our guidance, but we expect a stronger second half of the year, with next-generation memory ramping in earnest. The industry is still early in the transition to DDR5, with a server memory crossover from DDR4 projected for the first half of 2024, which is consistent with our view from last quarter.

And with that, our memory interface chip product mix will continue to be dynamic as the industry prepares for production shipments of DDR5. We are actively working with our customers to manage inventory adjustments and the transition to DDR5, and we believe we are well positioned for continued growth in 2023. As we look to the longer-term evolution of the data center, CXL brings many exciting opportunities. Multiple applications for CXL attached memory are emerging, enabling new memory tiers in the data center. CXL-enabled architectures promised to deliver higher performance and improved total cost of ownership in server generations to come. We continue to work in close collaboration with the ecosystem including cloud, OEM and DRAM makers and are well aligned with the market needs and timing.

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Finally, in silicon IP. The team executed very well, achieving over 30% revenue growth year-over-year. We continue to lead in our areas of focus for both interface and security IP. And while we expect challenging macro conditions, we remain confident in the long-term growth opportunities. We demonstrated strength with Tier 1 wins throughout the year and are well positioned to address the long-term need for high performance and highly secure IP in advanced SoCs. In closing, this was a tremendous year for the company. The team executed incredibly well and consistently delivered results. While we are now navigating cross currents in the first half of 2023, stemming from the overall economic environment and from a generational industry transition from DDR4 to DDR5, we continue to see solid growth opportunities in the data center.

We remain committed to making focused investments in the resources essential to delivering differentiated high-quality products and innovations that address the critical performance bottlenecks between processing and memory. I’m extremely proud of the team, and I’m confident that our strategy puts us in an excellent position for long-term profitable growth. And as always, I’d like to thank our customers, partners and employees for their ongoing support. 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 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 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 towards the high end of our expectations at $85.4 million driven by higher cost of goods sold related to record memory interface chip revenue. Operating expense of $55.8 million were in line with our expectations as we continue to be vigilant in our expense management. And we ended the quarter with a total headcount of 765 employees. Under ASC 606, we recorded $1 million of interest income related to the financing component of fixed fee licensing arrangements, for which we have recognized revenue but not yet received payment.

We incurred approximately $800,000 in adverse foreign currency exchanges during the period. After adjusting for noncash interest expense on the convertible notes, this resulted in non-GAAP interest and other income for the fourth quarter of $400,000. Excluding the financing interest income related to ASC 606, this would have been $700,000 of net interest expense. Using an assumed flat tax rate of 24% for non-GAAP pretax income, non-GAAP net income for the quarter was $28.3 million. Now let me turn to the balance sheet details on Slide 7. We ended the quarter with cash, cash equivalents and marketable securities totaling $313.2 million, up from the previous quarter, primarily driven by strong cash from operations of $51.3 million. At the end of Q4, we had contract assets worth $150.9 million, which reflects the net present value of unbilled accounts receivable related to licensing arrangements 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 restructured our patent agreements in a manner that allows us to recognize revenue each quarter. Fourth quarter CapEx was $8.7 million while depreciation expense was $7.1 million. We delivered $42.6 million of free cash flow in the quarter. As a reminder, the forward-looking guidance reflects our current best estimates at this time, and 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 have also been providing 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. Now let me turn to our guidance for the first quarter on Slide 8. Under ASC 606, we expect revenue in the first quarter between $107 million and $113 million. We expect royalty revenue between $25 million and $31 million and licensing billings between $61 million and $67 million. We expect Q1 non-GAAP total operating costs, which includes COGS to be between $87 million and $83 million. We expect Q1 CapEx to be approximately $9 million. Under ASC 606, non-GAAP operating results for the first quarter is expected to be between a profit of $20 million and $30 million. For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect approximately $500,000 of interest expense.

We expect the pro forma tax rate to remain 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 $5 million and $7 million in Q1. We expect Q1 share count to be 110 million basic and diluted shares outstanding. Overall, we anticipate a non-GAAP earnings per share range between $0.13 and $0.20 for the quarter. Let me finish with a summary on Slide 9. I am pleased with our excellent 2022 results and the company’s execution in a challenging microeconomic environment. Our top line growth was achieved by increasing our profitability and generating record cash from operations.

In 2023, we are focused on execution while maintaining financial discipline. Our innovations drive a diversified and expanding portfolio, fueling product revenue growth. We continue to deliver value to our shareholders with a robust balance sheet and strong cash generation. We are well positioned to continue executing on our long-term strategic growth plans. 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?

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Q&A Session

Operator: The first question comes from the line of Gary Mobley of Wells Fargo.

Gary Mobley: 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?

Luc Seraphin: 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.

Gary Mobley: 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?

Luc Seraphin: 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.

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