RMBS - NASDAQ

Welcome to the Rambus Second Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [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 second quarter 2024 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 PM 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 and other market factors 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 filed 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. In addition, 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?

Thank you, Des and good afternoon everyone. At Rambus we develop industry leading products that move data faster and safer to address the advancing needs for the data center and AI. Through our extensive technology expertise in designing state-of-the-art memory subsystems and ongoing strategic investments in new products, we are expanding our market opportunity to drive long-term profitable growth. In Q2, we continued to execute well with product growth fueled by ongoing leadership in DDR5 five RCDs, continued progress in the qualification of our high end DDR5 server PMICs and the introductions of our Client Clock driver chip and suite of PCIe 7 IP solutions. Strong growth in our quarterly product revenue drove overall results in line with expectations and outstanding cash generation from operations of $70 million further strengthened our balance sheet. We remain confident in the long-term outlook for data center, benefiting from both an uplift in traditional servers as well as the ongoing growth in AI. Memory Interface Chips grew 13% sequentially and delivered product revenue of $57 million at a high end of expectations, driven by strength in DDR5. And in Q3, we anticipate double digit sequential and year-over-year product revenue growth driven by our core RCD products and early contributions from new products. While we continue to see modest shipments of DDR4, the industry has transitioned to DDR5 as the predominant memory solution, supporting the memory performance demands of AI and other advanced workloads. We are well positioned for the ongoing DDR5 product lifecycle. We have multiple generations of DDR5 RCDs progressing through different stages of qualification and production to support the accelerated pace of new server platform rollouts. Our leading product position in DDR5 RCDs has delivered great value to our customers and laid the foundation for our complete DDR5 DIMM chipset. As I mentioned in my earlier remarks, we continue to leverage our strong balance sheet to support our strategic investments in new products to drive long-term growth. Last quarter, we introduced our family of DDR5 server PMICs, including the industry's first extreme current server PMIC. Power management IC is a critical part of DDR5 memory modules and are required to deliver reliable power at lower device voltages with tighter tolerance ranges. We are pleased with the demonstrated performance and the positive customer reception of the Rambus PMICs at the major DRAM vendors. We are seeing strong traction with qualifications in progress for multiple module types across our customers high performance, high capacity applications, and we are making qualification shipments later this year with production ramping throughout 2025. Our server PMICs product family amplifies our market opportunity and establishes a jumping off point for a growing roadmap of future power management chips. Also, as AI expands from training to inference, increasing demands on performance will extend beyond servers to client systems and drive the need for new PMICsolutions tailored for emerging use cases and form factors. Beyond PMICs, as DDR5 speeds continue to rise, many additional technologies used in the data center will waterfall into products for the client space to achieve higher levels of memory performance. Leveraging our broad experience in server memory chips and technology, today we introduced our first product dedicated to the client market, the DDR5 Client Clock driver chip, or CKD. This new chip supports DDR5 PC memory modules running at speeds of 6,400 and 7,200 megatransfers per second. Similar to the RCD, the CKD is required to maintain the signal integrity of the clock at high speed. CKDs will be targeted for high performance memory modules in next generation notebook and desktop PCs. While the CKD will initially address a small portion of the market, it is an exciting milestone for the company as we continue to expand our roadmap of new products and branch out into the client space. Turning to silicon IP, the demands of the data center fueled by AI continue to propel the accelerated development of complex purpose built chips that require advanced interface and security IP solutions. And while quarter-on-quarter revenue may vary from our growth trajectory due to customer program timing or other short-term impacts, AI continues to drive long-term momentum across our IP business. In Q2, our results were led by increased design wins in HBM and continued strength in our suite of PCIe high-speed interconnect cores at tier one AI chip suppliers and hyperscalers. As we see these purpose built chips proliferate, the continuing trend towards heterogeneous computing architectures places more value on moving and securing data. With the introduction of our family of PCIe 7 IP solutions, we further expanded our IP offering for AI and are working with market leaders on their next generation designs. PCIe 7 is designed to handle the massive parallel computing needs of AI workloads and enable secure data transfers between nearly every advanced chip in AI and HPC systems, including processors, accelerators and data processing units. When coupled with our ongoing investments in the industry most advanced security IP portfolio, including quantum safe solutions, we are providing vital building blocks for the next wave of high performance chip and system designs. As we look forward, demands on power, performance and security will continue to accelerate driven by generative AI and other data intensive workloads. We remain strategically focused on the ongoing scaling of system memory, bandwidth and capacity through novel memory, interconnect and power management solutions. These will be critical to improving efficiency and performance in computing systems for the data center to client. We are continuing our leadership in core products along with new product introductions to unlock higher levels of system performance and security to expand our market opportunity. In closing, Q2 was a solid quarter for the company, driven by the strong performance from our chip business, and we look forward to further double digit product growth in Q3. With continued leadership in DDR5 RCDs, growing momentum in PMICs and the introduction of our CKD as part of our ongoing investment in new products, we are well positioned to capitalize on current and emerging market trends. And our strong cash generation enables us to continue investing in innovative products and to pursue strategic initiatives that drive the long-term growth of the company, while consistently delivering value to our stockholders. 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?

Thank you, Luc. I'd like to begin with a summary of our financial results for the second quarter on Slide 5. We are pleased with our solid Q2 financial results driven by strong sequential product revenue growth in the quarter. Our profitable results and outstanding cash generation in the quarter enabled us to repurchase stock, demonstrating our commitment to stockholder returns. In addition, our ability to generate strong cash flows allows us to continue to invest in our strategic initiatives and consistently deliver value to our stockholders. Let me now provide you a summary of our non-GAAP income statement on Slide 6. Revenue for the second quarter was $132.1 million, which was in line with our expectations. Royalty revenue was $56.4 million while licensing billings were $61.5 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 $56.7 million consisting primarily of Memory Interface Chips. Contract and other revenue was $19 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 costs of goods sold for the quarter, were $77 million. Operating expenses of $53.4 million were in line with our expectations as we continued to be disciplined in our expense management and we ended the quarter with a total headcount of 657. GAAP interest and other income for the second quarter was $4 million, which includes $100,000 of ASC 606 interest income. Using an assumed flat tax rate of 22% for non-GAAP pretax income, non-GAAP net income for the quarter was $46.1 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 $432.9 million. This is up from Q1, mainly due to strong cash from operations which was $70.4 million. In the quarter we repurchased $12.5 million of stock, which retired approximately 221,000 shares. Second quarter CapEx was $16.3 million while depreciation expense was $6.3 million. We delivered $54.1 million of free cash flow in the quarter. Let me now review our outlook for the third 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. Under ASC 606, we expect revenue in the third quarter to be between $144 million and $150 million. We expect royalty revenue to be between $59 million and $65 million, and licensing billings between $60 million and $66 million. In Q3, we will begin to recognize royalty revenue under ASC 606 from the SK hynix patent licensing extension that we signed last year. As a result, we expect to see minimal difference between royalty revenue and licensing billings for Q3 and on a go forward basis. We expect Q3 non-GAAP total operating costs, which include COGS, to be between $82 million and $78 million. We expect Q3 CapEx to be approximately $12 million. Under ASC 606 non-GAAP operating results for the third quarter is expected to be between a profit of $62 million and $72 million. For non-GAAP interest and other income and expense, we expect $4 million of interest income. We expect the pro forma tax rate to be approximately 22%, with non-GAAP taxes expected to be between an expense of $15 million and $17 million in Q3. We expect Q3 share count to be 109 million diluted shares outstanding. Overall, we anticipate the Q3 non-GAAP earnings per share range between $0.47 and $0.54. Let me finish with a summary on Slide 9. In closing, I am pleased with our Q2 financial results. Our team delivered double digit product revenue growth with strong cash generation in the quarter. We are optimistic about the continued product revenue growth in Q3 and we are excited about the long-term opportunity ahead of us. A robust balance sheet with strong cash generation enables us to invest in our market expansion opportunities in data center and AI while consistently delivering value to our stockholders. Before I open up the call 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?

Thank you. [Operator Instructions] Our first question comes from Kevin Cassidy with Rosenblatt Securities. Kevin, your line is now open.

Yes, thank you and congratulations on the good results. Just when you look at your product revenue, how many generations of DDR5 RCDs are you shipping now or do you expect to ship in the next quarter?

Hey, thank you, Kevin. We're currently shipping in production Gen1. Gen2 is ramping into production today. So we have these two generations, Gen1, in production, Gen2 ramping in production, and we have qualification volumes for Gen3 that will also contribute to the second half of the year.

Okay, and maybe if you could maybe give a little more color too as Gen1 is in full production, how are the average selling prices? Is there any price pressure or are you, I guess, what's happening in that market?

Hi Kevin, it's Des here. That's a good question. I would say the overall pricing environment is playing out in line with our expectations and normal sort of pricing cycles. In terms of Gen1, I would categorize this as low single digit price erosion, which is really in line with our expectations from there. So I wouldn't call out anything special on the pricing environment from there.

Okay, great, thanks. I'll get back in the queue.

Thanks, Kevin.

Our next question comes from Blayne Curtis with the company Jefferies. Blayne, your line is now open.

Hey, thanks for letting me ask a question. I just want to go to the DDR5 share question. You know, double digit growth, it's great. I think your competitor was kind of growing maybe double that and I know different modules at different volumes, and it's a hard thing to pin down. So I'm just kind of curious, as if you could just revisit your share position.

Were we pleased with our growth on the product side? Q2 was 13% higher than Q1. We expect Q3 to be 15% higher than Q2. So, we see product growth mostly coming from DDR5. What's interesting is, we do see continued depletion of inventories on DDR4, but the demand for DDR4 remains small for us, so we are growing share as we move. Last year, our share was slightly higher than 30% on a yearly basis, with 40% on the DDR5 side of things. And because DDR5 is the main product we sell today, we continue to increase share.

Thanks. I just want to ask on the buyback, you did $50 million, I think, in the quarter. I think that's what you said. Just kind of curious, you are throwing up these amount of cash. What's the plan for the year?

Hi, Blayne, it's Des here. What I would say is, in terms of buyback, in Q1, we did do the $50 million ASR. In Q2, it was structured 10b5-1 repurchase, which was about $12.5 million in the quarter from there. What I would say is that we have a consistent approach to capital allocation and shareholder return, which really targets returning 40% to 50% of our free cash flow back to shareholders. And I think if you look over the last three years, we've certainly been above that sort of targeted level and we'll continue making these returns to shareholders going forward.

Okay, thanks so much.

Thanks, Blayne.

Our next question comes from Mehdi Hosseini with SIG. Mehdi, your line is now open.

Thank you. A couple of follow ups from me and looking at, you're talking about the double digit product revenue growth in the second half. To an extent, the sequential growth is impacted by companionship that we're expecting to be material by year end. In other words, what is your target for the mix? So I was going to clarify. I'm just trying to understand the mix of companionship and how should that mix increase into next year?

Hey, thank you, Mehdi. We mentioned double digit growth Q3 over Q2. That's what we mentioned. And by the way, Q3 is also more than 20% higher than Q3 of last year. So we are growing on the core business of the RCD and we're starting to see the contribution of new products to the mix. It's a small number at this point in time. It's probably low single digit in Q3, but we are seeing each one of our products ramping into the qualification phases with our customers. I mentioned on the call as well that we're seeing traction with PMIC in particular. We were the first one to introduce the extreme PMIC to the market. We indicated in the last call that we had good reception from customers. I can say today that we are being qualified with all three customers and this is going to go in the high end systems. So we are pleased with all the new products that we are introducing to the market. They are going through the qualification phases and in terms of Q3 that this is probably going to represent low single digit part of our product revenue.

Okay. And then given how your product gross margin has remained around 60% in the first half, what is driving the gross margin improvement in the second half? Is that a mix of just shipping more DDR5 RCD or new product ramping or combination of the two?

Hi, Mehdi, it's Des. Our Q2 gross margins were around 60%, which was flat to Q1 and really in line with our expectations for the quarter. In the short-term, our gross margins have been impacted by higher costs associated with the ramp of new products. But really looking ahead to the second half of the year, we do expect to see an improvement in our gross margins compared to the first half, which will be driven by a combination of favorable product mix, as well as some cost savings from there. And certainly for the full year, we do expect our gross margins to be in line with our long-term model of 60% to 65% gross margin. And I think as a company, we have really a strong track record of delivering on gross margins through a disciplined approach to price management, as well as our continued ability to drive manufacturing cost savings.

Great, I'll get back in the queue.

Thanks, Mehdi.

Next question comes from Tristan Gerra with Baird. Tristan, your line is now open.

Hi, this is Tyler on for Tristan. Thanks for taking the question. You touched on the new DDR5 Client Clock driver for high performance PCs. Can you dig a little deeper into the opportunity you see emerging in the client market? What is driving this and when should we expect contribution?

Yes, that's a great question. We're very pleased with the announcement of the CKD. This is a trend that we've talked about for some time. The performance requirements in the high end client systems are going to be similar to the ones we see today in the data center. So as we said in the prepared remarks, we're going to target high-end desktop and notebook solutions with speed at 6,400 or 7,200 megatransfers per second. And at those speeds you do need to clean the clock to the DRAMs as we do today in the data center. As a reference, the current platforms that are ramping the MMR rapid [ph] are at 5,600. That gives you an idea that the types of technologies that we develop for data center will soon make their way into the client and we're preparing for that. When we say we're making new strategic investments in new products, what we're trying to do is we're trying to leapfrog from the technology standpoint. For example, we are the first one to introduce the extreme PMIC. Extreme PMIC goes for the very high dense modules. And we know that if we are the first in this extreme PMICs, it's going to waterfall into other solutions. The same applies when we move to the client’s space. We're not going to the standard PC market. We're going to address the most challenging technology requirements, which is how do you drive those speeds at 6,400 and 7,200 in a PC environment? So we've developed that CKD for that market. So it's going to take time to go through the qualification process as well. This is a market that we expect to grow to about $100 million in a few years from now, and we'll grow our share into that market as we go through the qualifications.

Great. Thank you very much.

Our next question comes from Kevin Cassidy with Rosenblatt Securities. Kevin, your line is now open.

Thank you for taking my follow up. Just to expand on the PC market, are these going to be aligned with various x86 PCs or CPUs I mean, from Intel and AMD? Also, do you expect any ARM processors to be included in this interface?

Yes, that's a good question. It's going to intercept as a first platform, the equivalent of Arrow Lake platform from Intel, and the follow-on platforms, the equivalent of AMD. And as for the ARM question, typically we agnostic to whether it's an ARM or an x86 solution because the memory interface remains the same. So as we see today, people are ramping ARM based solutions in a data center that creates demand for us. We're kind of agnostic whether it's an x86 or an ARM processor.

Okay, great. Thank you.

Thanks, Kevin.

Our next question comes from Mehdi Hosseini with SIG. Mehdi, your line is now open

Yes, thank you. Look, I just want to look at the longer-term and want to get an update on strategy. I hear that the Gen3 qualification is going and I'm under assumption that with every generation of RCD you get ASP increase, but the prior generation products will have a declining ASP. So you have that dynamic in the RCD, you're also ramping companionship and now you have the client. As you look at all of those vectors pointing towards 2025 and assuming that CXL is not going to be a factor, should we assume that they manifest into a higher growth rate? And I said that because over the past two to four quarters we had been waiting for the DDR5 adoption and now that is happening I'm not sure if we understand the trajectory at the same time. Again, the CXL may not materialize and I'm just trying to figure out how the client would come in and third generation of RCD and companionship would help you with the top line growth.

Yes, thanks, Mehdi.

Hopefully that's clear.

Yes, thanks. In terms of RCD, we continue to introduce our different generations of RCD. As we said earlier, we believe we continue to gain share as the market is moving to DDR5. Gen1, Gen2. Gen1 is in production. Gen2 starts production. Gen3 is in qualification. We introduced Gen4 in December of last year. The way we look at this is that with AI we see an exciting opportunity in AI itself, but also in standard servers. AI is putting all of these technologies up in terms of performance. And as I said in my remarks, power, performance and security are going to become relevant in the data center, whether it's AI or not AI. And it's going to become relevant on the client space as well as we move from AI for training to AI to inference, for example. So what we're doing is we have building the blocks that are necessary to be successful in the data center and in the client space. And we're building those blocks based on what we know well as a company, which is how to manage signal integrity when the speeds increase every year, and how to manage power integrity when you need to deliver different power planes into very complex systems. So, all of these are going to contribute to the. The growth in standard RCD as we move from generation to generation, there is some expansion as we enter the companionship in data center, and some expansion as we waterfall those technologies into the client space. So all of this, in the long run, is going to define our growth trajectory. And that's why we always introduce the high end products first, is because we try to anticipate what the needs are going to be. We meet those needs, and then once we are recognized as being able to meet those needs, then this will waterfall into less demanding applications. So that's how we see the trajectory. Now, this growth trajectory is always defined by the speed of qualifications with our customers, which is what we've known in the data center as going to be very similar in the client space for what we produce.

Got it. Just a quick followup. As the AI story scales, should we assume that the contract and other silicon IP revenues should finally see a growth? Because last year that line item was kind of flat to down, and this year is trending to be down on a year-over-year basis. So should we assume that growth is going to resume into 2025?

Hi, Mehdi, it's Des. As it relates to contract and other revenue, this is a portion of our silicon IP revenue that shows up there. And remember, a portion of the silicon IP revenue can also show up under royalty revenue as well. What I would say year-over-year, any sort of comparison I would draw out the fact that we had this five divestitures last year in Q3, which will bring down our numbers on silicon IP. But what we've said as it relates to silicon IP is that, on an adjusted basis, last year we were about $110 million for revenue. And we do expect this business to grow at 10% to 15% and if you were to take our year-to-date performance, we're certainly on that trajectory to meet the growth rate of the business going forward from there.

Thank you. Thanks for reminding me.

Thanks, Mehdi.

Thank you. At this time, there are no other questions registered in the queue. This will conclude the question-and-answer session. I would now like to turn the conference back over to Luc Seraphin. You may proceed.

Thank you, everyone who have joined us today for your continued interest and time, and we look forward to speaking with you again soon. Have a great day. Thank you.