Luc Seraphin - Chief Executive Officer Rahul Mathur - Chief Financial Officer.

Gary Mobley - Benchmark Suji Desilva, - Roth Capital Mark Lipacis - Jefferies.

Presentation:.

Welcome to the Rambus Third Quarter and Fiscal Year 2018 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 Rahul Mathur, Chief Financial Officer. You may begin your conference..

Thank you, operator. And welcome to the Rambus third quarter 2018 results conference call. I'm Rahul Mathur, CFO. 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 furnished to the SEC on Form 8-K. A replay of this call will be available for the next week at 855-859-2056.

You can hear the replay by dialing the toll free number and then entering ID number 4888626 when you hear the prompt. In addition, we are simultaneously webcasting this call. And along with the audio, we’re webcasting slides that we will reference during portions of today's call.

So even if you are joining us via conference call, you may want to access the webcast with the slide presentation. A replay of this call can be accessed on our Web site beginning today at 5:00 PM Pacific Time.

Our discussion today will contain forward-looking statements regarding our financial guidance for future periods, including Q4 2018 and beyond, prospects, product strategies, timing of expected product launches, demand for existing and newly acquired technologies, the growth opportunities in the various markets we serve, and changes that we will experience in our financial reporting due to our adoption of the new revenue recognition standards that started in Q1 2018, amongst other things.

These statements are subject to risks and uncertainties that are discussed during this call and may be 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 to our financials, we are using both GAAP and non-GAAP financial presentations in both our press release and also on this call. We have posted on our Web site a reconciliation of these non-GAAP financials to the most directly comparable GAAP measures in our press release and our slide presentation.

You can see this on our Web site at rambus.com on the Investor Relations page, under Financial Releases. 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 including the guidance we issued in today's press release; 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, Rahul, and good afternoon everyone. I am very pleased to be taking on the role of CEO and excited about our prospects as a company as we drive towards greater value creation for our customers and shareholders. For Q3, we delivered solid results with continued progress in our businesses as we execute on strategy and improved profitability.

From a financial perspective, our performance was in line with our expectations, delivering GAAP revenues of $59.8 million on the ASC-606 and generating $32 million in cash from operations. For reference, our third quarter revenue under the prior ASC-605 accounting standards would have been $99.8 million.

If we compare under the same accounting standards and exclude the impact of our lighting division, this equates to 5% increase year-over-year. Overall, we executed well with strong execution in our product group and continued technology leadership on strategic programs.

Our licensing program remains strong with new deals and renewals closed in Q3, including Socionext, Phison, Infineon and Nvidia. For the Memory and Interface division, Q3 was another positive quarter with broad OEM and cloud customer qualifications ongoing in chips and steady revenue for IP cores.

Our DDR4 memory buffer chip business continues grow, with steady gains in market share and revenue growth, supported by a series of OEM design wins. As a result, we continued to hit our financial targets with $6 million in Q1, $8 million in Q2, $11 million in Q3 and remain on track to hit our target of $35 million to $40 million for the year.

As we look forward to next year, we expect that growth to continue with an anticipated revenue range of $50 million to $70 million for the buffer chip program.

For next generation DDR5 memory buffer chip, we maintained our leadership position as the first and only supplier with working silicon that supports the top end speeds for both the RCD and DB chips.

We are leveraging our head staff in product development with samples being validated by our partners, and continue to have strong collaboration with the memory vendors, as well as the broader ecosystem.

Following the record revenue from our high-speed IP Cores in the first half, we continued our leadership with further development of high-end and high-bandwidth SerDes and memory IP cores in advanced process nodes.

We see increased traction from a growing number of customers across multiple high-performance applications, including AI, automotive, data center and networking. Turning now to security. The Division remains focused on enabling trusting devices and their connection to the cloud, as well as protecting digital assets through tokenization and encryption.

As the importance of semiconductor device level security grows, our Cryptography group is seeing increased traction and opportunities in market segments like IoT, automotive and networking.

We see rapidly increasing interest and new requirements for establishing and managing the identity of devices throughout their lifecycle, starting on the factory floor.

With nearly 5 billion devices provisioned to-date by our CryptoManager infrastructure product, Rambus remains the most mature provider of at-scale device level provisioning solutions and expect to see steady growth in demand and customer traction.

As part of our ongoing efforts to make it simple and fast for our customers to implement security by design, we are systematically increasing our product portfolio.

We now offer the general availability of our RISC-V-based programmable CryptoManager Hardware Root of Trust, a full suite of DPA-resistant crypto cores for commercial and government applications, and an enhanced DPA Workstation with expanded side-channel attack testing capabilities through our partnership with Riscure.

The quarter also marked the commercial milestone for one of our existing customers, Cybertrust Japan. The subsidiary of SoftBank announced the availability of their software development kit, allowing customers to evaluate the IoT security platform, which integrates our CryptoManager IoT security service.

We are pleased with the progress on this group and look forward to meeting the market growing demand. As we look now to our Ticketing and Payment Groups, market traction and product development for tokenization continued to progress.

This year, we have expanded our tokenization solutions for mobile payments and retail to account based payments, e-commerce and now, the blockchain. Q3 saw announcements from both groups, introducing new customers, partners and products.

The Ticketing Group announced the selection and deployment of our transport tokenization solutions for mobile ticketing on Scotland's national rail network.

And our Payment Group, made announcements with a retail group, Coles in Australia, as well as Visa and American Express for our retail and e-commerce tokenization products, supporting a major industry shift from carbon file to document file.

Finally, last week we launched Vaultify Trade, the first solution to offer bank-grade tokenization and encryption technologies to secure the transaction and storage of crypto assets on blockchain. Our strategy of leveraging innovation and IT to develop differentiated products for high growth markets remain.

While we are pleased with the progress in our software-based payments and ticketing programs and see increasing market traction for tokenization solutions, we acknowledge that these businesses are far from our core in the semiconductor space.

With that, we are exploring strategic options to maximize the market opportunity and success of these businesses. In closing, Q3 was a strong quarter that continued to reinforce our confidence in our strategy and execution to plan.

We are creating the foundation for future profitable growth as we continue to roll-out products, improve operational efficiency and generate cash. With that, I’ll turn the call to Rahul to discuss the quarterly financial results.

Rahul?.

Thanks Luc. I'd like to begin with our financial results for the quarter. Let me start with some highlights on Slide 5. As Luc mentioned, we delivered solid financial results in line with our revenue and EPS expectations.

As you know, we've chosen to adopt the new revenue accounting standards ASC 606 using the modified retrospective method, which does not restate prior periods, but rather runs a cumulative effect of the adoption through retained earnings at the beginning balance sheet adjustments.

As a result, in comparisons between third quarter 2018 results under ASC 606 and prior results under ASC 605, it is not the best way to track the Company's progress. We are required to present a footnote that presents our 2018 results as if we continue to recognize revenue under the old standards.

To make this transition easier to the readers of our financial statements, we will continue to present our results under both ASC 606 and ASC 605 through this transition period of 2018.

This way, we can have a meaningful discussion regarding the performance of our business instead of focusing on accounting changes; under new accounting standards ASC 606, we delivered revenue of $59.8 million; under ASC 605, we would have delivered revenue of $99.8 million; under ASC 606, we delivered non-GAAP diluted loss per share of negative 1%; under ASC-605, we would have delivered non-GAAP earnings per share of $0.22; we delivered solid results while continuing to leverage our high margin historic businesses to fuel growth in adjacent areas where we have strong technical and market expertise for the focus on memory and security.

Now, let me talk you through some revenue details on Slide 6. Revenue for the third quarter was $59.8 million under the new revenue accounting standards, higher than our expectations due to licensing agreements signed in the quarter. Revenue would have been $99.8 million under ASC-605 in line with our expectations.

Year-over-year, including the lighting business we shutdown in Q1, our business was up 5%. As we've mentioned previously, the new revenue recognition standard has a material difference in the timing of revenue recognition for our fixed fee licensing arrangements.

Our licensing business continues to perform well, is the foundation of our success, is core to our initiatives of memory and security and will continue to generate cash in the years to come.

Going into additional detail under ASC-605, our memory and interface revenue would have been $79.8 million and our security business revenue would have been $20.1 million. As we mentioned last quarter, we've been restructuring the pipeline for a tokenization and embedded security businesses.

While we are pleased with our progress on the security initiatives, in particular our recent announcement, the revenue profile has continued to change.

As a result, we now expect security revenue in 2018 to be down year-over-year but we remain confident in this business long term, and are excited by the growing number of products and technology announcements and customer engagement. Let me walk you through our non-GAAP income statement on Slide 7.

Along with our solid revenue performance in Q3, we once again met our profitability targets on a non-GAAP basis. Cost of revenue plus operating expenses, or what we refer to as total operating expenses, for the quarter came in at $67.6 million. We ended the quarter with headcount of 814, up from 791 in the previous quarter.

Over the course of 2018, we expect to invest in headcount toward our growth initiatives in our memory and security businesses. Revenue and operating expenses under ASC-605 led to operating income of $32.2 million.

We've recorded $6.5 million of interest income under ASC-606 related to the significant financing component of licensing agreements for which we have not yet received payments, but recognize revenue under the new accounting standard.

We incurred $0.7 million of interest, primarily -- as interest expense, primarily related to the convertible notes we issued in Q4 2017. This was offset by incremental interest income related to the return on our cash portfolio.

After adjusting for non-cash interest expense on our convertible notes, this resulted in non-GAAP interest and other expense for the third quarter of $0.3 million, down from Q2. On a GAAP basis, we recorded a valuation allowance of roughly $90 million in Q3.

As you may recall from our adoption of ASC 606, we accelerated a significant portion of our revenues, mostly from patent licensing, resulting in roughly $820 million adjustments to retained earnings at the beginning of 2018.

The acceleration of revenue has also been roughly $157 million of foreign tax credits being utilized to offset the tax obligation. Given that we expect much of our growth to come outside of the U.S. in subsequent years, at a domestic level, we may still generate losses in future periods.

Furthermore, the decrease in our effective tax rate after last year's tax reform reduces our ability to utilize any domestic deferred tax assets for future periods hence the evaluation allowance.

Using an assumed flat rate of 24% for non-GAAP pretax income, non-GAAP net income for the quarter would have been $24.2 million under ASC 605 or $0.22 a share at the midpoint of our guidance. Now, let me turn to the balance sheet details on Slide 8. We're very pleased with the strength of our balance sheet.

Cash, cash equivalents and marketable securities totaled $248.2 million down $50 million from the previous quarter as cash from operations of $32 million help to offsets remaining $81.2 million pay down on the 2018 convertible notes that came due in Q3. As part of settling the 2018 notes, we also issued 424,000 shares.

We expect to maintain our ability to generate cash from operations in Q4. This will be an important metric to monitor as we adopted ASC 606.

As a result of adopting ASC 606, at the end of Q3, we had contract assets worth $700 million, which reflects the net present value of unbilled AR related to license arrangements for which the Company has no future performance obligations. I expect this number to continue to trend down as we bill and collect for these contracts.

And the reduction approximates the difference between our reported royalty revenue under ASC 606 and our licensing buildings. Third quarter CapEx was $2.6 million and depreciation was $2.6 million. Looking forward, I expect roughly $2.7 million of CapEx for the fourth quarter and roughly $10.5 million for the full year of 2018.

I also expect depreciation of roughly $3 million per quarter in 2019 and CapEx of $11 million for next year. Overall, we have a strong balance sheet with limited debt and expect to continue to generate strong cash from operations in the future. Now, let me turn to our guidance for the fourth quarter on Slide 9.

As a reminder, our forward looking guidance reflects our best estimates at this point in time, and our actual results could differ materially from what I'm about to review. We provide our investors and the analyst additional transparency during this accounting transition.

We're also providing financial outlook as if we were still under ASC 605, as well as ASC 606 during the transition period, which ends in 2018. Please note that the presentation under ASC 605 is not a substitute for the new ASA 606 revenue recognition standard under gap.

Future revenue under ASC 606 will be volatile from period-to-period due to the timing and structure of our licensing arrangements. We will continue to focus on leveraging our vast patent portfolio to maximize the value for our business, as well as to provide the best economic structure for our customers.

To offer additional transparency, we've also been providing information on license and billings, which is an operational metric that reflect amounts invoiced to our licensing customers during the period adjusted for certain differences.

The differences between licensing billings and royalty revenue under ASC 605 are primarily related to timing as we don't always recognize revenue the same quarter we bill our customers.

As you've seen in the supplemental information we provided on Slide 15 of our earnings deck, on an annual basis, license and billings closely correlates with what we've reported as royalty revenue under ASC 605 given this timing lag.

We'll continue to provide license and billings as another operational metric to help our investors understand the underlying performance of our Company. With that said, under the new ASC 606 revenue standard, we expect revenue in the fourth quarter between $56 million and $62 million.

Under the ASC 605 revenue standard, we expect revenue in the fourth quarter would be between $99 million and $105 million. Excluding the impact of the lighting division, this is up 4% year-over-year.

As a reminder, our ability to meet our financial commitments on a quarterly basis is heavily dependent on our ability to continue to renew our licensing agreements on a timely basis. We typically have multiple partners coming up for renewal each quarter and.

Aot closing these on schedule, could cause us to materially miss our financial commitments for the quarter. We expect Q4 non-GAAP total operating expenses, which includes COGS to be between $65 million and $61 million, down from Q3 spend due to our cost control.

Over the course of 2018, we expect operating expenses roughly flat as revenue grows, providing leverage to our financial model. I expect total operating expenses, which includes COGS related to our buffer chip business to grow through 2019 as we ship more products.

We continue to target $35 million to $40 million in buffer chip revenue in 2018 and could see this business grow to $50 million to $70 million in 2019. Under the new 606 revenue standards, non-GAAP operating results for the fourth quarter is expected to be between a loss of $9 million and income of $1 million.

Under the ASC 605 revenue standard, non-GAAP operating income for the fourth quarter is expected to be between $34 million and $48 million -- $34 million and $44 million. For non-GAAP interest and other income and expense, we expect roughly $5 million income for ASC 606 and $1.4 million expense under ASC 605.

This includes $0.8 million of interest expense related to the notes due in 2023. Based on the new tax legislation passed at the end of December, we expect our pro forma tax rate to drop to roughly 24%. The 24% is higher than the new statutory rate of 21%, primarily due to higher tax rates in our foreign jurisdictions.

As a reminder, we pay roughly $20 million of cash taxes each year, driven primarily by our licensing agreements with our partners in Korea. Under ASC 606 and based on a 24% tax rate, we expect GAAP taxes between a benefit of $1 million and a tax of $1.4 million in Q4.

We expect our Q4 share count to be roughly 108 million basic shares outstanding and 110 million fully diluted shares. This leads you to between a non-GAAP loss per share of $0.03 and non-GAAP earnings per share of $0.04 for the quarter.

Under ASC 605 using the same assumptions for operating expenses, $8 million to $10 million dollars for taxes and 110 million fully diluted share accounts, we would expect between $25 million and $32 million of non-GAAP net income and between $0.23 and $0.29 of non-GAAP earnings per share for the quarter.

While we do not issue annual guidance, looking ahead to 2019 as we've disclosed previously, we have structural set downs in a number of our long term licensing agreements, which impacts our 2019 revenues. We expect the growth we see in our product programs to offset the structural set downs.

However, given the structure of these agreements and what we're seeing from a macroeconomic perspective, we expect to see roughly flat revenue year-over-year.

As our Payments and Ticketing business is roughly breakeven, I do not expect any changes to overall profit as we explore strategic options in the future, though operating margins would improve significantly.

Through our continued top management, we also expect roughly flat earnings in 2019 as we maintain our commitment to earnings from cash flow and continue to invest in our product programs, which are growing nicely. Let me finish with a summary on Slide 10.

We are proud of the solid performance by our team and the progress we continue to make against our strategic initiatives. While we understand that the adoption of ASC 606 as a level of complexity to our financial reporting, it's important to reiterate that the underlying financial strength of our business remains strong.

In closing, we are systematically improving our operational performance, while rolling out compelling product offering and gaining traction with our customers. We continue to generate solid cash from operations and remain very well positioned for continued success as we close the year and head to 2019.

With that, I'll turn the call back to Jerome to begin Q&A.

Could we please have our first question?.

Thank you [Operator Instructions]. Your first question comes from the line of Gary Mobley from Benchmark. Gary, your line is now open..

Gary Mobley:.

Rahul Mathur:.

Gary Mobley:.

Rahul Mathur:.

Gary Mobley:.

Luc Seraphin:.

Gary Mobley:.

Luc Seraphin:.

Thank you. Your next question comes from the line of Sidney Ho from Deutsche Bank. Sidney, your line is now open..

Unidentified Analyst:.

Rahul Mathur:.

Unidentified Analyst:.

Luc Seraphin:.

Thank you. Your next question comes from the line of Suji Desilva from Roth Capital. Suji, your line is now open..

Suji Desilva:.

Luc Seraphin:.

Suji Desilva:.

Luc Seraphin:.

Suji Desilva:.

Rahul Mathur:.

Suji Desilva:.

Rahul Mathur:.

Thank you [Operator Instructions]. Your next question comes from the line of Mark Lipacis from Jefferies. Mark, your line is now open..

Mark Lipacis:.

Luc Seraphin:.

Rahul Mathur:.

Mark Lipacis:.

Rahul Mathur:.

Mark Lipacis:.

Luc Seraphin:.

Thank you. At this time, there are no further questions. This concludes today's question-and-answer session. I would like to turn the conference back over to the Company..

As you can see, we continue to demonstrate our leadership and ability to execute across the Company. There's tremendous opportunity ahead. And I look forward to leading Rambus to its next phase of success. So, thank you everyone for your continued interest and have a good day. Thank you..

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