Welcome to the Rambus First Quarter and Fiscal Year 20 29 Earnings Conference Call. At this time, all participants are in a listen only mode. At the conclusion of the prepared remarks, we will conduct a question and answer 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.
Please turn the call over to the Rambus Q1 2021 results conference call. I'm Rahul Mathur, CFO and on the call with me today today is Luke Sarafin, our CEO. The press release for the results that we will be discussing today have been furnished to the SEC on Form 8 ks. 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 3,985,069 when you hear the prompt.
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. Even if you're 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 website beginning today we will be conducting a presentation
at 5 pm Pacific Time. Our discussion today
will contain forward looking statements, including our financial guidance for future periods, product investment strategies, timing of expected product launches, demand for existing and newly acquired technologies, the growth opportunities of the various markets we serve, the the benefits of our merger, acquisition and divestiture activity, including the success of our integration efforts risks and potential adverse impacts related to or arising from COVID-nineteen and the effects of ASC 606 on reported revenue amongst other things. These statements are subject to risks and uncertainties that are discussed during we filed with the SEC, including our 8 Ks, 10 Qs and 10 Ks. These forward looking statements may differ materially our actual results and we're under no obligation to update these statements. In an effort to provide greater clarity to our financials, we're using both GAAP and non GAAP financial presentations in both our press release and also on this call. A reconciliation of these non GAAP financials the most directly comparable GAAP measures has been included in our press release and our slide presentation and on our website at brandus.com on the Investor Relations page under Financial Releases.
We adopted ASC 606 in 2018 using the modified retrospective method, which did not restate we would rather ran 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: Luke will start with an overview of the business I will discuss our financial results, including our guidance for future periods, and then we will end the Q and A. I'll turn the call over to Luke to provide an overview of the quarter.
Luc?
Thanks, Rahul, and good afternoon, everyone. Q1 was a strong quarter for the company, delivering at the high end of expectations for revenue and profitability. We continue to meet or beat expectations, And I'm very proud of the team's continued execution. Our cash generation remains strong with $39,500,000 in cash from operations and continues to fuel our ongoing investments in our product roadmap. As anticipated, our memory interface chip business rebounded to over we continue to expect our annual product growth to significantly outpace the market.
We also see a positive trajectory in Silicon IP growth for the primary catalyst across all of our businesses. We are actively building our ecosystem and expanding our reach through partnerships and collaboration and are confident in our ability to deliver profitable top line growth. Over the past few quarters, we've discussed some of the company's vectors for growth at a high level and are the more exciting trends shaping our roadmap in market opportunity. We see 3 fundamental trends that are driving growth at the market, system and chip level. 1st is the accelerated transition from to cloud.
2nd is the sustained increase in data generation and usage. And third is the proliferation of AI and data intensive applications across all markets. Beyond the secular growth in data center, these trends are increasing demand for performance with driving AI and AI workloads driving server growth at the system level. And at the chip level, the need for more data to feed this system is driving memory bandwidth and bit growth. As a result, data delivery, particularly in the memory subsystem, is now on the critical for meeting ongoing performance requirements.
Additionally, the emergence of new architectures and growing need for privacy create rest and in motion where we have built an instinctive portfolio of offerings. The combination of these factors has created an amplified market opportunity and a growing TAM for Rambus. Our company's TAM expansion is driven by a number In the near term, Intel's latest DDR4 platform supports a higher maximum This platform is currently ramping and will enable an optional increase in corresponding modules per box in high end systems. As the industry transitions to DDR5 beginning later this year, the growing complexity at higher speeds we'll require additional companionship like temperature sensors, power management integrated circuits, also known as PHEMIX And CERIO presents the Tech Hubs, also known as SPD Hubs. Each of these provides an adjacent chip opportunity for Rambus, we expect to see an increase in our portion of chip content per module.
Looking to next year and beyond, the industry is converging on the use of Compute Express Loops or CXL as part of the differentiated memory interface architecture in addition to traditional beams to expand system bandwidth and capacity. We are actively engaged with the ecosystem on the design and development of the new memory and finally, as we look a bit farther out in the future, there are opportunities to leverage those same high speed links as part of new these aggregated architectures that can boost utilization and efficiency and reduce total cost of ownership for data center customers. It is also important to point out that security has become a critical concern that must be security as part of chip and system specifications. As an industry pioneer with over 30 years of experience in high single facilities and an extensive portfolio of security offerings, Rambus is ideally suited to address these challenges. We see many we have opportunities for our product roadmap and focused R and D investment to drive client expansion and expect the long term profitable growth of the company to outpace that of the market.
Now let's get back to our product business. The industry has returned to healthy memory consumption levels following the track of last year. We remain confident that we have the supply chain in place to satisfy our ongoing customer demand and support share growth. As I mentioned previously, our Q1 product revenue returned to over $40,000,000 and will continue to build as demand for server memory is expected to remain robust throughout 2021 and into 2022. We expect our annual product growth to significantly outpace the market, driven by share gains in DDR4 and ramping volumes in DDR5.
We continue to improve our market position in DDR4 through superior execution and expect incremental gains given our larger qualification footprint on Intel's most recent DDR4 platform. With respect to DDR5, we are in a leading position for qualification with our memory customers All of the major DRAM suppliers are shipping DDR5 modules with our chips for end customer qualification, we expect volume to ramp in the second half of the year. We continue to invest in the development of companion chips solid archive platforms I look forward to sharing more in the near future. In closing, I'm very proud of the company's performance in the Q1. We are well positioned for above market growth, and I'm excited about the many opportunities this year and beyond.
The health and safety of our global workforce, customers and partners remain our top priority. We approach people, culture and diversity with the same level of passion and dedication as our technology leadership, profitability and capital investments. We remain committed to responsible and sustainable environmental and social practices as we deliver products to our customers. With that, I'll turn the call over to Rahul to discuss the quarterly financial results. Rahul?
Thanks, Luke. I'd like to begin with a summary of our financial results for the Q1 on Slide 8. Once again, we delivered a solid quarter and are very pleased with the ongoing execution on our growth we delivered financial results at the high end of our revenue and earnings expectations. Our product revenue grew 41% quarter over quarter. We generated $39,500,000 in cash from operations, bringing our total cash position to $529,100,000 our execution and operational discipline have yielded solid financial results on balance sheet that enables us to support our strategic initiatives.
Let me talk you through some financial highlights on Slide 9. We continue to be focused on profitable growth and have demonstrated this over the past many years. As Luke mentioned earlier, the significant growth in Silicon IP revenues is a result of our focused R and D investments in the exciting cloud we have dramatically improved our cash from operations and free cash flow. This has allowed us to return capital to shareholders while also further strengthening our balance sheet. Let me walk you through our non GAAP income statement on Slide 10.
Revenue for the Q1 was $70,400,000 towards the high end of our expected range. Royalty revenue was $28,900,000 while licensing billings was $63,500,000 The difference between licensing billings and royalty revenue primarily relates to timing as we don't always recognize revenue in the same quarter as we bill our customers. Our bucket ship business rebounded in the Q1 as we work through the inventory digestion and supply chain we had anticipated and discussed previously. Product revenue was $30,800,000 consisting primarily of our buffer chip business. Our contract and other revenue was $10,700,000 consisting primarily of our silicon IP business.
Total operating including COGS for the quarter came in at $58,200,000 Operating expenses of $45,300,000 were lower than our expectations due to our continued focus on operational efficiency. We ended the quarter with headcount of 589, lower than 623 in the previous we continue to align our product programs with growth markets. Under ASC 606, we reported $2,800,000 of interest income related to the financing component of our fixed fee licensing arrangement for which we recognize revenue but not yet received payment. We incurred $700,000 of interest expense primarily associated with our convertible notes. This was offset by incremental interest income related to the return on our cash and investment portfolio.
After adjusting for non cash interest expense on our convertible notes, this resulted in non GAAP interest and other income for the quarter of $2,200,000 Using an assumed flat rate 24% for non GAAP pre tax income, non GAAP net income for the quarter was $10,900,000 With continued focus on cost and disciplined execution, we delivered profit that was nicely above our expectations. Now let me turn to the balance sheet details on Slide 11. We have consistently generated cash. Cash, cash equivalents and marketable securities totaled $529,100,000 up from the previous quarter primarily due to cash from operations of $39,500,000 As we deliver on the top line and execute on operational efficiency, we expect to continue to deliver strong cash from operations in the future. At the end of Q1, we had contract assets worth 344,700,000 reflects the net present value of unbilled AR related to licensing arrangements for which the company has no future performance obligations.
Expect this number to continue to trend down as we bill and collect for these contracts. It's important to note that this metric doesn't represent the entire value of our existing licensing arrangements several customers have royalty based agreements that allow us to recognize revenue each quarter. 1st quarter CapEx the $6,600,000 while depreciation was $4,700,000 We delivered $32,800,000 of free cash flow in the quarter. Looking forward, I expect CapEx for the Q2 to be less than $5,000,000 I also expect depreciation of roughly $20,000,000 for the full year of 2021. Now let me turn to our guidance for the Q2 on Slide 12.
As a reminder, our forward looking guidance reflects our current best estimates our actual results could differ materially from what I'm about to review. In addition to the financial outlook under ASC 606, we've also been providing information on licensing billing, which is an operational metric that we announced invoiced to our licensing customers during the period, adjusted for certain differences. We reported as royalty revenue under ASC 605. Under ASC 606, we expect revenue in the 2nd quarter between $76,000,000 82,000,000 we expect royalty revenue between $32,000,000 $38,000,000 We also expect licensing billings between $60,000,000 $66,000,000 As Luke mentioned, we continue to closely monitor our supply chain. We're upholding our lead time commitments to our customers.
Additionally, we maintain inventory Q2 non GAAP total operating costs and expenses, which includes COGS, we expect to be between $61,000,000 $57,000,000
as we continue to invest
in programs. Under ASC 606, non GAAP operating results for the Q2 is expected to be between $15,000,000 $25,000,000 profit. For non GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect approximately $1,000,000 of expense, which includes $600,000 of interest expense related to the notes due in 2023. We expect our pro form a tax rate to remain consistent at roughly 24%. The 24% is higher than the statutory rate of 21%, primarily due to higher tax rates in our foreign jurisdictions.
As a reminder, we pay roughly $20,000,000 of cash taxes each year, driven primarily by our licensing agreements with our partners in Korea. We expect non GAAP taxes to be between an expense of $3,000,000 $6,000,000 in Q2. We expect our Q2 share count to be roughly 116,000,000 basic and diluted shares outstanding. This leads you to between a GAAP profit per share of $0.09 and $0.16 for the quarter. Our product businesses are well positioned relative to market we anticipate steady execution across our strategic priorities.
With that said, while we don't provide guidance beyond Q2, consensus estimates for our top line and bottom line growth in the remaining quarters of 2021 reflects our belief that our product growth will continue to outpace the broader semiconductor industry. Let me finish with a summary on Slide 13. We are proud of the excellent execution by our team. Over the past several years, we've made substantial progress strategically, operationally and financially. We've realigned our portfolio to address data center and cloud opportunities and to support our long term growth, improving our profitability, investing in the growth opportunities Luke mentioned previously and delivering value to our shareholders.
Before I open up the call to Q and A, I would once again like to thank our employees for their continued teamwork and execution resilience during these uncertain times. Everyone please stay safe and take care of yourself and your families. With that, I'll turn the call back to our operator to begin Q and A. Could we please have our first question?
Your first question comes from the line of Sidney Ho with Deutsche Bank. Your line is open. You may ask your question.
Thank you for taking my question. My first question is related to supply constraints that we've been hearing all over semiconductor supply chain. Has that been a headwind for you or do you expect it to be a headwind either directly or indirectly for both your memory chipset business as well as the Sony IP business?
Sydney, great question. At this point in time, we don't see this as a headwind. We hear what's happening in the market at large, but we have built for many years our supply chain and inventory profile for growth. We knew that our strategy for buffer ship was to gain share. And so the whole supply chain strategy has been built around that.
And this means that today, we feel confident that we can supply to our customers. We actually believe that we can supply Hi. And what the demand will be in the next few quarters. Yes, some lead times have increased a bit, but we also have increased our lead time for orders to our suppliers and they can supply to us. So at this point in time, we continue to be confident in our ability to supply.
As I said, the whole supply chain on our side was built on the view that our share would grow and our business would grow and that holds true now. Now you're absolutely right. There's always a possible risk that another device it might disrupt supply chain. But in our case, again, on the module, you don't have many devices. You have a circuit board, you have memories in your adapter chip and a few other devices.
So at this point in time, We've not seen any of these situations popping up, but that's something we are constantly watching.
Great. That's helpful. Maybe my follow-up question is, you talked about the Compute Express Link architecture. Can you talk about what that means to your revenue opportunity versus the traditional DDR5 DIMMs from a product revenue standpoint as well as relative licensing, and when do you expect the ramp up of C cell to begin? Understanding that DDR5 opportunity is already higher than DDR4.
Question. So we do see the DDR5 opportunity and adding to the revenue growth potential starting next year. CXL is going to revenue starting in 2020 into 2024, but the designs for CXL chips are going to start now are starting now actually. It's a bit like what happens in the buffer ship area. Designs and architectures start very early and If you do add the DDR5 potential, we see on DDR4 plus the we expect the TAM business to more than double
Your next Hosseini with SIG. Your line is open. You may ask your question.
Yes. Thanks for taking my questions. Just want to follow-up to Sidney's and want to dig into silicon IP opportunities, especially with AI and machine learning. And this is something that, in my opinion, we're still in the early phase, but I want to see how much of those incremental opportunities expectation or would there be upside to your guidance beyond? And I have a follow-up.
The
AI and NN opportunities do add our IP cores, especially HPM, we do show a very high bandwidth capability. AI is going to be consuming a large portion of the data center growth going forward. So anyone building a chip for AI that goes into data center will eventually need these high speed interfaces, mostly HBM, to some extent GDDR6. So these growth of AI into the data center, the data center market growth itself are driving growth for our IP cores. Our IP core business is growing in double digit growth, but the AI through HBM GDR6 are the main drivers for that.
So but would it be possible that this were early in adoption and perhaps if it materializes, it may provide an upside to your expectation for this year and beyond or is it already dialed into What you have communicated for opportunities?
Maybe it is dialed in what we have communicated for our opportunities. The Rambert strategy has always been to focus on data centers and high speed Internet. Over the last few years, we focus our portfolio on the IP that serve those markets and HVM, GDDR6, controller and 5 as well as our security IP our focus on to benefiting from that market growth. So this is dialed in our expectations.
Got it. Thank you. And just a quick follow-up, your pro form a OpEx over the past $50,000,000 Is this something that we should be thinking of over the next 4 to 8 quarters, like At most $50,000,000 of OpEx?
Hi, Mehdi, it's Rahul.
Thanks very much for the question and we're delighted to have you on the call today. In terms of an OpEx perspective, look, I think we've done a fantastic job of improving our operational efficiency and in particularly taking cost out of SG and A. What you've seen is that we've taken probably about $20,000,000 of cost out compared to where we were a couple of years ago. My expectation is that from an overall OpEx perspective, our SG and A through the course of this year should stay roughly flat on a quarterly basis. There's always some ins and outs on a quarterly basis related to tax or hiring or other things as well.
What I'd expect though is that if we had some increases in stand would be on the R and D side. We are investing in these very exciting product programs that Luke was talking about earlier, both on the side as well as on the silicon IP side. So you might see a little bit of increase on the R and D side from a quarter to quarter perspective. But I think that $50,000,000 a quarter, we should be under that through the course of this year. But I'd like to see us continue to invest in R and D towards the back half of this year and then out in the future to fuel these products plans that are growing very nicely.
Maybe to the question you're asking earlier, we look at our silicon IP business on total, as Luke mentioned, growing in the double digit range on an annual basis. And that's embedded, I think, in the growth estimates that you see for analysts and consensus estimates. And I think I mentioned that in our prepared remarks.
Okay, got it. Thanks for detail. I appreciate it.
Your next question comes from the line Gary Mobley with Wells Fargo Securities. Your line is open. You may ask your question.
Hey, guys. Thanks for taking my question. I want to ask about your supply chain. I noticed that in the Q1, your product gross margins were down about 400 basis points from where they were last year, and I know they were exceptionally high last year. Is that a function of you're having to pay for us.
And I wanted to ask Converse, I guess, go from a different angle from a question asked earlier. And I know your 2 main competitors in buffer chips are also fabulous. Any chance that you could benefit from those 2 competitors perhaps being capacity constrained?
Gary, it's Praful. Great to hear from you. I think in terms of your questions, we've been very gross margin should be in the 60% or 65% range. As you mentioned, we had a couple of few quarters earlier that were high, but I think us dropping in any is really related more to product mix more than anything else. It's not associated with any associated with the supply chain.
It really is mix. And the margin that we printed last quarter, I think are very consistent with what we expect from a longer term basis. Does that help answer your question?
Sure. And just a question about your competition in their supply chain.
Yes. So I think we've done a very nice job of gaining share from our competitors. And if you see our numbers for Q1 versus Q4 versus some of the other competitors who have announced, clearly, we've bounced back up and other folks haven't shown that 41% growth quarter over quarter. I think it's really more associated with design win activity. This is one of the things that we've talked about we have a very strong
focus on our business and that's what gives us confidence
in our ability to continue to grow. That actually gives us confidence we're pleased to announce that we're going
to continue to see the back half
of this year and growth as well. So I think it's really the right
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to think about the grow with us and so maintaining some of that strategic inventory to quickly satisfy demand has helped us. I think that was one of the reasons that we had such nice growth particularly in the first half of last year as well. So hopefully that answers that part of that question as well.
Yes, Gary. I think, yes, demand grew. Demand grew because of our design win activities. And as we said earlier, from day 1, we built the supply chain and inventory profile for growth So that we could benefit from those design wins. And what it means is that we have good redundancy in our supply chain.
We have strategic inventory placed in our supply chain, and we also own more and more of our own testing. So we can maintain that growth trajectory through these market share entries.
Appreciate that. And a follow-up question about DDR5. You mentioned some revenue in the back half of this year. I would assume a fairly immaterial amount, correct me if I'm wrong there. And then you mentioned the 3 die solution in DDR5 and I believe for DDR4, it's a 2 die solution.
Is it too simplistic to think that translates into a 50% boost in your bill material per DIMM? And if not, could you give us some sense of the ASP boost
the first question, PVR5 is going to ramp in the market in the market, but we should expect customers to place orders before that to fill their channels. So we should we see some preproduction orders in second half of this year and the large production orders in 2022. We are currently shipping DVR5 to the memory motor vendors as they go through their qualification process with their own customers. So that's the profile we see for DDR5. You should expect some revenue in the same quarter, something in earnest in 2022.
With respect to the ASP, there's a combination of a new generation of products coming to market that typically gives a pop to the ASP and the potential for additional chips. So we will certainly see overall an increase of ASP on the DDR5 platform, which Yes. I think you mentioned 60%. That could be in that range. And then take a Generation, this will decay at least on the same ships, but we have the opportunity for additional chips here.
Appreciate that. Thanks.
Thanks, Yai. Your next question comes from the line of John Fitzer with Credit Suisse. Your line is
open. Yes. Good afternoon, guys. Thanks for letting me ask
the question. Luca, I'm curious in your opening comments, you talked about Ice Lake and the benefit of moving up the number of memory channels, I would be curious though if you could talk a little bit about your opportunity To grow in the memory buffer space outside of Intel, either x86 or ARM, and I sort of asked a question because you're putting up good year over year growth At a time where their server Intel server business isn't. And so I'd be curious as to kind of helping to better understand your opportunities outside of the largest provider right now?
Correct. We mentioned the platforms from Intel. We do have the same types of engagements with AMD. So we are at the same levels of qualifications on Intel's when there's a market share change between the 2, we continue to grow. And that's also true for the next generation of networks.
We engaged with the 2 main vendors there. We also engaged with, I would say, nascent vendors who are starting to develop their own processors for data centers. And that will create some additional opportunity down the road, not this year or next year, but the year after. So we try to engage with everyone developing chips for data centers, whether it's the traditional AMDs or Intel or the people developing their own chips, especially the cloud Jazz. And then Lucas, as
my follow-up, you've talked about kind of the long design cycles As we go from DDR4 to DDR5 and your optimism around kind of your ability to continue to grow share through that transition, I'm curious, is it too early on the CXL side to talk about what the design funnel looks like and kind of what your position is in that design funnel?
It's a bit early to say where we are in the design funnel. What I would say is we think the industry first has converged mostly to the DXL interface. The architecture of the chips for sector interfaces are being defined as we speak. And we are thankful to those discussions with memory vendors, process vendors and the cloud guys. I think we are in the phase of defining chip architectures and memory subsystem architecture, and we're taking a good part or central part to those discussions.
We will go into a phase of development and market ramp. As I said, the volume for CXL buffer In earnest, we'll start sometime in 2023 2024. But the thing that has changed since last time we talked is that the industry has aligned around CX-seven interfaces. The architectures are being defined, and we are part of those discussions with the industry. The other thing that is happening for Rambus, I think we're uniquely positioned for that is that a lot of the IP contained in the CXL buffer are IP that we have as part of our IT business.
A CXL interface is actually 32 gigabytes V and a controller. We have part as we have this as part of our offering in our IT core business, the CXL buffers will require security functions. We have this as part of our IT business. So from an IP content standpoint that goes into these chips, I think we're uniquely positioned to be successful in that space.
We'll move on to your touchstone telephone. Your next question comes from the line of Mark Massase with Jefferies. Your line is open. You may ask your question.
Hi, thanks for taking my questions. A couple of questions. Luke, you in the past, you've successfully used inventory strategically to meet upside. And today, you had mentioned again that you often have or you have like some strategic inventory placed in the supply chain. Can you if I look at your balance sheet, it looks like your inventories are kind of flattish year on year, but you're expecting more revenues this year.
So where is the strategic inventory? Is it on other is that other places in the Sabine not showing up on your balance sheet where you have Stuart, if you could help explain like how you're positioned right now with the ability to meet upside, should it manifest?
Hey, Mark, it's Rahul. Thanks. And it's a great question. What I'll tell you is that inventory report is at a point in time at the end of the quarter. And so clearly over some part of the quarter, it will go up a little bit higher and sometimes it will go a little lower.
We do have some inventory that's placed with some distributors and that helps us solve the inventory or request from partners on a quick And so that's not going to show up in our balance sheet. But hopefully that's a little bit of additional color.
That's helpful. Thank you. And then a follow-up, if I may. Can you talk about like the visibility you see, and again On the DVR product side, the visibility you have into orders from the hyperscale customers, It seems like these are products that you're making that would go into the hyperscale data centers. And we hear from other semiconductor companies that supply the hyperscalers have been the planning is fairly robust and they typically get very good visibility And most we spoke with have believe that there's very good visibility into growth in the second half of the year.
So I guess I'm wondering, can you characterize the visibility you see from that kind of classic customer? Does it come directly do you get visibility directly from the consumer here, the hyperscale company or you get it through your the memory module makers themselves or the PC OEMs? Thank you.
Yes, thanks. We see it from both. From the cloud guys, what we see is aggregate growth, especially driven by the need for the AI applications. So that confirms the growth that we see in our forecast. Then from the memory vendors, we do see how these growth translate into different types of platforms, especially this year where there's an introduction of a lot of different platforms.
The last generation of DDR4 platforms in both AMD and Intel and is the 1st generation of DDR5 platforms from the same vendors. So that transition is going to translate into to demand mix that we're watching carefully for the second half of the year. But in aggregate, all of these fuels the growth driven by the Dana Santegas, which are the end users.
At this time, there are no further questions. This concludes the question and answer session. I would now like to turn the conference back over to Luc.
Thank you for your interest in Rambus, and we wish you all health, and I hope to talk to you soon. Thank you.
Thank you. This now concludes today's conference. You may now disconnect.