Welcome to the Rambus First Quarter And Fiscal Year 2020 Earnings Conference Call. We will conduct time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Raul Matter, Chief Financial Officer. You may begin your conference.
Thank you, operator, and welcome to the Rambus Third Quarter 2020 Results Conference Call. I'm Rahul Mather, CFO, and on the call with me 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 K. A replay of this call will be available for the next week at 8558592056. You can hear the replay by dialing the toll free number and then entering ID number 228 1104 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'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 at 5 pm Pacific Time. Our discussion today will contain forward looking statements including our financial guidance for future periods, product and investment strategies, timing of expected product launches, demand for existing future activity, including the success of our integration efforts, risks and the potential adverse impacts related to or arising from coronavirus for COVID-nineteen and the effects of ASC 606 on reported revenue amongst other things. These statements are subject to 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 were under no obligation to update these statements.
In an effort to provide greater clarity in 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 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. 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 with Q And A. I'll now turn the call over to Luke to provide an overview of the quarter.
Luke?
Thanks, Rahul, and good afternoon, everyone. The company had another very solid performance this quarter as our excellent product growth continues. We deliver on revenue of $56,900,000 and exceeded expectations for profitability, which continued great discipline on the bottom line. It was another very strong quarter of cash generation with This brings the total for the exceed our total for the entirety of last year. As our proven track record of cash generation and progress on strategic product initiatives continue, we're poised for healthy top line growth in 2021.
Data center remains a key growth market across all of our businesses, Cloud demand skyrocketed in the first half, driven by the significant increase in online activity from corporations and consumers, and has returned to more normal growth rates in the third quarter. We continue to see sustained investment from our customers, in products and solutions that will help improve the performance and security of the global data infrastructure. Memory and interface chips delivered a solid quarter, with quarterly revenue up 39% year over year. We are on track to have another record year with over 50% growth in our product business versus 2019. While we continue to gain DDR4 market share, the 3rd quarter saw the beginning of the short term data center inventory digestion we cautioned about in previous calls.
We expect the bulk of these adjustments to occur in the 4th quarter and a return to normal consumption levels early next year. We still anticipate to end 2020 significantly above the full year guidance we provided in 2019. Looking forward to 2021, we have a larger qualification footprint in the upcoming DDR4 server platform transition, we should drive further market share gains. For DDR5, we are in a leading position for qualification with our memory customers and CPU partners. DRAM suppliers are now sampling DVR5 modules without chips to system companies.
Looking forward, We are investing in the development of additional chips for DDR5 platforms, as well as new architectures and IP for novel memory subsystems. This will further strengthen our memory leadership position in the years to come. Turning to Silicon IP. We have strong quarter with increasing design win momentum across data center of 5g And Edge. This was supported by excellent execution from last year's acquisitions.
With the form of varied metrics and northwest logic teams, both hitting their targeted run rates for revenue. I'm delighted with this performance as the successful integration of these teams gives us Our solutions continue to lead the industry with the latest example being our silicon demonstration of the world's fast just HBM2E memory interface running at up to 4 gigabit per second. At this speed, Our comprehensive solution delivers the highest bandwidth for the most demanding data center applications, including AI machine learning training and high end graph 6. Lastly, we are very pleased Micron extended their license agreement for an additional 4 years under the existing financial terms. This extends their license agreements beyond the next renewal dates for Samsung and SK Hymix and is a great testament to the ongoing strength and relevance our patent portfolio, as well as our growing partnership with Micron.
With this extension, we have solidified a sustained foundation of cash generation from our licensing program that allows us to return value to our stockholders and build our growing product businesses. With that, this afternoon, we announced a new stop repurchase program which Raul will discuss in more detail later on in the call. The program demonstrates the board's confidence in our strategic direction and underscores our ongoing commitment and expand our technology road map to address more data centric applications. Through our ongoing focus and execution, We have multiple revenue streams across the company. And with our structural step downs behind us after Q4, we will be well positioned for significant absolute growth in 2021.
With that, I turn the call to Rahul to discuss the quarterly financial results. Raul?
Thanks, Luke. I'd like to begin with our financial results for the third quarter. Let me start with some highlights on Slide 5. As Luke mentioned, we delivered a solid quarter. We delivered financial results in line with our revenue expectations and at the high end of our earnings expectations, while continuing to strengthen our balance sheet and make progress on a number of business initiatives as well as our long term growth strategy.
We've adopted ASC 606 in 2018 using the modified retrospective method which does not restate prior periods, but rather runs 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 our company's progress. We will continue to provide operational metrics such as licensing billing to give our investors better insight into our operational performance. We delivered revenue of $56,900,000 and licensing billings of $63,100,000, in line with our expectations. The strength of our model reflects our proven record of generating strong cash flows.
We have a very strong balance sheet and ended the quarter with cash, cash equivalents and marketable securities of $520,200,000, up nicely from the previous quarter, primarily due to cash from operations of 44,100,000. This brings year to date cash from operations for the 9 months to 143,400,000 well above last year's full year total of $128,500,000 with another quarter remaining in the current year. Our continued execution on our strategy and our operational discipline have yielded solid financial results and a strong balance sheet that affords us flexibility to support us strategic initiatives. Over the past years, growth in our product businesses has enabled us to offset the known step downs in patent licensing. We are well positioned for next year with our final significant licensing step down scheduled for Q4.
Our products will drive overall company growth in 2021 improving both our top and bottom line. Now let me talk you through some revenue details on Slide 6. Revenue for the third quarter was fifty-fifty $900,000 in line with our expected range. Royalty revenue for the third quarter was $16,600,000, while licensing billings was 63,100,000 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. Going into additional detail, our product revenue was $29,800,000, consisting primarily of our buffer business.
Our contract and other revenue was $10,500,000, consisting primarily of our silicon IP business. For the year, there's roughly $40,000,000 of our silicon IP business such being reflected in our licensing billings. This is almost twice what we expected at our Analyst Day a year ago. Strengthen our security IP business in particular enabled us to meet our revenue expectations in Q3. These results represent excellent growth year over year.
Let me now walk you through our non GAAP income statement on Slide 7. Along with our revenue performance in Q3, we again exceeded our profitability targets as we have done consistently over the past many years. Total operating expenses, including COGS for the quarter, came in at 56,700,000 operating expenses of $45,800,000 were lower than the prior quarter due to lower expenses related to our headquarter facility and other variable expenses. Multiple revenue streams enable us to offset quarterly variances in any particular business. We ended the quarter with headcount of $679,000,000, slightly higher than $670,000,000 in the previous quarter as we continue to invest in our product program.
Under ASC 606, we recorded $3,300,000 of interest income related to the financing component of our licensing arrangements for which we've recognized revenue, but not yet received payment. We incurred $800,000 of interest expense, primarily as 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 $2,700,000, Excluding the interest income related to the significant financing component related to ASC 606, this would have been 600,000 of interest and other expense. Assuming a flat rate of 24 percent for non GAAP pretax income, Non GAAP net income for Now, let me turn to the balance sheet details on Slide 8. Over the past several years, we've built a very strong balance sheet Cash, cash equivalents and marketable securities totaled $520,200,000, up significantly from the previous quarter, primarily through cash from operations of $44,100,000.
As I mentioned previously, year to date cash from operations in the 9 months was $143,400,000, well above last year's total of $128,500,000 with another quarter remaining in the current year. As we continue to deliver top line and execute on operational efficiency, we expect to continue to deliver strong cash from operations into the future. At the end of Q3, we had contract assets worth $401,700,000, which reflects the net present value of unbilled AR related to licensing arrangement 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. It's important to note that this metric doesn't represent the entire value of our existing licensing agreements as several customers have low fee based agreements that allow us to recognize revenue each quarter under ASC 606.
As we announced previously, we were pleased to our existing licensing agreement with Micron in September at our existing financial terms, demonstrating the strength and relevance of our patent portfolio. When this to one time impact to revenue nor the corresponding addition to our unbilled contract assets. Instead, we expect to recognize ASC666 revenue on a quarterly basis starting in the first quarter of 2021. Between this extension and buffer chip growth our ASC 606 revenue is poised for strong growth next year. From a licensing billings perspective, as negotiated in the original agreement, the Micron contract will step down to $4,500,000 in Q4 and then step back up to $10,000,000 a quarter from Q1 'twenty one through Q4 of twenty twenty four.
It's also worth noting we renewed our agreement for 4 years longer than the extension period initially specified. We have a strong partnership with Micron and this bodes well for the that could allow us to take revenue over time as opposed to upfront under ASC 606. 3rd quarter CapEx was $10,600,000 and depreciation was $4,800,000. We delivered $33,500,000 of free cash flow in the quarter. Looking forward, I expect roughly $14,000,000 of CapEx for the fourth quarter.
This represents roughly $35,000,000 for the full year of 2020, 80% of which is related to the relocation of our headquarters facility. I also expect depreciation of roughly $5,000,000 for the 4th quarter and roughly $19,000,000 for the full year of 2020. Now let me turn to our reflects our current best estimates that 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 billings, which is an operational metric that reflects amounts' invoice to our licensing customers during the period, adjusted for certain differences. As you've seen the supplemental information we provided on Slide 13 of our earnings deck, license and billings closely correlates with what we had historically reported as royalty revenue under ASC 605.
Under ASC 606, we expect revenue in the 4th quarter between $45,000,000 $51,000,000. We expect royalty revenue between 12 and $18,000,000. We also expect licensing billings between $61,000,000 $67,000,000. We've been making steady progress on our business and financial initiative Similarly, we're very pleased with the execution on the acquisitions we made last year. The teams have integrated well into our company and honest trajectory nearing our expectations at the time of each acquisition.
Our guidance reflects the contract terms of the patent licensing extension with Micron I mentioned previously, as well as the inventory digestion impacting our buffer chip business. As we've been discussing, we've been monitoring the inventory build we thought at the beginning of the year and we're confident this pause doesn't reflect any change in our competitive position or market share. As Luke mentioned, we expect to be through this in early 2021. Our Q4 guidance on buffer chip reflects annual growth of over 50% year over year and is almost 30% better than what we anticipated at last year's Analyst Day. In total, our Q4 guidance reflects financial results for 2020 that are substantially better than what we expected in last year's Analyst Day on both the top and bottom line despite the unprecedented challenges presented by COVID-nineteen.
We expect Q4 non GAAP total operating costs and expenses, which include COGS to be between $59,000,000 $55,000,000 as we continue to invest in programs. Under ASC 606, Non GAAP operating results for the 4th quarter are expected to be between $4,000,000 $14,000,000 loss. Non GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect this to be approximately $1,000,000 of expense which include $600,000 of interest expense related to the notes due in 2023. We expect our pro form a tax rate in 2020 remain consistent with our 2019 pro form a tax rate of 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 We expect non GAAP taxes to be between a benefit of $1,000,000 $4,000,000 in Q4. We expect our Q4 share count to be roughly 117,000,000 basic and diluted shares outstanding. This leads you to between a non GAAP loss per share of $0.0310 for the quarter. We have gone through a successful transformation over the past several years, and our strong pot growth has offset structural step downs and pad licensing, the divestiture of payments and ticketing, and the shutdown of our lighting business. This has resulted in a roughly flat top line as we transition back to our core semiconductor focus.
Through this transition, however, our operational discipline resulted in fantastic growth in cash from operations. As we look forward, the scheduled step downs of patent licensing will be behind us and in the coming years, we expect patent licensing to stabilize at the same level we expect to see in 2020. As I mentioned earlier, our product growth will translate into profitable growth in 2021. With that said, While we don't provide guidance beyond Q4, we're comfortable with the analyst consensus estimates at the top line and bottom line for each quarter of 2021. While the near term macroeconomic conditions are difficult for g, reflecting product growth that continues to be significantly better than the broader semiconductor industry.
Our confidence in our in the near $20,000,000 share repurchase authorization from our board that we announced earlier today. Let me finish with a summary on Slide 10. We're proud of the excellent performance by our team in this unpredictable macroeconomic environment and the progress we continue to make against strategic initiatives to drive long term profitable growth. While we understand that ASC 606 added a level of complexity that the underlying financial strength of our business remains strong. We have a predictable base of revenue and a demonstrated ability to generate cash.
We have refocused our product portfolio around Rambus' core strengths in the semiconductor industry and are well positioned with a predictable licensing base and multiple product revenue streams across our company. We have continued to execute and our operational discipline has yielded solid cash from operations. We continue to leverage our 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.
Thank you Your first question comes from Suji Desilva with Roth Capital.
The, Raul, I model out ASC 605. I just wanted to check, the 3Q revenue, if I do my numbers, it seems to be $103,000,000 $0.30 of EPS. Does that sound like what the as of 605 might look like?
So Suji, I think what you're doing is you're substituting what we report for licensing billings for what, is royalty revenues. So you're kind of mixing some apples and oranges there, but I understand that's how a lot of our investors and analysts look at our company. And generally, that's how we look at it, ourselves. So I think if you were to do that math, yes, I guess it's the same numbers that you have.
Okay. And just to check
on the guidance for 4Q, I think, with the step down or the drop in the product revenue, it seems like it's more like 97,000,000 and 25 sets. Does that sound reasonable as well?
Yes. Again, you're doing math that
we can't publish, because it's a company specific non GAAP results. But if I were to do that math, I'd get the same numbers that you did.
Okay, good. And a couple of questions, quick on the financial perhaps, starting. You said, Raul, I think the 4Q 'twenty were licensed step down is the last one you see in the near future quarter wise. Is that correct? 21 is a more normalized year without any expected step down.
Is that what you were saying?
Yes, that's right. So this is something that we've been talking about for not just quarters, but I think for years. Just the agreements that we signed over the past several years, 2016, 2017, 2018, we're structured in a way that allowed our partner take advantage of a very positive time in our industry with some more payments upfront and then fewer billings. But what we said fairly consistently is that we think for the full year of 2020, that should be roughly the rate we'll be at for the next several years. We were very excited to extend the Micron agreement for 4 years instead of what was contractually 3.
So that extension then comes back up at the end of 2024. And as you know, we have Samsung coming up in the middle of 23 and then Hynix also in 24. So what we said is we expect licensing billings to be roughly flat now, for the next several years of the basis we had in 2020. The one caveat is that we also have our Silicon IT businesses. And in some cases, there are billings associated with that business that also up in our licensing billing.
And I think as I mentioned in our prepared remarks, there's probably about $40,000,000 of licensing billings in 2020. That's really related to the Silicon business. But that base associated with just our patent licensing business, I expect to be roughly flat for the next couple of years. Because we don't have large extensions and roles with big, 3 DRAM partners until 2324.
And then maybe one more question for Raul and perhaps Luke. With the burgeoning cash amount, I appreciate the buyback's input in place. But with the success of the recent acquisitions, can you talk about target area to further acquisitions? Is it similarly beef up memory security? And what size of acquisition are you perhaps willing to go to now or similar as before?
Hi, Suji. This is Luke. Yes, thanks. Yes, we continue to generate cash every quarter, and we're pleased with this buyback. We completely look at acquisitions, we would like to continue to grow, so the larger the acquisition, the better.
But looking at anything that complements our offering in the daylight infrastructure, to grow our business through acquisitions. We look at this very regularly. We say no to a lot of acquisitions that we think not going to be good for us strategically or financially, but that's, assigned to it to our strategy going forward.
Okay. And maybe a few more perhaps for Luke. On the data center side, the memory buffer opportunities count to 21, is the visibility driven by a resumption of Intel form that brings the data center spending back or data center cycles? Or is it your share gains perhaps you can talk about what's your ending calendar 20 shares versus total share opportunity?
Yes. So we continue to gain a share in 2020. As, you know, Raul said, we generate, we plan to generate about 50% growth over the last year in a market that probably grew at 5%. It was heavily front end loaded because, ecosystem ordered more in the first half. I would see early consequences of COVID nineteen.
Those fears are winding down and people are going through the phase of digesting the inventory. But overall, although the profile was heavily loaded in the first half, less in the second half, we grew 50% over the last year in the market, to only 5%. So we continue to gain share. Now when we look at 2021, there are a few things that are tailwind for us. One is we believe that early in the next year, this, inventory digestion is going to be over.
The, processors, from the next generation processes for Mitra are going to be long in the market. And as we said, we are processing independence. So whatever the share between A and B and Intel you know, as long as the market grow, we grow with them. Now in the longer run, we have the upside coming from DDR5. We have today, all of our DRAM customers have in place sample orders for DDR5.
Our CD and DVs. So that's going to be an upside for us in
the longer run that's going
to start to ramp at the end of next year. And we invest into the companion shifts that are going to be required on the GFI platforms as well as new architecture that we believe are going to emerge over the next few years, especially from the cloud companies. So that's, that's the business that is showing very nice growth potential for us, a very light share gain for us. We just need to go to reach, Q4 where we think, you know, the, impact reduction is going to happen. But all of, after that, we rarely see clearance.
Okay. Last quick question, Luke. I'll pass it along. Any thoughts on the Intel NAND divestiture to Hynix and the implications for reference?
It really doesn't have any implications for us. I think this is part of the industry consolidation. I think what's happening in the industry is that, we see a lot of consolidations. I think people are going to start to develop building specific platforms because they have to deal with, an exponential growth of data workloads, coming from the new application like video, work from home AI and so on and so forth. So we see some of that consolidation happening now in the industry.
For us, it's all benefit because what it means is that everyone's going to need to have access to more data faster, and that's where we spend our some money. And I think it's going to be very inquiring more security as well. And if you look at the track record of security design wins, we see this being translated in that track record. So all of this is good for us. But as Kieran is going to enter, it doesn't have a direct impact on our business.
Your next question comes from the line of Gary Mobley with Wells Fargo Securities. You may now ask your question.
Hey, guys. Congrats. Strong finishing the year. And thanks for taking my question. I wanted to ask about product cycles for the buffer chip business as we look into next year.
First, when you get your opinion on who will be the first to adopt the will be the hyperscalers. And then with respect to Intel's 10 nanometer ice lake, moving from 6 memory channels to 8, wonder if you can give me, sort of a take on how that might relate to your to your average selling prices and your content in these memory modules.
Yes, thanks, Gary. These are really good questions. So first of all, the move to 6 to 8 channels, is going to happen before DDR5 in the next version of the DDR4 processor from Intel. And that will give their customers the ability to populate more memory for a process So that's a potential growth in the market. And that's going to be up to
their customers to decide whether they they realize that growth of logs, because all
of their platforms are going to move to from 6 to 8 memory channels. When we move from, isolate with 8 channels in DDR4 to, the DDR5 platform. So we're going to stay on an 8 a channel platform. So that capacity of potential is more memory code processor will continue. For us, we see a couple of triggers for next year.
1 is the move to ice lake. And the fact that every time you have a new platform, there's an opportunity for us to have a better a design win footprint. And we know that our footprint for ice lake is better than what it was for captive lakes. So that's the first thing that is happening. So DDR5 I think we really run when the old ecosystem is ready as there are different stages of development when I say there.
So processor guys and the memory guys as well. The good news for us is we do have, some simple purchase orders now from all of them. We are shipping into modules and these modules are shipping into the very early samples in system companies. So all of these are good signs that I think, when, when, when everyone is ready, we're going to be in a very strong position to, enjoy a nice share from these swamps.
Thanks for that, Luke. To you, Raul, I wanted to ask about your buyback in your timeframe for the buyback. In the past, you've done accelerated share repurchases. And, so I'm just wondering if you need to go at it this time with a more, I guess, methodical approach or slower approach. And if I knew in the math right, given sort of the offsetting lower share count, offset by lower interest income.
This could be potentially $0.20 accretive on an annual basis.
So, Gary, thanks for the question. To put a little bit of context, the last time we did a share repurchase authorization was in 2015 and that was also for 20,000,000 shares. And then from an actual activity perspective, We did about $100,000,000 of accelerated share repurchase in 2015. We did another, I think, $50,000,000 in 'seventeen, another $50,000,000 in 2018. So that's how you get to the 3.6 that was on the previous authorization, which we canceled with the new one.
The reason I provide that history is that this is something we look at several years in the future. I think it's a very strong signal from our company and from our board that we believe in the long term value of our company. Now that said, we have done accelerated share repurchase in the past, because I think it's very positive signal. And it also gives us the surety of taking shares out of market. But then we're opportunistic in terms of when we actually act Now, of course, we can't be in any possession of material non public information whenever we choose to be in the market, so we have to look at some of those guidelines as well.
But if you look at what we've done in the past, what that typically refers to is about 40 40% to 50% of our expected free cash flow over the next 3 or 4 years. So that's, I think, how we look at how we size that amount Hopefully, that's helpful to you.
Sure. I appreciate the commentary with respect to your comfort level with current consensus year 'twenty one, which I believe, currently, from a revenue perspective, sits at $437,200,000, which course, there's an adjusted revenue number. But I was wondering if you can give us any sort of preliminary view into, sort of your OpEx trend against that backdrop?
Sure, sure. So just from an OpEx trend, I think what we look at is we're going to continue to look at investing in our business right? We have done a fantastic job over the past couple of years of taking cost out of our company. So what you would see is from a total OpEx perspective is that, it'd be a little bit larger than we have in this this year 2020 because we will continue to go invest in our programs. I think I'd expect to see our gross margins on
the product side continue to
be very strong, kind of in the 60% to 65% range. And then you also have high margins in the Silicon IP business as well. So I think that's what adds up to our comfort both on the top line as well as the bottom line for each quarter of 2021.
Your next question comes from the line of Sidney Ho with Deutsche Bank. Can we now ask your question?
Hi, this is Jeff Randall on for Sydney. Congrats on the nice quarter. Early in the year, you announced a the agreement with the Chinese company building DRAM, have the recent escalations and trade tensions had any impact us
on this and how do
you think about the China market going forward?
Basically, we've watched what's happening in China like everyone else, but, what's the tensions really don't have an impact, direct impact, I would say, on that agreement. This is pure patent licensing agreement. This is a legal agreement that allows the partners in China to build DRAM devices. And this is a a royalty agreement. So our revenue will ramp when they ramp their products.
So I would say the impact could be indirect depending on how fast they run their products for other reasons, but it would not have direct impact. This is just a legal agreement for to be able to deal with Ziva as well.
Great. Thanks.
I'm just going to add
a little. What we talked about is that we don't expect to see significant impact from a dollar perspective in the near term, just as the partner is ramping. And as Luke mentioned, there's no technology transfer in the Black It's just a legal agreement that allows them to ship. I think one of the benefits of the license firm from my view is that, license agreements are usually 5 years or longer. And so that extended beyond the existing renewal and extension timeframes for or the big 3 d ramp manufacturers and it just talks to the strength and relevance of our portfolio.
Great. And then just following about commentary from earning so far point to on premise IT spending still being pretty weak. Can you talk about how on premise spending risk cloud spending impacts your business?
You mean on profit spending compared to what's the rate?
Yes, compared to client spending.
Well, it's difficult for us to, to, track that. Our, in partnership business mostly goes into, data center types of types of applications. We see a shift from a cloud demand from from enterprise to cloud demand, but that does not affect us because you need memory modules, so either not price or in cloud. And just by the same token, we said we were almost eating difference to a relative share instead of A and D. Kind of indifference to the share between enterprise and cloud.
So as long as the market grows and we continue to gain share in terms of design win footprint, we should see a nice, continuation of our share gain in that, in that space. We don't ship any products into the client space. In terms of buffers.
Your next question comes from John Pitzer with Credit Suisse. Can you now ask a question?
Yes, guys. Congratulations on the solid results, especially the free cash flow. And thanks for letting me ask the question. I guess my first question is on the data center digesting you see in the calendar fourth quarter, is there any way to quantify kind of the hit that you're expecting to see in the fourth quarter because of that? And is this because customers have too many, too much CPUs.
They bought too much early in the year, or is it because they actually have too much memory? And I guess, important to get as you think about visibility as to data center coming back, why are you confident that it's only a 1 quarter phenomenon?
Sure, Don. It's Raul, and thanks very much for your commentary. Let me start now. I'll see if Luke would like to add. If you look at the guidance that we gave Q4.
We had our buffer chip business dropping from roughly $30,000,000 in Q3 to about $21,000,000 in Q4. And what we said is that all of our channel checks and conversations with our partners indicate that this should come back sometime early next year in terms of what's there. I think it really is the best way to use is inventory digestion. And I think our partners and you see this downstream the last John are just being very cautious in terms of how much inventory they have in hand. Now it's really something we've been talking about all year, right?
We saw great demand in the first half of the year. And I think really that was because of the uncertainty of what was going to happen from a supply chain perspective under COVID. I think now, as Luke mentioned earlier, as people have better visibility and have more faith in the resilience of the supply chain, then what they're trying to do is just go manage their inventories. So I'll pause there and see if there's anything Luke wanted to add.
Yes. I think what has happened, John, is, earlier in the year, the system company started to build it. Thanks for because they were concerned about some, disruptions downgrading the supply chain. But these inventory buildup far as we understand, it was more upstream from us at the system level. Now these concerns have gone away.
So people are starting to just digest the inventory at the system level. You asked question about is it possible? Is it memory engine? That's the great question. The memory is on a different site still can populate their systems late, in, in the process.
They can build system and their elastic populate their memory, which is good for us because if we track that, we can track how our memory, related sales that are going to go, but also because this is populated late in the process that gives us flexibility depending on who gains share to in that transition. But what platform ramps when, at the end of the day, those memory modules are going to be used in one of the other platforms. When things go back on track. Again, the view on Q1 is based on just talking to the ecosystem. That's a very close ecosystem.
With their strong payers, that's the, that's the current view. We see Q4. I'm going to see the digestion early next year. I'm going to see demand picking up again.
That's good color. And then just as my follow-up, Raul, you kind of implicitly answered this when you commented that you feel comfortable with street consensus estimates for the quarters next year in 2021. But I'm just kind of curious on the OpEx front. How do we think about kind of COVID as an OpEx driver, how much more expensive was this year because of COVID? And conversely, were there any cut that you were able to take out of this year's OpEx, is that coming to next year's OpEx?
I'm just kind of curious how we should
be thinking about that dynamic.
Yes, John, that's a great question. And I think as I mentioned earlier, we've done a fantastic job over the last several years taking costs out of our company. You see it in guidance from operating expenses and you see it in the overall come down particularly in terms of SG and A. I think from a COVID impact, we actually had fewer expenses here, particularly related to travel. And that's something I think that helps us.
One of the things that I think we've done very well this company is use the opportunity with COVID to kind of reimagine how we want to go run our company. So things like hybrid work and our facilities with them, for example, right? So I think there are definitely things that we can do to continue to take costs out of our company next year. And what we're going to do is then take that cost that we might have otherwise had on infrastructure and invested back into programs. I think I've been delighted with the growth in our product program.
So it's something where we're using the learnings we've seen over the course of this year with COVID to become more efficient next year, as our employees come back to work. I hope that helps answer your question. I gave some feedback a little earlier just in terms of range of of OpEx. I think I'd see a little bit of increase, specifically on the R and D side year over year, but you should have flat or SG and A coming down.
Perfect. Thanks guys. Appreciate it. Thank you, John.
Questions. Your next question comes from Mark Lopez with Jefferies. You may now ask your question.
Hi, thanks for taking my questions. And I just want to make sure I was clear on this. So for the renewed Micron contract. This is under the same terms as before, and there's no change in revenue recognition from an ASC 606 standpoint. That go ahead?
Did I understand that properly?
So let me spend a
little time on this, Mark, because the reason that it could sound confusing is because it can be and it is. When we adopted ASC 606 in 2018, if you look at the existing agreement we had with Micron, because of the nature of the agreement, essentially, we had earned everything associated with that contract even through the end of this year. So when we adopted ASC 606 in 2018, the entire balance was adjusted. As part of retained earnings and the entire value of the contract. Now when we had the renewal that we signed in Q3, that renewal actually doesn't come into effect until next quarter in Q4.
And then what ends up happening is that from a billings perspective, contractually that contract comes down by 5,500,000 for us in in Q4. And so that's why you see kind of a delta in terms of our expected results from Q3 to Q4, and that comes back up to $10,000,000 a quarter in Q1 of twenty twenty one. And it should be, $10,000,000 a quarter from Q1, twenty twenty one all the way through the next 4 years. So Q4 of 2024. Now from an ASC from let me back from a billings perspective, it'll just be $10,000,000 a quarter for the next, 16 quarters.
From an ASC 606 perspective, because we've essentially signed an extension, I do expect that we'll be able treat that agreement as a variable contract and recognize ASC 606 revenue on a quarterly basis starting in Q1 of 2021. So as I mentioned in my prepared remarks, I don't expect to see a massive one time entry for revenue in Q4 when that license essentially takes effect, nor do I expect to see a massive increase in our contract asset or unbilled contract asset? Rather what I'd expect to see is that us, able to recognize that ratably as ASC 606 revenue, from 21 through 24. Hope that helps answer your question.
Got you. I think I understand. So previously, when you adopted 606, you took a one time, you took a one time revenue, you recognize one time revenues. And then just on a billings basis, you would get the you would get you'd have billings, but you wouldn't have ASC 606 revenues recognized on this?
Sorry, Omar, if I couldn't help you because actually, because the contract was signed before our adoption of ASC 606, we were never able to recognize revenue. It was a one time to retain your earnings to reflect the time of that billing. So it's one of the vagaries of 606.
So the change, so you are going to recognize revenues quarterly now from Micron according to ASC 606.
Starting in Q1 of 'twenty one. That's correct.
Got you. Okay.
Okay. That's great. And do you think is this what you would expect to happen with future contracts as they
come up for renewal?
So, Mark, that's exactly what we've been trying to do. As we sign new agreements or as we sign renewals or extensions is to have contracts that are more friendly from a 60 perspective. But we've also been very straightforward that we're not going to give up economic value in order to get slightly better accounting But yes, in our rules and extensions, that's what we've been trying to do.
Okay. All right. Understand. So your your revenues recognized and expenses recognized on Micron going forward are going to more closely remember, resemble your cash flows. Is that fair?
Yes, we don't really have specific expenses associated with Micron. But the revenue associated with that will be better. And it's one of the things I mentioned in my prepared remarks is that Given the variable treatment of the Micron extension as well as our expected growth in buffer chip, I expect to see a fairly significant increase in AC 60 revenue in 2021 versus 2020.
For me again. Now on the share repurchase, is the way to think about this that you guys throw off a lot of cash, you look for opportunities, you look for inorganic opportunities, if none manifests, you build up a pile of cash and then you say, okay, well, the right thing to do is return this to shareholders. Is that Is that the right way to think about your MO?
So Mark, we've been very consistent in terms of capital allocation. We look had organic investment in organic and then returned to shareholders. And we ended the quarter with, I think, $520,000,000 of cash. So we continue to do a great job investing organically in the places that are growing and you see it, particularly in our product growth. We've also been active inorganically.
I'm very pleased with the progress on the 2 acquisitions we made last year. When we look at our cash balance, what it shows is that we have enough cash on hand to continue to invest organically and also to continue to participate in states in the industry consolidation from an inorganic perspective as well. And then what we've done is, then been kind of opportunistic in terms of this capital return as well. So I think as I mentioned earlier, it continues as part of our commitment as the company. To return cash to our shareholders.
And what we target is returning somewhere between 40% 50% of free cash flow back to our shareholders. And we've been doing a pretty good job of that over the past several years. One thing also is, just to be clear, the share repurchase does not preclude us from doing the right M and areas in terms of data center and memory and security. And we're constantly looking for more opportunities to add to our business like we did very successfully last year. What I'd also remind you is for our size, we had relatively little debt.
We had one convertible issue that comes to you, I think, in in early 23. There's a call spread there, so it's not dilutive to us until we're training at $23.30. So it gives us a level of firepower that I think is unusual for unusually high for a company our size. And certainly, we'd like to see ourselves continue to grow both organically and inorganically.
Very helpful. Thank you. We'll appreciate that.
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 Luke Therapine.
Thank you to everyone who has joined us today for your continued interest and free of time. We hope each of you stayed safe and healthy and look forward to speaking with you again soon. Have a great day.
Thank you.
Thank you. This now concludes today's conference.