Welcome to the Rambus Third Quarter And FY19 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 Raul Matter, Chief Financial Officer. You may begin
call. I'm Rahul Mather, CFO, and on the call with me today is Luke Sarafin, our CEO. 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 855-859-2056. You can hear the replay by dialing the toll toll free number and then entering ID number 717-0477 when you view 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 a big time. Our discussion today will contain forward looking statements, including our financial guidance for future periods, product and investment strategies, timings expected product launches, demand for existing and newly acquired technologies, the growth opportunities of the various markets we serve, the expected benefits of our merger acquisition and divestiture activity, including the expected timing of transaction completions and the success of our integration efforts, the effects of ASC 606 on reported revenue 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 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 included in our press release, in our slide presentation and on our website rampus.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 to provide an overview of the quarter.
Thanks, Raul, and good afternoon, everyone. Over the past year, we have consistently demonstrated strong and product revenue growth, while meeting or exceeding the expectations in the market. This quarter was no exception with revenue above the high cash from operations, thinking the year to date total to $93,100,000, which already exceeds the cash generated for all of 2018. The company has made tremendous progress toward the strategic objectives set out at the beginning of the year that are critical to our company's success. Our efforts continue to be driven by refocusing our product portfolio and research around our core strength in Semiconductor optimizing the company for operational efficiency and In Q3, we had significant M and A activity in line with our areas of focus and mission to deliver data faster and safer.
We announced 2 exciting silicon IP acquisitions that will enhance our offerings and expand our market position in interfaces and security. We began with the acquisition of Digital Controller company Northwest Logic as a market leader in memory PCIE and NIPI Digital Controllers, Northwest Logic expands our interface solutions for data center AI communications and automotive. Every SOC design that uses the PHY also needs an associated controller. With a combination of complementary digital and physical IP portfolios from Northwest Logic And Rambus, We can offer fully integrated PCIe and memory interface subsystems for our customers. As we mentioned in last quarter's call, this transaction will not materially impact 2019 results, having just closed in August.
But we expect it to have an immediate positive impact on the business and be accretive to revenue and earnings in 2020. We also announced an agreement to acquire the secure silicon IP and protocols businesses of Veri Metrics formerly Insight Secure. Much like the purchase of Northwest Logic, the anticipated acquisition of the Insight Secure teams and offerings we augment our portfolio of offerings for data center, AI, networking, and automotive. This will bring more mission critical embedded security products, expanding our global reach and creating the industry's most comprehensive portfolio of Silicon proven security IP and Chief Provisions. We expect the acquisition to close before the end of the year, subject to customary regulatory approvals.
Finally, 2 weeks ago, we closed the sale of our payments and ticketing business to Visa, marking a very important milestone for the company. This deal was a critical step for Rambos and redefined our perimeter in the semiconductor markets. While the Rambus team has worked very hard on successfully closing and integrating our acquisitions, Our business units continue to execute on existing programs. We continue to drive sustained revenue growth in Silicon IP with key design wins for both our interface and security IP solutions. We closed 4 Tier 1 SoC design wins across the portfolio for data center, Edge, IoT and governments.
We also announced a combined interface and security IP win at SEKAR, for aerospace and satellite communications. The team expanded our portfolio with leading edge interface solutions for GDDR6 HBM2 and 112 gig on TSMC's leading edge 7 nanometer process. These are critical building blocks for AI data center, 5g And Automotive. And finally, we announced the industry's fastest complete memory subsystem solution for GDDR 6, including the PHY and controller capable of running at 18 gigabit per second. Turning now to chips.
Q3 was the 2nd consecutive quarter of record revenue for our memory interface chip business. Which we now expect to almost double year over year. This is driven by increased OEM and data center qualifications, leading to steady gains in our DDR4 memory interface chip market share. The industry is also starting to recover from the softness earlier this year in the memory market. In closing, Rambus has made tremendous progress toward the strategic objectives critical to our future, and have successfully realigned the company around our core strengths in Semiconductors.
With record revenue from our chief business, and continued silicon IP design wins at Tier 1 SoC customers, we exceeded our commitments to the market and delivered a great third quarter. With that, I'll turn the call to Raul to discuss the quarterly financial results. Raul?
Thanks Luke. Like to begin with our financial results for the third quarter. Let me start with some highlights on Slide 6. As Luke mentioned, we continue to execute in our product businesses and delivered solid financial results above our revenue and earnings expectations. We've adopted AC-six's 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 an accurate way to track additional performance. Revenue was higher than our expectations due to strong buffer chip sales. We have a very strong balance sheet and ended the quarter to cash, cash equivalents and marketable securities of $338,000,000, flat from the previous quarter as cash from operations of 25 $600,000 was offset by cash used for the acquisition of Northwest Logic. We delivered solid results while continuing to leverage our with a focus on chips and silicon IP. Now let me talk you through some revenue details on Slide 7.
Revenue for the third quarter was 57.4 dollars above our expected range due to market share gains in our buffer chip business. Royalty revenue for the third quarter was 19,400,000 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 the same quarter we bill our customers. Going into additional detail, our product revenue was $21,400,000 consisting primarily of our buffer chip business. Our contract and other revenue was $16,600,000 consisting primarily of our silicon IP business.
As we expected due to the timing of the close, our acquisition of Northwest Logic did not have a material impact on the third quarter. We recorded $5,100,000 of revenue and $6,800,000 in operating costs and expenses associated with our payments and ticketing business in Q3. Let me walk you through on a non GAAP basis. Cost of revenue plus operating expenses for what we refer to as total operating expenses for the quarter came in chip revenue. Excluding payments and ticketing, our profit was nicely above our expectations.
We ended the quarter with headcount of 8.40, up from 772 in the previous quarter as we welcomed employees from Northwest Logic and converted several long term contractors to employees in Bangalore. Under ASC 606, we recorded $4,900,000 of interest income related to the financing component of our fixed fee licensing arrangements for which we've recognized revenue, but not yet received payment. We incurred $600,000 of interest expense 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 financing component related to ASC 606, this would have been $1,000,000. Assuming a flat rate of 24 percent for non GAAP pretax loss, non GAAP net loss for the quarter was $2,900,000 or a diluted net loss of $0.03 per share.
Now let me turn to the balance sheet details on Slide 9. We are very pleased with the strength of the balance sheet. Cash, cash equivalents, and marketable securities totaled $338,000,000 flat from the previous quarter as cash from operations of $25,600,000 was offset by of Northwest Logic. Our Q3 ending cash balance doesn't reflect the cash we received for our payments and ticketing business nor does it reflect what we expect to pay for the secure silicon IP and protocols businesses of Verimetrix. Given 93,100,000 of cash from operations through our first three quarters, we expect over $100,000,000 of cash from operations this year.
Our strong balance sheet allows us the flexibility to invest strategically in our patent portfolio and in our growing product programs. At the end of Q3, we had contract assets worth 560,000,000 which reflects a net present value of unbilled AR related to licensing 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. It's important to note that this metric doesn't represent the entire value 6. As a sale of our payments and ticketing business did not close until October 21st, at the end of Q3, we classified the assets and liabilities for this business as held for sale.
The net carrying amount of this business as of the third quarter was $74,000,000 considering assets and liabilities. After considering the $75,000,000 purchase price and transaction costs, we recorded a recovery of $1,900,000 in Q3 that offset the impairment charge in our Q2 GAAP results. 3rd quarter CapEx was $3,200,000 and depreciation was $4,400,000. Looking forward, I expect roughly $3,000,000 of CapEx for the 4th quarter and that makes roughly $9,000,000 for the full year of 2019. I also expect depreciation of roughly $4,000,000 for the fourth quarter and roughly 14,000,000 for the full year of 2019.
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 10. 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 financial outlook under ASC 606, We've also been providing information on licensing billings, which is an operational metric that reflects amounts, invoices to our licensing customers during the period adjusted for certain differences. As you see in the supplemental information we provided on Slide 16 of our earnings deck, licensing billings closely correlates with what we had historically reported as royalty revenue under ASC 605.
We expect to close our transaction with Ferra Matrix in Q4 as we complete regulatory approvals and other customary closing conditions. Until we close, those financial results will not be included in our guidance. With that said, under ASC 606, we expect revenue in the fourth quarter between $50,000,000 56,000,000. We expect royalty revenue between $15,211,000,000. We also expect licensing billings between $60,000,000 $66,000,000.
Excluding the payments and ticketing business, we expect q 4 non GAAP total operating expenses, which includes COGS to be between $59,000,000 63,000,000. We remain focused on our execution and are very pleased with our continued market share gain in our buffer chip business. We now expect that business to nearly double year over year ending near the high end of the $50,000,000 to $70,000,000 range we had anticipated previously. Under ASC 606, non GAAP operating results for the fourth quarter is expected to between a loss of $12,000,000 $2,000,000. The non GAAP interest and other income and expense, which excludes interest income related ASC 606, we would have expense related to the notes due in 2023.
Based on the new tax legislation passed at the end of 2017, we expect our pro form a tax in 2019 2020 to remain consistent with our 2018 pro form a tax rate of roughly 24%. The 24% is higher than the $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 a benefit of $3,000,000 in Q4. We expect our Q4 share count to be roughly 115,000,000 basic and diluted shares out outstanding. This leads you to between a non GAAP loss per share of $0.08 $0.01 for the quarter.
Looking ahead to 2020, we remain comfortable with the business outlook we provided at our Analyst Day in September. I expect our revenue trends by quarter to be similar to 2019 with Q1 down seasonally, slight improvement in Q2 and then growth in Q3 and again in Q4. I expect our total expense trends, including COGS, will be more linear through the year, with small increases in Q3 and Q4 for higher product shipments. I also expect CapEx of $26,000,000 for 2020, roughly half of which is related to our headquarter move in the first half of the year and depreciation of $20,000,000. Let me finish with a summary on Slide 11.
We are proud of the solid performance by our team and the progress we continue to make against our strategic initiatives to drive long term profitable growth. We've had a significant amount of M and A activity as we refocus our company and are very pleased with our execution on organic and inorganic growth. While we understand that ASC 606 added a level of complexity to our financial reporting, it's important to reiterate that the underlying financial strength of our business remains strong reflected in our demonstrated ability to generate cash. In closing, we have refocused our product portfolio around Rambus' core strengths in the Semiconductor industry improved our operational efficiency and profitability generated solid cash from operations and leverages our strong balance sheet to support our strategic initiatives. We continue to focus on our core markets and are very well positioned for long term profitable growth.
With that, I'll turn the call back over to Benita to begin Q And A. Could we please have our first question?
Your first question comes from the line of Suji Desilva with Ralph Capital.
Hello, Kybrahim. Congratulations on the strong cash generation here. So, every quarter, I I try to go through these numbers to make sure I get the kind of address 605 pro form a correct, if I did the math correctly. So for Ronald, for 3 2 19, I get revenue of a 100 $1,000,000 would have been reported an EPS of $0.23. Do those numbers sound reasonable?
So, Suji, I, we can't report the 605 numbers anymore as you know, but if I were to do that math that I think you're doing, I'd get the same numbers.
Okay. Good to know. And then for 4Q 2019, couple of moving parts here, but it seems like if I put it together, I can get to something like 98,000,000 midpoint revenue guidance in $2.5. And if you back out the payment attack and ticketing from 3Q, the revenue is a sequential growth. Does that sound right as well?
Yeah. Again, I understand the math we're doing and I would get the same results, but that's not math that we can do as a company.
Understood. That's fair enough. Okay. And then, for the business for 'twenty, you reiterated the guidance from the Analyst Day. Can you give us maybe some more color or detail on what, Northwest logic of Bear Matrix contribute to the 20 run rate?
So we have some idea of the inorganic versus organic year over year?
Yeah, absolutely. So what we expected and we said this at our Analyst Day in September at New York is we expected Northwest Projects to generate roughly 10,000,000 secured to generate roughly $20,000,000 of revenue for us, in in 2020. And both of these should be minimally accretive to our EPS Now as a reminder, we have for a significant portion of 2019. So when you strip take those numbers out of 2019, you see very nice growth across the board in our product businesses. You see product revenue.
I think what we said is we expect to be at the high end of our range for, for 2019 of almost $70,000,000. And again, that's almost entirely our buffer chip business. And I think what we said in September is that our range for that product revenue in 2020 is between 75.95. So that's a business that's growing very nicely. What you also see is growth in our Silicon IP business, and that's, really reported as, as contract and other.
As a reminder, there's about 20,000,000 of billings that we have in licensing billings that we think are really directly related to that silicon IP business. So if if you had, I think what we said in September between 70 90 or 80 at the midpoint, yeah, that 20, I think in in 2020, that's almost $100,000,000 of billings associated with our silicon IP business, which is really nice growth over 2019, both organic and inorganic. So we're certainly pleased with our execution of our business. As we've talked about repeatedly, Suji, what we see is structural in our structural patent licensing agreements to see step downs in certain agreements that we have. And what you see is then that product growth is offset any step downs that we have.
And we're also growing from a bottom line and from a cash from operations perspective as well. So we're very pleased with our performance and the guidance.
Okay. That's a lot of helpful color, Raul. Appreciate that. And then a couple more questions before I pass it on. The DDR4 memory, you had, kind of upside versus expectations.
Was this driven potentially by perhaps the hyperscale or data center recovery that Intel called out, or are there competitive factors versus IDTbranded sauce that might be also in the mix here?
Hi, Suji. It's actually both we do see some recovery in the market. We see the inventory levels normalize in the market and demand is up from a data center and they resume purchase to our customers. So that's one factor. The other factor is that, we are starting see the results or continue to see the results of our design win activity on the Cascade Lake platform where our footprints of design wins was twice what it was on the Skylake platform.
So the combination of our increase of footprint in the design wins with the recovery of the memory market explains these results for the buffer chip. Okay.
And my last question is, you talked about, closing a set of deals here in the quarter. I was curious what the numbers were, relative to that, the number you reported in the most recent quarters, whether, whether that's a typical level of number of deals you'll see or if there's more or less than a a typical quarter historically.
Yeah, I think Q3 was very active for us because we were able to, announce the divestiture of our payments and ticketing. And then we also announced the closure of, northwest logic and our intent to acquire the business from their matrix. I think we have an opportunity. We have very strong balance sheet, and we definitely have an opportunity to continue to drive more inorganic growth. But it's really driven by what the opportunities are and they align from a timing perspective.
I think we will continue to be judicious. What I'm very pleased with is that certainly, the execution on the divestiture of payments and ticketing helped refined our focus back to our semiconductor business. And certainly, the acquisitions in Northwest Logic, we expect to acquire from Inside Secure, very nicely bolster both our memory and security solutions of that silicon IP business. I think we certainly will expect to continue to look forward to other inorganic opportunities.
Okay. Thank you very much guys.
Your next question comes from the line of Gary Mobley with Wells Fargo Securities. Mr. Mobley, your line is open for your question. There's no response from that line. We'll go we'll go to the line of Sydney Ho with Deutsche Bank.
Great. Thank you. Just want to follow-up to previous questions. At the Analyst Day you gave a full year guidance for next year's, architectural license billings of $2.20 to $2.40, which is now about 1 about 10% from this year, just taking the midpoint of the guidance one, is that still a valid assumption? And if so, can you help us understand the moving pieces?
How much of that decline is related to sale of the ticketing business? How much related to any scheduled step down that like we've seen this year. And what kind of growth does it mean for the rest of the businesses?
Yeah, it's a great question, Sydney. And what I'll tell you is that, there's really not that much of that that's related to the payments and ticketing business. Most of the revenue in the payments and ticketing business was more in the contract and other segment. We did have a little bit in that, licensing billings, but most of the, the revenue that we recognized in contingency was under contract and other. It really is almost entirely related to just the structure of our licensing agreements.
What we did is we signed long term licensing agreements from 2014, 2016, 2017, And those have very defined structures in terms of how much, we are able to collect from our partners each quarter. There are some of those agreements which are our royalty based, and so you will see some variability in terms of of what we come in. But really it's it's almost entirely related to just the the structure of those agreements. What we found is that those years were very strong for many of our partners and our partners took that as an opportunity when they were having strong years. To, upfront some of the payments that they had in those agreements.
What we looked at is what the total value and we're very comfortable with that total value. But again, to answer your question, it's almost entirely related to the structure. Looking forward beyond 2020, I'd expect it to be really flat with what we showed here. There are upsides. I think one thing that we've talked about that's very difficult for us to predict is, is really what happens with China.
And again, how that happens and how those agreements are structured are going to be something that that will will work through. But hopefully that helps to answer your question.
That's helpful. Thanks. Follow-up, maybe a follow-up question is on the crypto manager business. You announced the design with Micron at the end of last year. And I think Micron just announced that product and service has met fact, just a couple of weeks ago.
Can you help us understand your revenue opportunity there? How do you think about the ramp? How would it look like? And maybe comparing contrast with some of the well, I guess the other customer that you have announced in the past?
Just to clarify things. So our crypto manager device key management system is the software foundation that Micron is using the authentic key management services and for the IoT application. So it's nice to see that this product is being commercialized As every one of our crypto manager deals, it's a combination of license to that customer that sometimes is linked to volume tiers. And that's, that's the kind of business model that we have, and we cannot give more details than that. But it's a great opportunity for us.
We are the software foundation for the IoT services based on that memory. That they just announced.
Okay. Maybe one quick question for me. In terms of the 5 g side of things, we've been hearing there's a lot of acceleration of 5 g 5 g infrastructure, build out. And the expectation is what 5 g hands are quite high, maybe 200, 250,000,000 units next year. Can you help us understand how and when you will start benefiting from that kind of rollout?
Yes, Travis, a great question. We actually start to benefit from the deployment of 5G. One of the key interfaces being used in 5G tends is a PCIe you join for ID interface using 30s at 32 gig per second. So a lot of the design wins that we have announced over the course of the past quarters actually used in SoCs that are being used in 5G infrastructure. So the way we benefit from 5G is actually people designing SoCs with that type of interfaces that are required for 5G.
In the call today, we mentioned several types of applications that are using our IT course. I would just add to add to add to this that these are with very large cap our customers, our trendsetters, and one of them is actually addressing the 5G market.
Great. Thank you very much.
Thank you, Seema. At this time, there are no further questions. I would now like to turn the conference back over to Luke Thank
you everyone for your continued interest and time and have a good day. Thank you.
This now concludes today's conference call. You may now disconnect.