Welcome to
the Rambus First Quarter And Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Raul Mather, Chief Financial Officer.
Please begin.
Thank you, and welcome to the Rambus First Quarter 2018 Results Conference Call. I'm Raul Mather, CFO, and on the call with me today is Doctor. Ron Black, our president and 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 939-2458 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. 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 web beginning today at 5 pm Pacific Time.
Our discussion today will contain forward looking statements regarding our financial guidance for future periods including Q2 2018 full year 2018, prospects, product strategies, timing of expected product launches, Demand for existing and newly acquired technologies, central benefits of our past acquisitions, the growth opportunities of the various markets we serve, and changes that we will experience in our financial reporting due to our adoption of the new revenue recognition standard starting in Q1 2018, amongst other things. These statements are subject to risks and uncertainties filed with the SEC, including our 8 Ks, 10 Qs, and 10 Ks. These forward looking statements may differ materially from our actual results were under no obligation to update these statements. In an effort to provide greater clarity in our financials, using both GAAP and non GAAP financial presentations in both our press release and also on this call. We have posted on our website a reconciliation of these non GAAP financials, the most directly comparable GAAP measures in our press release and our slide presentation.
Can see this on our website at rambus.com in the Investor Relations page under Financialsolutions. The order of our call today will be as follows: Baughn will start with an overview of the business. I will discuss our financial results, including the guidance we issued in today's press release. And then we will end with Q And A. I'll now turn the call over to Ron to provide an overview of the quarter.
Ron?
Thanks, Rahul, and good afternoon, everyone. We delivered a solid 1st quarter and are making strong progress across all of our businesses as we maintain our growth trajectory living up to our tagline, Rambus, making Getty faster and safer. From a financial perspective, In Q1, we delivered revenues of $46,400,000, which reflects the impact of the new accounting standard ASC 606. As a reference point, under the prior ASC 605 accounting standard, our 1st quarter revenue would have been $100,500,000, which included $2,500,000 exclude lighting. This equates to expectations.
So overall, we performed well with strong execution in our product groups, continued technology leadership on strategic programs, and ongoing licensing of our broad IP portfolio. Q1 was a positive quarter for our memory and interfaces division in both chip in IP cores. Our DD4 memory buffer chip business continues to grow with further OEM and cloud customer qualifications leading to further design wins at our customers. Indeed, we remain on track to meet our targets for the business drive significant revenue growth for 2018. As we look to the next generation We believe supports the top end speeds for both the RCB and DB chips.
We remain actively engaged with our customers and the ecosystem. Leveraging our head start and product development and learnings to help enable the industry develop both the hardware and software infrastructure required to support the bring of high quality DDR5 solutions. Moving to the other side of our memory and interface division, This quarter saw record revenues for IP cores as we continue to grow our portfolio with new technologies and expand into new market segments. As we discussed on our previous call, we launched our new GDDR6 Memory PHY in January. As part of a comprehensive solution alongside ecosystem partners, Micron, Northwest Logic, and Avery Design.
Leveraging our expertise in high speed interface design. As the first IP supplier to offer a broadly available GDR65, We aim to enable new markets outside of graphics that require high performance memory, including Indeed, during the call order, we closed our 1st major design win for a non graphics application. For the IP cores business, we continue to collaborate with our ecosystem partners to extend our foundry access and gain traction in next generation technologies. Solidifying our market leadership in leading edge process nodes and performance capabilities, while all the time feeding our IP portfolio with best in class innovation. Turning now to our security division, which consists of our cryptography, picking and payments product groups.
We continue to build strong momentum across all areas with solid commercial traction, product development and expanded patent licensing. Developers in our cryptography product group were part of the research team of world class security experts that earlier this year, identified 2 wide reaching CPU vulnerabilities called meltdown Inspector. These vulnerabilities highlight the need for a secure chip security by design with controlled secure processing that does not depend The discovery of these vulnerabilities reinforces the importance of SoC designs implementing a strategy of security first and highlights the value of our Crypto Manager security platform which absolutely uses this approach. Our 1st generation cryptomanager security engine was an embedded security core that acted as a Secure Vault for sensitive keys and configuration information that can be used for secure provisioning and device authentication throughout the lifecycle of a device. It was not, however, designed to provide processing capabilities or programmability with the core.
Recently, we announced our new next generation cryptomanager root of trust that does provide such secure processing capabilities. This next generation programmable secure core uses a risk 5 CPU that has been customized by our security experts to go beyond a secure vault enabled and enable the siloed execution of secure code within the core, thus helping to protect against vulnerabilities such as meltdown inspector. Also part of the cryptography product group is our DPA Patent Licensing program, which we continue to expand. In 1Q, we signed an agreement with Gemalto to provide access to our DPA countermeasures portfolio, which protects against side channel attacks. Turning to our ticketing brand services to train and bus operators across the UK.
Our mobile ticketing offering includes a ticket wallet service, and white label app that utilizes host card emulation or HCE to enable passengers to securely buy and download tickets directly to their smartphone, and then tap through the existing gates or readers to travel. We are looking forward to additional pilots in the coming months. Turning to our payments product group, there's ongoing traction for our tokenization solutions with worldwide implementation of our token service providers saw flare solution to replace traditional credit card primary account numbers with temporary unique identifiers, the payment tokens, that keep the actual account number secret. As global trends continue to shift toward new payment methods like peer to peer in real time payments, we see growing demand Our unified payment platform then enables multiple payment options for real retail scan and go experience using our bank grid tokenization security continues to attract global were in Asia Pacific to integrate and deploy the unified payment platform into their digital payment system. This pilot offers not only multiple payment options, but also real time loyalty point redemption with the convenience of Scan and Go and is all based on our hardened bank grade tokenization software.
More on this and other pilots in the coming months. Last, but certainly not least, is our Emerging Solutions division which focuses on advanced research, innovation, and IP development. We had 2 significant announcements from the division. The first was a partnership with IBM to develop hybrid memory system architectures for future data centers. Much like our ongoing relationship with Microsoft and cryogenic memory, we are collaborating with IBM to explore advanced memory system architectures targeted at solving the industry's key performance challenges.
As part of the collaboration, we will develop an architecture that combines attributes of DRAM and storage class memory to create a high capacity architecture at Lowe's cost per bit with performance levels comparable to that of DRAM. The second, which just came out last week, was the formation of a joint venture which focuses on commercializing embedded REIT resistive RAM access memory or reRAM. Rambus has invested in RRAM technology for several years in this joint venture is a natural way to continue the path to productization and provide innovative memory solutions for the next wave of state of the art mobile devices. In closing, Q1 was a strong With that, I'll turn the call to Raul to discuss the quarterly financial results. Raul?
Thanks, Ron. I'd like to begin with our financial results
for the quarter. Let me start with some highlights on Slide 5. As Ron mentioned, we delivered solid financial results in line with our revenue and EPS expectations. We've chosen to adopt the new accounting standard ASC 606 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. As a result, any comparison between first quarter 2018 results under ASC 606 and prior results under ASC 605 is not the best way to track the company's progress.
Under the old standard. To make this transition easier to the readers of our financial statements, we will present our results under both ASC 606 and ASC 605. This way, we can have a meaningful discussion regarding the performance of our business instead of focusing on accounting changes. Under our new accounting standard ASC 606, we delivered revenue of 46,400,000. Under ASC 605, we would have delivered revenue of $100,500,000, which included roughly $2,500,000 of revenue from our lighting division, which we closed in the quarter.
Excluding the benefits from RLD, our revenue was up year over year and in line with the midpoint of our guidance. Under ASC 606, we delivered non GAAP diluted loss per share of 10¢. Under ASC 605, we would have delivered non We delivered solid results, while continuing our investments in our business to drive long term profitable growth. To drive this growth, we continue to leverage our high margin historic businesses to fuel growth in adjacent areas where we have strong technical and market expertise with a focus on memory and security. Now let me walk you through some of point 4,000,000 under the new revenue accounting standard and would have been 100,500,000 under ASC 605, both within our expectations.
Year over year, excluding lighting, under ASC 605, our business was up 4%. As we've mentioned previously, the new revenue recognition standard has a material difference in the timing of revenue recognition for our fixed fee licensing arrangements. Our licensing business continues to perform well is the foundation of our success and is core to our initiatives in both our memory and security businesses. Going into additional detail under ASC 605, our memory and interface revenue would have been $78,000,000, security $19,900,000, and our lighting and display technology revenue, which we closed midway through the quarter, $2,500,000. Let me now walk you through our non GAAP income statement on Slide 7.
Along with our solid revenue performance in Q1, we once again met our profitability targets on a non GAAP basis. Cost of revenue plus operating expenses or what we refer to as total operating expenses the quarter came in at $68,700,000. Again, this included expenses from our lighting division, which has historically been a breakeven business for us. And for which we don't anticipate will contribute to significant pro form a revenue or expenses going forward. We ended the quarter with headcount of 771 down from 819 in the previous quarter, primarily due to the employees impacted by the light enclosure.
Over the course of 2018, we expect to invest in head account to support our growth initiatives in our memory and security businesses. Revenue and operating expenses under ASC 605 led to operating income of $31,700,000. We recorded $7,500,000 of interest income under ASC 606 related to the financing component of licensing arrangements for which we have not yet received payment, but recognized revenue under the new accounting standard. We incurred $600,000 of interest expense, primarily related to the convertible notes we issued in Q4. This was offset by instrumental incremental interest income related to a higher return on our cash portfolio.
After adjusting for noncash interest expense on our convertible notes, This resulted in non GAAP interest and other income for the first quarter of $100,000, up from Q4. Assuming a flat rate of 24 percent or non GAAP pretax income, non GAAP net income for the quarter was $24,000,000 or $0.21 a share just above the midpoint of our guidance. Now let me turn to the balance sheet details on slide 8. We're very pleased with the strength of our balance sheet. Cash, cash equivalents, and marketable securities totaled $291,200,000 down $38,200,000 from the previous quarter due primarily to the $50,000,000 accelerated share repurchase program we launched in the quarter.
Cash note also increased due to the $16,500,000 of cash generated from operations. We're pleased with our progress in this area and we expect to maintain our ability to generate cash from operations in 2018. This will continue to be an important metric to monitor as we adopt ASC 606. As a result of adopting the new revenue standard, we recognize contract assets worth $818,000,000, which reflect a net present value of unbilled AR related to licensing arrangements for which the company has no future performance obligations. The offset of this contract asset is primarily reflected in a $639,000,000 net credit to accumulate the deficit predominantly from the acceleration of revenue recognized under the new revenue standards.
1st quarter CapEx was $1,700,000 and depreciation was $2,900,000. Looking forward, I expect roughly $3,000,000 of CapEx for the 2nd quarter and roughly $10,000,000 for the full year of 2018. I also expect depreciation of roughly we have a strong balance let me turn to our guidance for the second quarter on Slide 9. As a reminder, our forward looking guidance reflects our best estimates at this point in time and our actual results could differ materially from what I'm about to review. To provide our investors and analysts additional transparency during this transition, We're also providing financial outlook as if we were still under ASC 605, as well as ASC 606 during this transition period.
Please note that the presentation under ASC 605 is not a substitute for the new ASC 606 revenue recognition standard under GAAP. Future revenue under ASC 606 will be volatile from period to period due to the timing and structure of our licensing arrangements. We will continue to focus on leveraging our vast patent portfolio to maximize the value for our business. As well to provide the best economic structure for our customers. To offer additional transparency, we've also been providing information on licensing billings which is an operational metric that reflects amounts' invoice to our patent and technology licensing customers during the period adjusted for certain differences.
The differences between licensing and billings and royalty revenue under ASC 605 are primarily related to timing as we don't always recognize revenue the same quarter we bill our customers. As you see in the supplemental information we provided on Slide 16 of our earnings deck, on an annual basis, licensing billings closely correlates with what we reported as royalty revenue under ASC 605 given this timing lag. We'll continue to provide licensing billings as another operational metric to help our investors understand the underlying performance of our company. With that said, under the new ASC 606 revenue standard, we expect revenue in the 2nd quarter between $42,000,000 $48,000,000. Under the ASC 605 revenue standard, we expect revenue in the 2nd quarter would be between $94,100,000,000.
Excluding the impact of the Lighting division, this is up 4% year over year and flat quarter over quarter when we are historically down 5% seasonally. We expect q 2 non GAAP total operating expenses, which includes COGS to be between 6864,000,000 down from Q1, primarily due to the exclusion of the lighting division. Over the course of 2018, I expect we will keep operating expenses roughly flat as revenue grows, providing leverage to our financial model. I expect total operating expenses, which include COGS related to our buffer chip business, the growth through the year as we ship more product, we continue to target $35,000,000 to $40,000,000 in buffer chip revenue in 2018. Under the new 606 revenue standard, non GAAP operating loss for the second quarter is expected to be between $26,000,000 16,000,000.
We expect roughly 1,700,000 the 23 note 2023 notes and $200,000 related to the remaining 2018 notes, which we expect to pay off in Q3. Based on the new tax legislation passed at the end of December, we expect our pro form a tax rate to drop to roughly 24%. The 24% is higher than the set new statutory rate of 21%, primarily due to the higher tax rates in our foreign jurisdictions. As a reminder, we pay roughly $20,000,000 of cash taxes per year, driven primarily by our licensing agreements with our partners in Korea. Based on a 24% tax rate, we expect a GAAP benefit of between $74,000,000 from taxes in Q2.
We expect our Q2 share count to be roughly 107,000,000 basic shares outstanding. This leads you to between $20..13 of non GAAP loss per share for the quarter. Under the ASC 605 revenue standard, using the same assumptions for expenses and other income and expenses, $6,000,000 to $8,000,000 for taxes and $111,000,000 fully diluted share count we would expect between $19,026,000,000 of non GAAP net income and between $17.23 of non GAAP earnings per share for the quarter. Looking ahead to 2018, while we do not issue annual guidance, as we look at consensus estimates from our sell side sell side analysts, we remain comfortable with current quarterly consensus estimates for growth and earnings for 2018 as reported under ASC 605 prior to the new revenue recognition rules. Let me finish with a summary on slide 10.
We are proud of the solid performance by our team and the progress we continue to make against our strategic initiatives. While we understand that the adoption of ASC 606 as a level of complexity to our financial reporting, it's important to reiterate that the underlying financial strength of our business remains strong. We continue to generate solid cash from operations and remain very well positioned for continued success as we head into fiscal 2018. With that, I'll turn the call back to our operator
Your first question is from Suji Desilva with Roth Capital.
Nice job on the quarter here. Just want to check next quarter, that would be 0 lighting revenues. Is that right? In the guidance?
Yes, Suji. The next quarter assumes 0 revenue for lighting for the quarter. Course of the year, but I don't expect that to be material and it's excluded from our guidance.
Okay, helpful. And then on the, as I look at the security business, the royalties there, are down in the first quarter versus the fourth quarter, 3rd quarter for security. Is that seasonality or is there some other trend going on there?
Yes. It's a combination of seasonality and also just timing of arrangements and agreements. I'll tell is one of the benefits of our business is because we do have so many different growth opportunities is we're not dependent on any of them in order to make our commitments to you on a quarterly basis. So in this case, it was just simply timing of agreements.
Okay. Helpful there. And then the, OpEx, if I look at your guidance versus the revenue guidance, it seems like it's up as a percent of revenues Is additional investments going on there or any other factors?
So we are continuing to invest in both our memory and secure businesses. But what's also changing is that as our buffer chip revenue grows, there's more COGS associated with it. And so you'll see a little more of the total expenses related to those costs.
That's kind of leads to one of my other questions, which is on the cost on the gross margin. What would be the drift down there as the memory buffer business grows? What would you expect that to exit the year at or just some quantification there, would it be helpful?
Sure. I wouldn't be surprised to see our overall pro form a gross margins under 60 5 drop a couple of points towards the end of the year just as our buffer chip business grows. Now that said, we still have a lot of other very siding interesting opportunities on the licensing and core to see a couple of ticks down from gross margin on a year over year basis.
Okay. And then my last question, I'll get back in the queue. Fee CPE you guys have developed here, is there extensible use for that beyond the crypto manager root of trust where it's first showing up here?
Yeah. I'm very pleased to say that we've had unprecedented interest in it. Part of it you know, we found the Spector and Elkdown issues when we were developing this last year, our brilliant, technologists in the Security Division and are announced of the new initiative has generated interest in both licensing as a core, but also us using it as a chip in various applications. So we're very broadly exploring that with a lot of very high file names. Unfortunately, I can't reveal them.
Your next question is from Sidney Ho with Deutsche Bank.
Thanks for taking my questions. My first question is, you have said in the past that you expect our the security revenues to grow 10% to 15% Is that still your target? Maybe a little color on how much of that growth comes from IP and cores, how much from tech implementation and maybe how much from subscription model that you to transform to?
Yes, sure. That is, Sydney, it's Ron. It's exactly what we expect. I mean, obviously, we're targeting more aggressively than that, but that's the what we expect. I think we've said in the past that the licensing and cores is more of flattish And the growth is really about the crypto manager, the IoT security service, the software side of things.
Then the the patent or the, payments and ticketing, which are tokenization solutions. So again, software based security part Now what can change that trajectory, is the announcement that we just made with, the risk 5 core given the demand that we have. That may see a significantly higher uptick in more of these embedded security solutions over time.
That's helpful. My follow-up question is, if you look at your royalty revenue for your memory division, has accelerated in the past few quarters to now, I think, if my math is right, it's close to 14% year over year. Is there any one time been fit in those numbers, or is that more sustainable going forward? Just to look at the royalties and within MIT.
Hello?
Your next question is from Gary Mobley with Benchmark
Hello. Are you guys there? Raul? Ron? Operate if we lost him.
Because I do have your line still connected, you may have placed the line on mute. We are unable to hear you.
Thank you. Can you hear us? Gary?
Ron, I can hear you now.
Okay. We're here.
Raul? Raul, are you there?
Yes. Yes, Gary. Go ahead. Thanks for your patience.
Sure. I apologize for the last questioning or the last caller, but, with respect to the mobile interface division and this relates to the last question asked, was hoping that you could break down the split between the buffer chips, IP core licensing and just straight patent royalties and give us a sense of the growth of the IP cores in the buffer
that we provide. Gary, we break down revenue under both 606 as well as 605. And what you'll see on the mid side in terms of what we report as product revenue, that's predominantly what we do from a buffer chip perspective. Now the the royalty and technology revenues are in the royalty revenue line. And then we also have some cores in the contract and other revenue line as well.
So those aren't broken out as as cleanly. But what you'll see is that we had about 6,000,000 in buffer chip revenue in in Q1. And what I'd expect that I'd expect that to grow in each subsequent quarter of 2018 to get to the 35000000 to 40000000 for the total year. I think from the patent side, particularly on mid for the royalty contract and other, I'd expect that to continue to be maybe roughly flat go up or down just based on timing of renewals for different partners and customers.
Okay. And, on the China resist of our RAM JV that you announced last week, can you give us a sense of, how that may impact the P and L statement and, in the balance sheet as well, looking out over the next couple of quarters.
Sure. What I'll tell you is that's still relatively new, and I think it's going to take us a while to get to traction from a a product perspective. So we did make a a small investment into that JV, and we invested not just cash, but patents as well. But I expect it's gonna take at least a year or 2, in order for that to really come up with some sort of product revenue. So there's a small bit of cash that was deployed, for that JV that we announced last week, but I don't expect it to have, material benefit from revenue for at least 1 or 2 years.
Okay. Last question for me. You mentioned on your last earnings call that you were your intent was to get out of the lighting business. But your hope was to find a buyer for the business. And I'm assume assuming that you had a restructuring charge and, you know, you're basically winding down the business that you were unable to find a buyer or is that still perhaps in the cards?
We ended up, Gary, it's Ron. Really breaking it into pieces and selling different parts of the business, but there wasn't a sustainable long term business there from our perspective. And as a consequence, there was no buyer of the whole asset.
Got you. Okay. That's it for me. Thanks.
And there are no further questions. Ron, do you have any closing remarks?
Yeah. Thank you. As you can see, we continue to demonstrate our leadership and execution across our products and deliver profitable growth across the company. Thank you for your continued interest and time. Have a very nice evening.
Thank you for attending today's conference. You may now disconnect.