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spk00: Welcome and thank you for standing by. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed and hold. Thank you for your patience. Once again, today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed and hold. Thank you and please continue to stand by. Oh, my God. THE END Welcome to the third quarter in fiscal year 2020 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. If you would like to ask a question, you may press on your touchstone pad at any time. If anyone should require assistance during the conference, please press on your touchstone pad at any time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Rahul Mathur, Chief Financial Officer. You may begin your conference.
spk02: Thank you, Operator, and welcome to the RAMBUS Third Quarter 2020 Results Conference Call. I'm Rahul Mathur, CFO, and on the call with me today is Luke Serafin, 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 855-859-2056. 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 p.m. 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 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 success of our integration efforts, risks and the potential adverse impacts related to or arising from coronavirus or COVID-19, and the effects of AC606 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 8Ks, 10Qs, and 10Ks. These forward-looking statements may differ materially from our actual results, and we're 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&A. I'll now turn the call over to Luke to provide an overview of the quarter.
spk06: Luke? Thanks Rahul and good afternoon everyone. The company had another very solid performance this quarter as our excellent product growth continues. We delivered on revenue of $56.9 million and exceeded expectations for profitability with continued great discipline on the bottom line. It was another very strong quarter of cash generation with $44.1 million in cash flow operations. This brings the total for the year to over $143 million, which already significantly exceeds our total for the entirety of last year. As our proven track record of cash generation and progress on strategic product initiatives continue, we are poised for healthy top-line growth in 2021. Data Center remains the 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 third 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 fourth 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, which 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 DDR5 modules with our 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 with momentum across data center 5G and edge. This was supported by excellent execution from last year's acquisitions with a form of very 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 confidence in our ability to create greater value from future acquisitions. Our solutions continue to lead the industry, with the latest example being our silicon demonstration of the world's fastest 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 graphics. Lastly, We are very pleased Micron extended their license agreement for an additional four years under the existing financial terms. This extends their license agreement beyond the next renewal dates for Samsung and SK Hynix and is a great testament to the ongoing strength and relevance of 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 stock repurchase program, which Rahul 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 to investors. Strong cash generation, also gives us the flexibility to invest and expand our technology roadmap to address more data-centric applications. Through our ongoing focus on 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. Rahul?
spk02: Thanks, Luke. I'd like to begin with our financial results for the third quarter. Let me start with some highlights on slide five. 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 strategies. 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 $56.9 million and licensing billings of $63.1 million, 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 in end of the quarter with cash, cash equivalents, and marketable securities of $520.2 million, up nicely from the previous quarter, primarily due to cash from operations of $44.1 million. This brings year-to-date cash from operations for the nine months to $143.4 million, well above last year's full year total of $128.5 million, 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 our 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 six. Revenue for the third quarter was $56.9 million, in line with our expected range. Royalty revenue for the third quarter was $16.6 million, while licensing billings was $63.1 million. 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 $29.8 million, consisting primarily of our buffer chip business. Our contract and other revenue was $10.5 million, consisting primarily of our silicon IP business. For the year, there's roughly $40 million of our silicon IP business that's being reflected in our licensing billings. This is almost twice what we expected our analyst day a year ago. Strength in 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 $56.7 million. Operating expenses of $45.8 million 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, slightly higher than 670 in the previous quarter as we continue to invest in our product programs. Under ASC 606, we recorded $3.3 million 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 $0.8 million of interest expense primarily associated with our convertible notes. This was offset by incremental interest income related to the return on our cash and investment portfolio. After adjusting for non-cash interest expense on our convertible notes, this resulted in non-GAAP interest and other income for the quarter of $2.7 million. Excluding the interest income related to the significant financing component related to ASC 606, this would have been $0.6 million of interest and other expense. Assuming a flat rate of 24% for non-GAAP pre-tax income, non-GAAP net income for the quarter was $2.2 million. With continued focus on cost and disciplined execution, we delivered profit that was nicely above our expectations. Now, let me turn to the balance sheet details in slide 8. Over the past several years, we've built a very strong balance sheet. Cash, cash equivalents, and marketable securities totaled $520.2 million, up significantly from the previous quarter, primarily through cash from operations of $44.1 million. As I mentioned previously, year-to-date cash from operations in the nine months was $143.4 million, well above last year's total of $128.5 million, with another quarter remaining in the current year. As we continue to deliver on the 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 $401.7 million, which reflects the 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 of our existing licensing agreements, as several customers have loyalty-based agreements that allow us to recognize revenue each quarter under AAC 606. As we announced previously, we were pleased to extend our existing licensing agreement with Micron in September at our existing financial terms, demonstrating the strength and relevance of our patent portfolio. When this extension comes into effect in Q4, we expect to account for this agreement to be recognized as a variable contract. we do not expect a one-time impact to revenue nor the corresponding addition to our unbilled contract assets. Instead, we expect to recognize ASC 666 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 $4.5 million in Q4 and then step back up to $10 million a quarter from Q1 2021 through Q4 of 2024. It's also worth noting we renewed our agreement for four years, longer than the extension period initially specified. We have a strong partnership with Micron, and this bodes well for our upcoming renewals and extensions with our other partners. Over time, we endeavored to transition renewals and extensions to variable agreements that could allow us to take revenue over time as opposed to upfront under ASC 606. Third quarter CapEx was $10.6 million and depreciation was $4.8 million. We delivered $33.5 million of free cash flow in the quarter. Looking forward, I expect roughly $14 million of CapEx for the fourth quarter. This represents roughly $35 million 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 million for the fourth quarter and roughly $19 million for the full year of 2020. Now, let me turn to our guidance for the fourth quarter on slide nine. As a reminder, our forward-looking guidance reflects our current best estimates, and 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 invoiced 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, licensing billings closely correlates with what we had historically reported as royalty revenue under ASC 605. Under ASC 606, we expect revenue in the fourth quarter between 45 and 51 million. We expect royalty revenue between 12 and 18 million. We also expect licensing billings between 61 and 67 million. We've been making steady progress on our business and financial initiatives. Similarly, we're very pleased with the execution on the acquisitions we made last year. The teams have integrated well into our company and on a 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 saw 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 chips reflects the 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 at last year's Analyst Day on both the top and bottom line, despite the unprecedented challenges presented by COVID-19. We expect Q4 non-GAAP total operating costs and expenses, which include COGS, to be between $59 and $55 million as we continue to invest in programs. Under ASC 606, non-GAAP operating results for the fourth quarter are expected to be between $4 and a $14 million loss. For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, We expect this to be approximately $1 million of expense, which includes $0.6 million of interest expense related to the notes due in 2023. We expect our pro forma tax rate in 2020 to remain consistent with our 2019 pro forma 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 million 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 $1 and $4 million in Q4. We expect our Q4 share count to be roughly 117 million basic and diluted shares outstanding. This leads you to between a non-GAAP loss per share of $0.03 and $0.10 for the quarter. We have gone through a successful transformation over the past several years, and our strong product growth has offset structural step-downs in patent licensing, the divestiture of payments and ticketing, and the shutdown of our lighting business. This has resulted in the 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 any of us to predict, consensus estimates are currently in line with our long-term strategy, reflecting product growth that continues to be significantly better than the broader semiconductor industry. Our confidence in our long-term prospects is reflected in the new $20 million 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 to our financial reporting, it's important to reiterate 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's 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 strong balance sheet to support our strategic initiatives. Before I open up the call to Q&A, I would, once again, like to thank our employees for their continued teamwork and execution resilience during these uncertain times. Everyone, please stay safe and take care of yourself and your families. With that, I'll turn the call back to our operator to begin Q&A. Could we please have our first question?
spk00: Thank you, Rahul. Ladies and gentlemen, if you have a question, please press par 1 on your touch-tone telephone. Your first question comes from Suji De Silva with Roth Capital. Can we now ask your question?
spk03: Hi, Luke. Hi, Rahul. Congratulations on a very strong cash generation. Good sign of the turnaround here. The model out ASC 605, I just wanted to check the 3Q revenue. If I do my numbers, it seems to be 103 million and 30 cents of EPS. Does that sound like what the ASC 605 might look like?
spk02: So, Suji, I think what you're doing is you're substituting what we report for licensing billions for what is royalty revenue. 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. But I think if you were to do that math, yes, I'd get the same numbers that you have.
spk03: Okay, and just to check on the guidance, the 4Q, I think, with the step-down or the drop in the product revenue, it seems like it's more like $97,025. Does that sound reasonable as well?
spk02: Yeah, again, you're doing math that we can't publish because it's company-specific non-GAAP results, but if I were to do that math, I'd get the same numbers that you did.
spk03: Okay, good. And a couple of questions, quick on the unfinished preps and starting. You said, Ronald, I think the 4Q20, the licensed step-down, is the last one you see in the NIRR. future quarter-wise. Is that correct? 21 is a more normalized year without any expected step-downs? Is that what you were saying?
spk02: 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, 17, 18, were structured in a way that allowed our partners to take advantage of a very positive time in our industry with some more payments up front 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. You know, we were very excited to extend the Micron agreement for four years instead of what was contractually three. 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 at the basis we had in 2020. The one caveat is that we also have our silicon IP businesses, and in some cases there are billings associated with that business that also show up in our licensing billings. And I think, as I mentioned in our prepared remarks, there's probably about 40 million of licensing billings in 2020 that's really related to the silicon IP business. But that base associated with just our patent licensing business, I expect to be roughly flat for the next several years because we don't have large extensions and rules with the big three BRM partners until 23 and 24.
spk03: Okay. And then maybe one more question for Rahul and perhaps Luke. You know, with the burgeoning cash amount, I appreciate the buyback simple in place. But with the success of the recent acquisitions, can you talk about the target areas for further acquisitions, which is similarly to beef up memory and security? And what size of acquisition are you perhaps willing to go to now or similar to before?
spk06: Hi, Sujit. This is Luke. Yeah, thanks. Yeah, we continue to generate cash every quarter, and we're pleased with this buyback. We continue to look at acquisitions. We would like to continue to grow, so the larger the acquisition, the better. But we're looking at anything that would complement our offering in the data infrastructure. to grow our business through acquisitions. We look at this very regularly. We say no to a lot of acquisitions that we think are not going to be good for us strategically or financially, but that's a center to our strategy going forward. Okay.
spk03: I'm going to do a few more preps for Luke. On the data center side, the memory buffer opportunity to calendar 21, is the visibility driven by a resumption of Intel platforms bring the data center spending back or data center cycles, or is it your share gains? Perhaps you can talk about what your ending calendar 20 shares versus 21 share opportunity.
spk06: Yeah, so we continue to gain share in 2020. As Raoul said, we plan to generate about 50% growth over the last year in a market that probably grew about 5%. It was heavily front-end loaded because the ecosystem ordered more in the first half out of fear of the consequences of COVID-19. Those fears are winding down, and people are going through the phase of digesting their 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, but grew 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 processors from Intel are going to be launched in the market. And as we said, we are processor independent. So whatever the share between AMD and Intel, as long as the market grows, we grow with them. Now, in the longer run, You know, we have the upside coming from DDR5. We have today all of our DRAM customers having placed sample orders for DDR5. RCD and DBs. 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 companionships that are going to be required on the GDR5 platforms as well as new architecture that we believe are going to emerge in the next few years, especially from the cloud companies. That's a business that is showing very nice growth potential for us, very nice share gain for us. We just need to go through the Q4 where we think the inventory digestion is going to happen. But after that, we're going to see clear wins.
spk03: Okay. Last quick question, Luke. I'll pass it along. Any thoughts on the Intel NAND investor behind it and the implications for Remnick? Thanks.
spk06: 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 domain-specific platforms because they have to deal with an exponential growth of data, workloads coming from the new applications 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 benefits because what it means is that everyone is going to need to have access to more data faster, and that's where we spend our investment money. And I think it's going to be requiring more security as well. And if you look at the track record of security design, we see this being translated in that track record. So all of this is good for us. But it kind of doesn't have a direct impact on us.
spk00: Your next question comes from the line of Gary Mobley with Wells Fargo Securities. He's going to ask a question. Hey, guys.
spk05: Congrats to a strong finish to 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, I want to get your opinion on that. Who will be the first to adopt DER5? Will it be the hyperscalers? And then with respect to Intel's 10-nanometer Ice Lake, moving from six memory channels to eight, I wonder if you can give me sort of a take on how that might relate to your average selling prices and your content in these memory modules.
spk06: Yeah, 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 per processor. So that's a potential growth in the market, and that's going to be up to their customers to decide whether they realize that growth or not, because all of their platforms are going to move from six to eight memory channels. When we move from Ice Lake with eight channels in DDR4 to the DDR5 platform, we're going to stay on an eight-channel platform. So that capacity of potentially more memory processor will continue. For us, we see a couple of triggers for next year. One is the move to Ice Lake. um and you know the the the fact that uh every time you have a new platform there's an opportunity for us to have a better designing footprint and we know that our footprint for ice lake is better than what it was for catholic lake so that's the first thing that is that is happening for ddr5 It will really run when the whole ecosystem is ready. There are different stages of development when I say there's the processor guys and the memory guys as well. But the good news for us is we do have sample 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, you know, once everyone is ready, we're going to be in a very strong position to enjoy a nice share on these straps.
spk05: Thanks for that, Luke. To you, Raoul, I wanted to ask about your buyback and your timeframe for the buyback. In the past, you've done accelerated share repurchases. And so I'm just wondering if you could go at it this time with a more, I guess, methodical approach or slower approach. And am I doing the math right, you know, given sort of the offsetting, you know, lower share count, you know, offset by lower interest income? This is, you know, could be potentially 20 cents accretive on an annual basis.
spk02: 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 million shares. And then from an actual activity perspective, we did about $100 million of accelerated share repurchase in 2015. We did another, I think, 50 million in 2017, another 50 million in 2018. So that's how you get to the 3.6 that was on the previous authorization, which we canceled with a new one. The reason I provide that history is that this is something we look at for 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 a 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 nonpublic 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% to 50% of our expected free cash flow over the next three or four years. So that's, I think, how we look at how we size that amount. Hopefully that's helpful to you.
spk05: Sure, sure. I appreciate the commentary with respect to your comfort level with current consensus for fiscal year 21, which I believe currently from a revenue perspective sits at $437.2 million, which of course is 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.
spk02: Sure, sure. So just from an OPEX trend, I think – you know, what we look at is we're going to continue to look at investing in our business, right? You know, 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, you know, 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 on the consensus, both on the top line as well as the bottom line for each quarter of 2021.
spk00: Your next question comes from the line of Sydney Ho with Deutsche Bank. Can you ask your question?
spk03: Hi, this is Jeff Randall for Sydney. Congrats on the nice quarter. Early in the year, you announced a patent agreement with a Chinese company building DRIM. Have the recent escalations in trade tensions had any impact on this, and how do you think about the China market going forward?
spk06: Hi, Jeff. This is Vuk. Basically, we watch what's happening in China like everyone else. But the tensions really don't have an impact, a direct impact, I would say, on that agreement. This is a pure patent licensing agreement. This is a legal agreement that allows these partners in China to build DRAM devices. And this is 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 as this is just a legal agreement for them to be able to build the ramp for us.
spk02: What we talk about is that we don't expect it to be a 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 this license. 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 our license agreements are usually five years or longer, and so that extended beyond the existing renewal and extension timeframes for the big 3D ramp manufacturers, and it just talks to the strength and relevance of our portfolio.
spk03: Great. And then just following up, commentary from Ernie so far point to on-premise IT spending still being pretty weak. Can you talk about how on-premise spending versus cloud spending impacts your business?
spk06: You mean on-premise spending compared to what? Compared to cloud spending. Well, it's difficult for us to track that. Our buffer chip business mostly goes into data center types of applications. We see a shift from cloud demand, from enterprise to cloud demand, but that does not affect us because these memory modules go either in enterprise or in cloud. And just by the same token, we said we were almost indifferent to the relative share of Intel of AMD. We're kind of indifferent to the share between enterprise and cloud. As long as the market grows and we continue to gain share in terms of designing footprint, we should see a nice continuation of our share gain in that space. We don't shift any products into the client space, you know, in terms of buffers.
spk00: Great. Thank you. Your next question comes from John Fitzgerald with CreditSmith. Can you now ask a question?
spk01: yeah guys congratulations on the solid results especially free cash flow and thanks for letting me ask the question i 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 that you that you're expecting to see in the fourth quarter because of that and is this Because customers have too much CPUs, they bought too much early in the year, or is it because they actually have too much memory? And I guess importantly, as you think about visibility as to data center coming back, why are you confident that it's only a one-quarter phenomenon?
spk02: Sure, John. It's Rahul, and thanks very much for your commentary. Let me start, and I'll see if Luke would like to add. If you look at the guidance that we gave for Q4, we had our buffer chip business dropping from roughly $30 million in Q3 to about $21 million in Q4. And what we said is that all of our channel checks and conversations with our partners indicates that this should come back sometime early next year in terms of what's there. I think it really is the best phrase to use is inventory digestion. I think our partners, and you see this downstream of us, John, are just being very cautious in terms of how much inventory they have in hand. It's really something we've been talking about all year. 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. And 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.
spk06: Yeah, I think what has happened, John, is earlier in the year, the system company started to build inventory because they were concerned about some destruction downstream in the supply chain. But these inventory build-ups, as 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 the question about is it processor or is it memory? That's a great question that The memory is on a different cycle. People can populate their systems late in the process. They can build a system and then at the last minute populate their memory, which is good for us because if we track that, we can track how our memory related cells are going to go. But also, because this is populated late in the process, that gives us flexibility depending on who gains share during that transition or what platform ramps when. At the end of the day, those memory modules are going to be used in one or the other platform when things go back on track. Again, the view on Q1 is based on just talking to the ecosystem. That's a very closed ecosystem with very strong players.
spk01: uh that's the uh that's the current eq4 we're going to see the digestion early next year we're 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 21 but i'm just kind of curious on the opex front how do we think about kind of COVID as an OpEx driver, you know, how much more expensive was this year because of COVID? And conversely, were there any cuts that you were able to take out of this year's OpEx that come into next year's OpEx? I'm just kind of curious how we should be thinking about that dynamic.
spk02: Yeah, 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 our guidance on operating expenses, and you see it in the overall comedown, particularly in terms of SG&A. I think from a COVID impact, we actually had fewer expenses this year, particularly related to travel. And, you know, that's something I think that helped us. One of the things that I think we've done very well as a company is use the opportunity with COVID to kind of reimagine how we want to go run our company. So, you know, things like hybrid work in our facilities, for example, right? So I think there are definitely things 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 invest it 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 that 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 OpEx. I think I see a little bit of increase, specifically on the R&D side year over year, but you should have flat or SG&A coming down.
spk01: Perfect.
spk00: Thanks, guys. Appreciate it.
spk02: Thank you, Jim.
spk06: Thank you.
spk00: Once again, ladies and gentlemen, if you have a question, please press star 1 on your touchstone telephone. Again, if you have a question, please press star 1 on your touchstone telephone. Your next question comes from Mark with Jefferies. You may now ask your question. Hi.
spk04: 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. Did I understand that properly?
spk02: 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, 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 $5.5 million for us 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 million a quarter in q1 of 21 and it should be 10 million a quarter from q1 21 all the way through the next four years so q4 of 2024. now from an asc From a billings perspective, it'll just be $10 million 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 to treat that agreement as a variable contract and recognize ASC 606 revenue on a quarterly basis starting in Q1 of 21. 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 our 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. I hope that helps answer your question.
spk04: Gotcha. I think I understand. So previously, when you adopted 606, you took a one-time revenue. You recognized one-time revenues. And then just on a billings basis, you would have billings, but you wouldn't have ASE 606 revenues recognized.
spk02: Actually, Mark, because the contract was signed before our adoption of ASC 606, we were never able to recognize revenue. It was a one-time adjustment to retained earnings to reflect the time of that billing. So it's one of the vagaries of 606.
spk04: So you are going to recognize revenues quarterly now from Micron according to ASC 606? Starting in Q1 of 21. That's correct. Gotcha. Okay. Okay, that's great. And do you think is this what you would expect to happen with future contracts as they, you know, as they come up for renewal?
spk02: 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 606 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.
spk04: Okay. All right.
spk02: I understand.
spk04: So your revenue Revenues recognized and expenses recognized on Micron going forward are going to more closely resemble your cash flows. Is that fair?
spk02: 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 ASC606 revenue in 2021 versus 2020. Right. Gotcha. Okay.
spk04: All right. All right. Thanks for reviewing that 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 know, you look for opportunities, you know, you look for inorganic opportunities. If none manifest, you know, 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
spk02: is that the right way to think about your mo so mark we've been very consistent in terms of capital allocation we look at organic investment inorganic and then return to shareholders and we ended the quarter with i think 520 million dollars of cash so we continue to do a great job investing organically in the places that are growing and you see it you know particularly in our product growth um We've also been active inorganically. I'm very pleased with the progress on the two 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 the industry consolidation from an inorganic perspective as well. And then what we've done is then been kind of opportunistic in terms of 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 And what we target is returning somewhere between 40% and 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&A. I think Luke talked a little bit earlier about some of our focus 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 have relatively little debt. We have one convertible issue that comes to you, I think, in early 23. There's a call spread there, so it's not dilutive to us until we're turning 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.
spk04: Very helpful. Thank you. We'll appreciate that. You're most welcome, Mark. Thank you.
spk00: 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 Seraphin.
spk06: Thank you to everyone who has joined us today for your continued interest and for your time. We hope each of you stay safe and healthy and look forward to speaking with you again soon. Have a great day. Thank you.
spk00: Thank you. This now concludes the conference.
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