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spk00: Welcome to the RAMBUS first quarter fiscal year 23 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 star 1 on your touchtone pad at any time. If anyone should require assistance during this conference, please press the star 0 on your touchtone pad at any time. As a reminder, this conference is being recorded. I would now like to turn the conference over to Desmond Lynch, Chief Financial Officer. You may begin your conference.
spk08: Thank you, Operator, and welcome to the RAMBIS first quarter 2023 results conference call. I am Desmond Lynch, Chief Financial Officer at RAMBIS, and on the call with me today is Luke Serifin, our CEO. The press release for the results that we will be discussing today has been filed with the SEC on Form 8K. A replay of this call will be available for the next week at 866-813-9403. 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. 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 expectations regarding projected financial results, financial prospects, market growth, demand for our solutions, the company's ability to effectively manage any supply chain shortages, and the effects of ASC 606 on reported revenue, amongst other items. These statements are subject to risks and uncertainties that may be discussed during this call and are 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 are under no obligation to update these statements. In an effort to provide greater clarity in the financials, we are using both GAAP and non-GAAP financial presentations in both our press release and 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. We adopted ASC 606 in 2018 using the modified retrospective method, which did not restate prior periods, but rather ran the cumulative respect of the adoption through retained earnings as a beginning balance sheet adjustment. Any comparison between our results under ASC 606 and prior results under ASC 605 is not an accurate way to track the company's progress. We will continue to provide operational metrics such as licensing billings to give our investors better insights into our operational performance. The order of our call today will be as follows. Luke will start with an overview of the business, I will discuss the financial results, and then we will end with Q&A. I'll now turn the call over to Luke to provide an overview of the quarter. Luke?
spk07: Thank you, Des, and good afternoon, everyone. This was a strong start to the year for the company with Q1 revenue and earnings at the high end of guidance. We delivered $39 million in cash from operations and retired the last of our remaining debt, further strengthening our balance sheet. These results were driven by continued execution and achieved in the context of a challenging macroeconomic environment. In addition to our strong financial performance, We were very pleased to extend our strategic relationship with SK Hynix through the middle of 2034 with the early renewal of our comprehensive patent licensing agreement. Similar to our extension with Samsung announced in Q4, this agreement strengthens our foundation for ongoing investment in product and technology leadership across our portfolio, and is a great demonstration of the ongoing value of our innovations to the market. Turning to our business results, memory interface chips performed well, delivering Q1 product revenue of $64 million, up 33% year over year, despite the challenging market conditions. In the near term, We remain vigilant as we navigate through the dynamics of the industry transition to a new generation of memory. While DDR4 inventories remain high at some end customers, as reflected in our second quarter guidance, we are seeing initial orders come through for DDR5 with shipments starting towards the end of the quarter. We remain focused on execution and are actively working with our customers. We expect a stronger second half as inventories return to more normal levels and demand for DDR5 continues to ramp. As we have said previously, the server memory crossover to DDR5 is projected for the first half of 2024, and we expect our memory interface chip product mix to be lumpy during the transition period. Given our strong leadership position in DDR5 and improving market conditions in the second half, we believe we are well positioned for continued annual growth in 2023. As we look farther out, advancing the performance of data center memory will be critical to address the growing bandwidth and capacity requirements of generative AI and other advanced workloads. We are making good progress on the following generations of DDR5 with our Gen 2 RCD in qualification across the ecosystem and our Gen 3 RCD sampling to all of our customers and partners. In addition to DDR5, close collaboration and development with the ecosystem continues on CXL, and we are well aligned with the market needs and timing to support the roadmap of future server generations for years to come. Finally, in silicon IP, our recently announced GDDR6 interface, achieving a best in class data rate of 24 gigabit per second, is a great illustration of our continued technology leadership. It is the latest addition to our market leading portfolio, which also includes the industry's fastest HBM3 memory IP subsystem. With these memory solutions, Rambus addresses the needs of both AI training and inference with state-of-the-art offerings. We continue to lead in our areas of focus for both interface and security IP. And in spite of current challenging macro conditions, we remain confident in the long-term growth opportunities. In closing, this was a strong quarter for the company with results at a high end of guidance and the team executing well. While we navigate the dynamic market conditions in the near term, we continue to see strong secular trends and solid growth opportunities. This is a very exciting time for the industry with the broadening availability of generative AI applications like ChatGPT that have captured the public imagination. These are perfect examples of the advanced workloads that will drive accelerated growth in computing and the data center with the ever-increasing demand for data. And with memory bandwidth as a first order enabler, Rambus is well positioned to enable the state-of-the-art memory performance required by these advanced applications. With our strategic focus in data center, continued execution, and diverse portfolio of offerings, we have confidence in the strength of our strategy and ability to drive long-term profitable growth for the company. We are making the right focused investments to deliver differentiated, high quality products and innovations that address the critical performance bottlenecks between processing and memory. As always, I'd like to thank our customers, partners, and employees for their ongoing support. And with that, I turn the call over to Des to discuss the quarterly financial results. Des?
spk08: thank you luke i'd like to begin with a summary of our financial results for the first quarter on slide five once again we delivered a strong quarter and we are very pleased with the company's ongoing execution in a challenging macroeconomic environment we delivered financial results at the high end of our revenue and earnings expectations while continuing to strengthen our balance sheet In April, we were delighted to announce we extended our licensing agreement with SK Hynix for an additional 10 years at similar financial terms. This extension becomes effective in Q3 2024, and we expect to recognize revenue quarterly under ASC 606. In the last six months, we've extended our two largest patent licenses both for 10-year terms, which demonstrates the continued strength and relevance of our patent portfolio and innovation engine. Additionally, in Q1, we continued to strengthen our balance sheet. We repaid the final balance of our convertible notes and settled the associated underlying hedge agreements. We've utilized our existing cash on hand to retire the debt while continuing to generate strong cash flows and drive shareholder value. Let me walk you through our non-GAAP income statement on slide six. With our continued focus on execution, revenue for the first quarter was $113.8 million at the high end of our expectations. Royalty revenue was $28.2 million, while licensing billings was $63.4 million. The difference between licensing billings and royalty revenue primarily relates to timing, as we do not always recognize revenue in the same quarter as we bill our customers. Product revenue was $63.8 million, consisting primarily of memory interface chips. Contract and other revenue was $21.8 million, consisting primarily of silicon IP. As a reminder, only a portion of our silicon IP revenue is reflected in contract and other revenue, and the remaining portion is reported in royalty revenue, as well as in licensing billings. Total operating costs, including cost of goods sold for the quarter, was $86.3 million. Operating expenses of $58.3 million were in line with our expectations as we continued to be vigilant in our expense management, and we ended the quarter with total headcount of 762 employees. Non-GAAP interest and other income for the first quarter was $1.8 million. This included $900,000 of ASC 606 interest income related to the financing component of fixed fee licensing agreements for which we have recognized revenue, but not yet received payment. Excluding the financing interest income related to ASC 606, this would have been $900,000 of net interest income. Using an assumed flat tax rate of 24% for non-GAAP pre-tax income, non-GAAP net income for the quarter was $22.3 million. Now, let me turn to the balance sheet details on slide seven. We ended the quarter with cash, cash equivalents, and marketable securities totaling $292.1 million. a decrease from the prior quarter, mainly driven by the convertible note repayment and the settlement of the underlying hedge agreements. Cash from operations for the quarter was $38.9 million. At the end of Q1, we had contract assets worth $113 million, which reflects the net present value of unbilled accounts receivable related to licensing agreements for which the company has no future performance obligations. We expect this number to continue to trend down as we bill and collect for these contracts. It is important to note that this metric does not represent the entire value of our existing licensing agreements. As at each renewal opportunity, we restructure our patent agreements in a manner which that allows us to recognize revenue each quarter during the life of each agreement. First quarter, CapEx was $11 million, while depreciation expense was $7.4 million. We delivered $28 million of free cash flow in the quarter. Now let me turn to our guidance for the second quarter on slide eight. As a reminder, the forward-looking guidance reflects our current best estimates at this time. We continue to actively monitor the macro environments, and our actual results could differ materially from what I am about to review. In addition to the financial outlook under ASC 606, we also provide 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 we have reported historically, licensing billings closely correlates with what we had historically reported as royalty revenue under ASC 605. Under ASC 606, we expect revenue in the second quarter between $111 and $117 million. We expect royalty revenue between $37 and $43 million and licensing billings between $61 and $67 million. We expect Q2 non-GAAP total operating costs, which includes COGS, to be between $82 and $78 million. We expect Q2 CAPEX to be approximately $10 million. Under ASC 606, non-GAAP operating results for the second quarter is expected to be between a profit of $29 and $39 million. For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect zero interest expense. We expect the pro forma tax rate to remain approximately 24%, The 24% is higher than the statutory tax rate of 21%, primarily due to higher tax rates in our foreign jurisdictions. As a reminder, we pay approximately $20 million of cash taxes each year, driven primarily by licensing agreements with our partners in Korea. We expect non-GAAP taxes to be between an expense of $7 and $9 million in Q2. We expect Q2 share count to be 112 million basic and diluted shares outstanding. Overall, we anticipate a non-gap earnings per share range between 20 and 26 cents for the quarter. Let me finish with a summary on slide nine. I am pleased with our strong results in the team's execution in this challenging macroeconomic environment. We have a diversified portfolio with a stable and predictable backbone from our patent licensing business. We remain disciplined in our investments to support a long-term growth strategy. We continue to deliver value to our shareholders with our strong innovation, a robust balance sheet, and strong cash generation. Before I open the call up to Q&A, I would like to thank our employees for their continued teamwork and execution. With that, I'll turn the call back to our operator to begin Q&A. Could we have our first question?
spk00: Thank you. Ladies and gentlemen, if you have a question, please press star 1 on your touchtone telephone. Our first question is from the line of Gary Mobley with Wells Fargo. You may proceed.
spk06: Hey, guys. Good afternoon. Congratulations on a good start to the year. I understand the second quarter is a transitional quarter for the product revenue, but I appreciate the comments, given its colors, as to when you can see some resurgence in DDR5 related revenue. And related to that, I was hoping that maybe you can give us a preview into product revenue for the second half of the year, considering the selling price uplift for the registered clock driver and your market share position in DDR5 and the expectation of industry crossover for DDR5, all those different things. You know, is it possible to see a new revenue high in product revenue by the time we exit calendar year 2023?
spk07: Hi, Gary. Thank you for your question. Yeah, we had a good first quarter in terms of product revenue with good execution at $64 million. $64 million was actually 33% higher than the same quarter last quarter. So we continue to grow in the business despite the challenging environment. This is also the second highest quarter in terms of product revenue for the company. As we previously said, the product transition between DDR4 and DDR5 will be lumpy, and that's reflected in our Q2 guidance for products. Given the softness in the data center outlook, there will be a period of inventory digestion for DDR4 in advance for the DDR5 product transition. But we are very encouraged by the fact that we have received orders for DDR5 which will start to shift in late Q2. And our view is that the second half of the year would be a half of growth compared to the first half of this year. So we expect the second half of this year to be stronger compared to the first half, driven precisely by the ramp of GDR5. This being said, as we said, it's lumpy. You know, that transition is lumpy. And we're watching the overall timing and dynamics, you know, every week.
spk06: Okay. Appreciate that, Luke.
spk07: I think the second part of your question was the transition. Yeah, the transition between DDR4 and DDR5 was a crossover. We still see this happening in the first half of 2024. Got it. Thanks, Luke.
spk06: I want to ask about your SK Hynix license renewal. In your 8K, you described the average royalty rate at $11 million a quarter, with the first five years being higher than the second five years. So to put that to the form of a question, when you start to recognize revenue from the new license deal in the second half of next year, Will you see a step up in your patent licenses specific to SK Hynix?
spk08: Hi, Gary. Thanks for your question. We were very happy to renew the licensing agreement with SK Hynix for 10 years. You are correct that this is a variable structure that we have with SK Hynix, which will allow us to recognize revenue under ASC 606. If you look at the way that the contract is written, in the first couple of years of the contract, we will see a slight step up on the royalty rate, which will then even off on the sort of back end. This will not change our overall estimates on the patent revenue for the year. We've consistently talked about being $200 to $220 million with $210 at the midpoint, but there is a small step up on the first part of the contract from there. But overall, we're very happy that we're able to renew the contract with SK Hynix, which really speaks volumes to our patent portfolio and innovation. Thanks, Jack. Thanks, Kelly.
spk00: Thank you, Mr. Mobley. Our next question is from the line of Mehdi Hosini with Susquehanna. You may proceed.
spk02: Yes, thanks for taking my question. I want to go back to two items. Can you give us an update on how we should think about the gross margin traction outside of licensing and royalty? I think in the last earning call, you talked about hitting that 60% to 65% for product margin in the second half of the year. Do you feel comfortable, especially given Luke's commentary that second half revenue should be higher than the first half? And the same margin question about Silicon IP, would that continue to improve above 92%, and I have a follow-up.
spk08: Hi, Mehdi. Thanks for your question. On the product gross margins, I think both our revenue growth and gross margin performance has been strong. And if you look back at 2022 for the full year, our product gross margins were around 61%, which was in line with our long-term gross margin target of 60% to 65%. What we've consistently said is that this transition could be lumpy and depending upon what products are shipping in any given quarter, you could see some fluctuations in the product gross margin. In Q1, our product gross margins were around 59% for the quarter, which was up about 1% compared to Q4. And looking into Q2, we do expect to see a slight improvement in product gross margins, mainly driven by favourable product mix. As Luke mentioned, we do expect to grow in the second half of the year. And with that, we do expect to see a more favourable product mix from a margin perspective. And we do expect that our gross margins will improve based upon that. As a company, we've been very disciplined in our ASP management and will continue to drive our product cost reductions, Mary. And for the full year of 2023, we do expect our product gross margins to be in line with our long-term target of 60% to 65% from there. I think the second part of your question related to our silicon IP gross margins, they were just over 90% in Q1 2020. And we do expect a similar sort of mix being around that sort of 90% gross margin on a sort of go-forward basis. So you can see that we have a very rich and healthy gross margin profile on Silicon IP.
spk02: Got it. Thank you. And then one question for Luke, talking about or referencing parity between DDR4 and DDR5 in the first half of 2024. So that's a 50-50. Should I assume that, like, Q2 this year, the reference point is like 20, so that over the next three quarters, the mix increases by like around 10 points of incremental increase, or 10 points of increase on a quarterly basis.
spk07: Thank you, Mehdi. Yes, we expect the crossover point to happen in the first half of 2024. As I indicated earlier, we are starting to see orders for DDR5 that will start shipping at the end of this quarter. So this is really encouraging. As we said also earlier, the transition between DDR4 and DDR5 is going to be lumpy in nature. So it's difficult to say whether it's going to be linear or not over the period that stretches from now to the first half of 2024. But what we can say is that the trend is that it's going to be in favor of DDR5 over DDR4 as customers digest the inventories of DDR4 and start to run DDR5. But it's going to be lumpy in nature.
spk04: Thank you.
spk00: Thank you, Mr. Hosseini. The next question is from Kevin Cassidy with Rosenblatt Securities. You may proceed.
spk05: Yeah, thanks for taking my question, and congratulations on the good results. Maybe just to follow on with that, with DDR4 inventories getting worked down this quarter, can you see DDR4 revenue growth in the second half of the year, or will that just continue to decline?
spk07: So as we said, there's still some high level of inventories of DDR4, but these inventories are being digested or burned. I think it's going to take a couple of quarters for these inventories to burn. This being said, there's still demand for DDR4, and we expect that we should receive more orders for DDR4 towards the second half of the year. DDR4 still has a life. As we said, we expect the crossover point to happen in the first half of 2024. we have good backlog, but obviously that backlog doesn't cover us until that period. So at some point in time, you know, our customers are going to replenish their backlog to cover their demand for DDR4 as we move through the transition. So we expect more orders from DDR4 in the second half of the year.
spk05: Okay, great. Thanks. And maybe on a different subject, you know, the market has been, I see a lot of activity around the CXL developments and I think you've said in the past you're expecting a second half of 24. But can you give us any data points or any feel around, you know, your licensing activity for CXL? You know, maybe if you could compare it to any other type of licensing ramps that you've seen in the past. Is it an aggressive ramp or, you know, do you have plenty of customers? Maybe just some type of feel of how the CXL licensing activity is.
spk07: Thank you, Kevin. Yes, CXL has been a strong driver to our Silicon IEP growth last year on the controller side as well as on the FI side. A lot of our end applications had to do with PCIe or CXL. That explains the record revenues that we reached last year on the Silicon IEP revenue at $130 million for the year. We do see now some headwinds in the market that are not coming from CXL. per se as just the macroeconomic environment is less favorable. But CXL continues to drive some sales for our silicon IP business. These silicon IP sales are going into systems, silicon systems that our customers are deploying in the first generation of CXL. And that's how we play in that first generation of CXL. Our products are going to reach the market later down the road when CXL2.0 comes into play in a couple of years from now.
spk05: Okay, great. Thank you. Thank you, Ken.
spk00: Thank you, Mr. Cassidy. The next question is from Nam Kim with RSA Research. You may proceed.
spk03: Hi. Thank you for taking my question. I have a couple of questions. DDR5 RCD chip price premium. I know you don't comment on chip pricing. However, do you expect the DDR5 to carry RCD chip price premium over DDR4? I know chip price are usually very high initially and come down over time when product mature. But I'm just curious if you see DDR5 chip price will continue to carry premium over DDR4, you know, based over lifetime. And then, you know, second question about PMIC. I think you are developing PMIC on DDR5 module. Are you developing your own chip or you have any partnership with the existing PMIC supplier? And when should we expect the ramp of this product? Thank you.
spk07: Hi, Namin. Welcome. The first question for DDR5, yes, you're right. You know, we do see an ASP premium associated with the DDR4 to DDR5 transition. And, you know, the DDR4 products have been in the market for six to seven years now. And, you know, as expected, we have seen some erosion over time. And I think the pricing is stabilizing, as we speak, on DDR4. In DDR5, today, the ASP are higher. It is expected a new product launch. They are higher now, but we expect to see some erosion over time. But, you know, if we take the DDR4 example, you know, it took six to seven years to be at the price we are now. Price will erode, you know, as volume grows. And that's something we're going to monitor quarter over quarter. To your question regarding PMIC or PMIC devices, We are developing our own PMIC devices, and we're developing this on our own, not in a partnership. And we expect to hit the market with the PMIC devices next year.
spk03: Okay, one more question. Thank you, if I can. Silicon IP revenue, last time you guided low to mid single digit percent. this year you said it's a macro headwind, but in the meantime, there are a lot of activities going on with AI in cloud and some, you know, um, you know, uh, AR, um, the solution in edge, uh, do you still keep your earlier guidance, like, like, uh, low to mid single digit growth this year or any changing?
spk07: um yes there are a lot of uh you know end applications for you know our controllers our files as well as our security ip um it's just that the macro environment is a bit challenging you know these days with with a lot of headwinds we do see uh you know the number of uh designs uh just slow slowing down uh we see some you know startups taking a little more time to make decisions. So yes, we maintain our guidance as low single-digit growth year over year, remembering that last year was an exceptionally high growth year. But in the long run, we expect that business to grow between 10% and 15%. I think we just have to deal with the current headwinds this year.
spk03: Okay, thank you.
spk07: Thank you.
spk00: Thank you, Mr. Kim. Our next question is from Sydney Ho with Deutsche Bank. You may proceed.
spk01: Thank you. I have two questions. The first question is, in the past, you talked about the memory chips that TAM is somewhere for last year was $800 to $900 million. Can you remind us what the split between DDR4 and DDR5 was? And as you think about the older trends you're seeing here today, DDR4 still coming down, DDR5 start picking up. How do you expect that TAM to change this year? And what do you think your revenue mix would look like?
spk07: So I would say that, you know, when we talk about the RCD chip, we don't see the TAM changing much year over year. If we talk about the RCD chip alone, as we said earlier regarding revenue, the TAM split between DDR4 and DDR5 is also lumpy. It depends on how fast our customers and our customers' customers are going to digest their inventory on DDR4, number one, and ramp their DDR5-based products. So again, I think we have to be very agile this year for total time that would remain about the same. And if we assume that the time for RCD remains the same, it means that we are expecting to continue to grow our share in the combined time of RCD as we look at 2023. The companionships can add $200 to $300 million of time to that when VDR5 is ramping in earnest on an annual basis.
spk01: Great. Thank you. And then maybe a follow-up question. I know there's a lot of excitement around generative AI, and that uses a lot of memory in the form of high bandwidth memory and high density DRAM modules. Can you walk us through maybe qualitatively or quantitatively how you are benefiting from this, both from an IP and product revenue point of view? Thanks.
spk07: Sure. Great question. On the IP side, generative AI and high workload type of applications, were a catalyst to our IP sales, especially on the memory side. As part of our offering, we do have HBM and GDDR6 memory subsystems that were going into silicon products from our customers that are addressing those types of applications. And again, that explained the growth that we saw in the silicon IP business last year. On the product side, Generated AI does not necessarily increase the TAM, but it's a proof point that the trends underlying our strategy in terms of need for more capacity and more bandwidth are very strong strengths. And I think we're very pleased with that. And we do see the development of GPUs and specialized products around generative AI type of applications to be a catalyst for standard modules as well. So I think it affected in a positive way our silicon IP business and continues to. And it's also a proof point that, you know, bandwidth and capacity are critical factors in our strategy.
spk01: Great. Thank you very much.
spk00: Thank you, Sidney. Thank you, Mr. Ho. The next question is a follow-up question from Gary Mobley with Wells Fargo. You may proceed.
spk04: Hi, Kelly. Are you there?
spk06: Hey, guys. Sorry about that. I just had a multi-part follow-up question as it relates to the companionship opportunity. Looking specifically at the SPD hub and the two temperature sensors that may be located on each DDR5 DIMM, when would you expect to ship your specific companion chip products? Is that Gen 2 or Gen 3 of DDR5? And then I have a follow-up related to that.
spk07: So in the first generation of DDR5, we'll ship modest volumes of you know, those chips as we indicated in earlier calls of the temperature sensor and SPD hub, modest volumes towards the end of 2023 and, you know, in 2024. We're also working on, you know, follow-on generations of all of the companion chips, you know, to hit the follow-on generations of DDR5. You know, DDR5 is going to be on the market for a long time, like we had many generations of DDR4. And therefore, we are working on follow-on generations of those products or the follow-on generation of DDR5 LCD chips.
spk06: Okay. I guess related to that, a common question that I get is trying to understand, you know, who is shipping SPD hubs and temperature sensors for your products today for your DDR5 and what compels your customers to eventually start to take
spk07: your spd hub your temperature sensors and what do you think the attach rate for those companion chips can be for your rcd sales so there are multiple vendors of companion ships be there the temperature sensor spd hubs or power management chips and you know our customers are using different combinations of different suppliers and RCD suppliers in the first generation of products, the goal being to ramp up in the market. I think what's going to be compelling for future generations is that the qualification and validation process become more and more challenging and difficult as you increase the speed of the RCD and you roll out new generations of DDR5. And that's why we're working on the follow-on generation of those products. And at some point in time, it will be compelling for customers to work with the people who will be able to go through the validation process the fastest. So I think the first generation of DDR5 is going to see a lot of suppliers in that space. And over time, you know, that number of suppliers may, you know, reduce as the complexity of the DDR5 systems increase over the years to come.
spk06: It's helpful. We appreciate it. Thanks.
spk07: Thank you.
spk00: Thank you, Mr. Mobley. Once again, it is star one to ask a question. 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 the company.
spk07: Thank you to everyone who has joined us today for your continued interest and time. We look forward to speaking with you again soon. Have a very good day.
spk00: Thank you, this now concludes today's
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