Rambus, Inc.

the second quarter fiscal year 2025 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 phone at any time. If anyone should require assistance during the conference, please press star 0 at any time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Desmond Lynch, the financial officer. you may begin your conference.

Thank you, Operator, and welcome to the Rambus second quarter 2025 results conference call. I'm Desmond Lynch, Chief Financial Officer at Rambus, and on the call with me today is Luke Serafin, our CEO. The press release for the results that we will be discussing today has been filed with the SEC on Form 8K. We are webcasting this call along with the 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 5pm 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, other market factors including reflections of the geopolitical and macroeconomic environment 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. In addition, we will continue to provide operational metrics such as licensing billings to give our investors better insight 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 our financial results. and then we'll end with Q&A. I'll now turn the call over to Luc to provide an overview of the quarter.

Luc. Thank you, Des. Good afternoon, everyone, and thank you for joining our second quarter conference call. Rambus delivered a very strong second quarter, exceeding expectations for both revenue and earnings while continuing momentum in our growth initiatives. This achievement was driven by our memory interface chip business outpacing the market with 43% year-over-year growth and another quarter of record product revenue. The strong performance highlights our sustained leadership in core DDR5 products as we continue to execute on our strategic roadmap of signal and power integrity solutions and to drive the adoption of our new products. We also generated record cash from operations of $94 million, showcasing the efficiency of our execution and the robustness of our business model. Our balanced portfolio and diverse revenue streams across chips, silicon IP, and patent licensing position us exceptionally well in the market. They also provide stability in a dynamic micro environment and enable our continued product investment to drive long-term growth. Our chip business continues to be a key growth engine for the company, with Q2 marking our fifth consecutive quarter of product revenue growth. As I mentioned in my opening remarks, we delivered a historic quarter of record product revenue. Our strength in DDR5 continues to be a cornerstone of our success, with increased sales of our core products driving above-market growth. Looking forward to Q3, we expect our ongoing RCD market share leadership combined with early contributions from new products to drive double-digit sequential product revenue growth. We have growing traction for the record number of new products introduced throughout last year, with chips progressing through the respective stages of customer qualification and adoption. Additionally, we remain actively involved in the definition of future generation products with the industry. As we look further into the future, we are also very pleased that our industry standard MRDM chipset is advancing on schedule, and we are excited about its role in meeting the growing memory performance requirements of next generation server workloads. Going beyond servers, we recently launched our client memory module chipset for AI PCs. With that introduction, we are proud to now offer chipsets for all JEDEC standard DDR5 and LPDDR5 modules. Our client chip solutions waterfall our proven server class technology into new applications and extend our reach into next generation high performance PCs opening up a growing market opportunity in the coming years. Our expanding product offerings support the next wave of high-performance computing platforms in servers and client systems. Through ongoing leadership in RCDs and growing fraction across our portfolio of new products, we expect continued momentum and long-term growth. Turning to Silicon IP, we delivered solid results in Q2 and we remain on track for long-term growth. AI and data center applications continue to drive strong demand for our high-speed memory and interconnect IP, as well as our security IP. Our IP solutions are foundational to enabling the performance and security required by next-generation accelerated computing ICs. We're seeing strong demand and design-win momentum across our portfolio, led by best-in-class HVM4 and PCIe7 solutions. Now, as we look ahead for the company, the data center will continue to undergo profound transformation, driven by exponential growth of AI workloads and the increasing complexity of high-speed performance computing. Across the ecosystem, the shift towards scalable, heterogeneous computer architectures is accelerating demand for novel high-performance memory solutions and enabling technologies. These trends align directly with Rambus's long-term strategy, We are strategically focused on advancing system memory bandwidth and capacity through groundbreaking memory connectivity and power management solutions. These capabilities are foundational to enabling the next generation of AI and HPC platforms. We have built a roadmap that addresses the increasing technical demands of data-intensive applications. Our leadership in signal and power integrity, core to enabling robust high-performance memory subsystems, places us at the heart of this transformation. With our strong balance sheet and ongoing focused investment, Rambus is poised to capitalize on these secular growth trends. In closing, Q2 was a standout quarter for Rambus. We achieved excellent financial results, delivered record product revenue, and continue to execute on our roadmap. We are excited to enter the second half of the year with strong momentum, and we expect another quarter of record product revenue with double-digit growth in Q3. Our leadership in DDR5, increasing customer traction for new products, and strong business model position us well for continued success and long-term profitable growth. As always, I want to thank our customers, partners, and employees for their continued support. And with that, I turn the call over to Des to walk through the financials. Des?

Thank you, Luke. I'd like to begin with a summary of our financial results for the second quarter on slide three. We delivered a strong quarter, exceeding our expectations for both revenue and earnings. Our chip business continued to drive our growth as we delivered record results, marking our fifth consecutive quarter of product revenue growth. In addition, our diversified portfolio generated record quarterly cash from operations of $94 million. Our ability to consistently generate cash is a key aspect of our strategy and enables us to continually invest in initiatives that fuel our long-term growth. Let me now provide you a summary of our non-GAAP income statement on slide five. Revenue for the second quarter was $172.2 million, which was above our expectations. Royalty revenue was $68.6 million, while licensing billings were $66.4 million. The difference between licensing billings and royalty revenue mainly relates to timing as we do not always recognize revenue in the same quarter as we bill our customers. Product revenue was $81.3 million as we delivered another quarter of record product revenue. This represents a 7% sequential increase and a 43% year-over-year growth driven by continued strength in DDR5 products. Contract and other revenue was $22.3 million, consisting predominantly 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, were $93.2 million. Operating expenses of $60.4 million were in line with our expectations. Interest and other income for the second quarter was $4.8 million. Using an assumed flat tax rate of 20% for non-GAAP pre-tax income, non-GAAP net income for the quarter was $67.1 million. Now let me turn to the balance sheet details on slide six. We ended the quarter with cash, cash equivalents, and marketable securities totaling $594.8 million up from Q1, primarily driven by record cash from operations of $94.4 million. Second quarter, capital expenditures were $10.4 million, while depreciation expense was $7.4 million. We delivered $84 million of free cash flow in the quarter. We consistently deliver value to our stockholders as we continued our stock repurchase programme in the quarter. Let me now review our non-GAAP outlook for the third quarter on slide seven. As a reminder, the forward-looking guidance reflects our current best estimates at this time, and our actual results could differ materially from what I'm about to review. The economic environment remains a dynamic environment and we continue to actively monitor the situation. In addition to the non-GAAP 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. We expect revenue in the third quarter to be between $172 and $178 million. We expect royalty revenue to be between $57 and $63 million and licensing billings between $58 and $64 million. We expect Q3 non-GAAP total operating costs, which includes COGS, to be between $98 and $94 million. We expect Q3 capital expenditures to be approximately $12 million. Non-GAAP operating results for the third quarter is expected to be between a profit of $74 and $84 million. For non-GAAP interest and other income and expense, we expect $5 million of interest income. We expect the pro forma tax rate to be 20%, with non-GAAP tax expenses to be between $15.8 and $17.8 million in Q3. We expect Q3 share count to be 108.5 million diluted shares outstanding. Overall, we anticipate the Q3 non-GAAP earnings per share range between 58 and 66 cents. Let me finish with a summary on slide eight. In closing, I am pleased with our strong financial results and ongoing execution. Our diversified portfolio and disciplined business model continues to drive profitable growth with strong cash generation. Our robust balance sheet allows us to invest in market expansion opportunities in the data center and AI while consistently delivering value to our stockholders. 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?

Of course. Ladies and gentlemen, if you have a question, please press star followed by one on your touchtone phone. Please save it to where you have asked one question and one follow-up and then return to the queue just so we can access everyone's questions. Our first question comes from the line of Aaron Rikers with Wells Fargo. Your line is now open.

Aaron Rikers Yeah. Yeah. Thanks for taking the question. I'll just ask my question and my follow-up together here. I guess first on the product revenue line, you know, strong growth up 43.5% year over year. I'm curious, Luke, how do we think about the contribution from the RCDs, your positioning as, you know, I think your target's been 40% market share in D5, and where we're at as far as seeing the ramp of the PMIC opportunity? And then as the follow-up real quickly goes, Can you just remind us again, you know, as we think about Granite Rapids, you know, from Intel, from a CPU perspective, and we look at the roadmap going forward, is the expectation that we see continual memory channel expansion with next generation platforms, i.e., you know, moving from 12 to 16 and so on going forward? Thank you.

Thank you, Aaron, to your first question. Yeah, we're very pleased with the growth of our product business with these 43% year-over-year growth in the second quarter. You know, RCD remains very strong for us, and, you know, our belief is that we continue to gain share with the expansion of DDR5 in the market. We were slightly above 40% share, you know, at the end of 2024, and we expect to continue to gain share this year. And we do start to see the contribution for new chips, power management chips, but all the chips that we're introducing to the market. It's still modest. It represents low single-digit contribution to the product revenue in Q3, but it's going to grow to need to offer single-digit contribution in Q3. Sorry, it was low single-digit in Q2. And we do see momentum there. So it's modest, but we do see momentum across the board. And as we said, we are at different stages of qualification and adoption of these different products in the market, which is very comfortable with the momentum there. With respect to the different platforms, our partners continue to roll out platforms. We do sell cheap ahead of the platform deployment. So the platform you mentioned, we're starting to see volume shipments of products on the RCD side. We do believe that, you know, in addition to the Intel platform, AMD and the ARM-based platforms are also going to roll out products that will create demand for, you know, our DDR5 RCD chips. And the fact that, you know, these platforms are, you know, transitioning from 12 channels to 16 channels is also going to create, you know, further demand for DDR5, you know, in the quarters and years to come. So that's the good news for us. Thank you.

Thank you for your questions. Our next question comes from the line of Gary Mobley with Loop Capital. Your line is now open.

Hey, guys. Thank you. Thanks for taking my question. I had some questions about the PC market. I know it's not what everybody's focused on, but if I'm not mistaken, your newly introduced PMIC products are geared towards Panther Lake and With that launch imminent, can you share with us whether or not you've got any visibility into the PMIC sales into the PC market ramping this year or next? And are you generating yet any client clock driver revenue from the PC market?

Thank you, Gary. Yeah, you know, as we said in earlier calls, you know, we do see the requirements that we initially or historically saw. in the data center flowing into high-end PCs and the need for the equivalent of an LCD or the equivalent of the power management chip flowing into the high-end PC market. So we introduced the clock driver last year, and we are starting to see modest traction. Modest traction not because the product is not successful. It's just the market is limited at this point in time. It really targets the very high-end speed you know, a layer of the market. And over time, it's going to flow down, you know, all the segments of the market. We were encouraged with, you know, the reception of our PNIC products into the data center. And that's why we announced, you know, PNIC products, you know, for the client market, you know, a Gen 2 PNIC for, you know, DIMS in the client market, as well as an LPCAM you know, solutions for, you know, for the PC market. So we're planting the seeds in a market that we think is going to be very fertile, you know, going forward. But that's going to address the high-end PC markets first and then slow down. So we do expect the contributions from, you know, these client markets, you know, to start to be visible in 2026, when this year we're going to just see, you know, the initial shipments of, you know, qualification and pre-production orders.

All right, thanks, Luke. As a follow-up, I wanted to quickly ask about inventory. It appears as though your dollars of inventory are getting lean and days of inventory especially lean. And so the reason I bring this up is, you know, are your lead times extending? And if they are, is there a motivation for your memory customers to start to maybe sort of insure or hedge against that in a form of higher inventory?

Hi Gary, it's Des here. That's a good question. Our inventory levels in Q2 came down to about 120 days, which was mainly driven by more finished goods inventory at the end of the quarter. It is important to note that our inventory holding at June 30th is just a snapshot in time and really based upon our current view of demand, we will have sufficient inventory to support our customers' demand through at the end of the year. We do have long-term relationships with our supply chain partners and they are fully supportive of our growth plans going forward into 2026 and beyond. If we look ahead, given our expanding product portfolio and strong cash generation, we are comfortable with holding more strategic inventory on our balance sheet and this is something we will definitely endeavour to do here over the next couple of quarters. As it relates to lead times, I would say that they remain within normal levels and consistent with prior quarters from there, Gary.

Thanks, Des.

Thanks, Gary.

Thank you for your questions. Our next question comes from the line of Kevin Cassidy with Rosenblatt Securities. Your line is now open.

Thank you, and congratulations on the great results. You know, the AI ASIC market is exploding, and it's called the XPU. Can you say how that ASIC market might be changing the demand for your silicon IP?

Thanks, Kevin. Yes, sure. You know, what we see with the AI market exploding and the emergence of these XPU solutions, ASIC solutions, is that the need for very high-speed connectivity and the need for very high-speed memory interfaces increases and accelerates. And that translates for us into an acceleration of our development for solutions such as HBM4, HBM4e, as well as PCIe7. So we are engaged with customers. These markets tended to be quieter. It's a bit like the RCD market. Everything is accelerating. But we do have several engagements on these leading-edge technologies, on the HVM4 and the PCIe7 in particular, as well as for the security solutions. So the need to actually secure data when it sits into those chips or secure data when it moves around between those chips is becoming critically important. So that's also giving traction to the sales of our silicon IP in the security area.

Okay, great. Thanks for that detail. And, you know, maybe a more mundane discussion is that there's been announcements for DDR4 end of life. Does that change anything for Rambus? Or, you know, I guess a couple of years ago, we had an inventory issue. So I guess that's out of the way now. But what does it mean going forward?

It doesn't change much for us. You know, DDR5 sales remain very limited. And this has been our message for several quarters now. And we don't see that picture changing. We do see slowly inventories going down in the market. We hear about the last time by orders. We expect DDR4 demand to remain low, even decreasing. And maybe it's going to be on a case-by-case basis when people work through these last time by orders.

Okay, great. Thanks. Congratulations again. Thank you, Kevin. Thanks, Kevin.

Thank you for your questions. Our next question comes from the line of Mehdi Hasini with SIG. Your line is now open.

Yes, thanks for taking my question. I want to better understand the mix of the product revenue, especially given the increased contribution from the companionship. How should I think about the DDR5 RCD chip or RCD buffer chip versus a companion chip? How is that mix evolving?

The way to look at it is we introduced a lot of products and there are different stages of introduction and qualification with, you know, with our customers. But in Q2, you know, these new products represented low single digit contribution in percentage terms. of our product revenue. And when we look at Q3, that contribution in terms of percentage is probably going to be mid to upper single digit percentage of our product revenue. So as I said earlier, we planted the seeds, we see traction, and we're very happy with the traction with our customers. The contribution today is modest, but we do see very strong momentum in terms of adoption of these products.

Got you. Thanks for that clarification. Would that increased contribution continue into year end?

Yes, it will continue into year end. You know, we, again, we're still in the phase of, you know, introduction, pre-production of these products. So, you know, when we look at, you know, the view of our product revenue, you know, for Q4, you know, we're comfortable with where the street sees us and we see a slightly higher contribution from our new products. But the real thing is going to be 2026 when the platforms are in full swing into the market.

Okay. All right. If I may squeeze my second question, I want to better understand the same kind of a diversification in your silicon IP. There was a Amir Asadi- significant improvement on a Q over Q basis of almost 6 million. Amir Asadi- Is that driven by HPM4? If not, what is driving that sequential increase in silicon IP? And if the HPM4 was not a factor, when should we expect customers to come back and buy more IP for that specific application, HPM4?

Hi Mary, it's Des here. We're really pleased with the performance of our Silicon IP business, which delivered strong results in the first half of the year. And we're really on track to meet our annual growth expectations for the full year from here. What I would say is when you look at the different revenue categories of contract and other and licensing billings, these can move around on each sort of quarter. which is really dependent upon the IP that we are selling to customers. So what you did see in Q2 is an increase in our contract and other sort of line. which represents more customizable IP been sold. And we saw the corresponding sort of decline on the licensing billings line, which is off the shelf IP. But what we really see here is a really strong momentum in the business, which has really been led by the memory controller solutions of HBM4, PCIe7, and also nice traction on the leading edge security IP solutions. But overall, So the full year, we do expect the business to grow in line with our overall sort of expectations from here.

Thank you, guys. Thanks, Mehdi.

Thank you for your questions. Our next question comes from the line of Talia Winkler with Evercore. Your line is now open.

Hi, thank you for taking my question. My first one, it was about our deal opportunity. Look, I was wondering if you can help us with an update and how you guys see that market and maybe sort of, you know, the ultimate proportion of the CPU market that might be using that technology.

Yeah, so MRD may stage to, you know, enter the market towards the end of 2026. You know, depending on the availability of platforms, this is not the next generation platform, but the one after. But it's important to engage with customers very early on. So, you know, at this point in time, you know, we're very pleased with the progress we're making with our customers in terms of, you know, design winning and engagement from the qualification side. But that will contribute to, you know, the revenue towards the second half of 2026 and beyond. You remember, you know, the MRDM content is much larger than, you know, the content of the standard RDM for DDR5. because the RFID is more complex, the power management chip is more complex, but you also have 10 dB chips that were not present on the standard, you know, DIMM. So we're very excited with the progress, but that's going to have an impact in 2026 that can happen beyond. You know, the market is difficult to assess at this point in time, but we expect, you know, in full swing, it could represent about $600 million market for, you know, MRDM. you know, that you can compare to a market for Ardyn today, which is about $800 million. So that's a significant, you know, growth potential in terms of SAM, but that's something that's going to happen in 26. That can happen beyond.

Thank you. That's very helpful. And then my second question is around ARM CPUs. If you could Help us understand if there's a little bit of a trade-off, you know, from the standpoint of units of the CPUs and the channel counts, if you guys view the ARM CPU market, you know, different from x86.

We kind of agnostic as to, you know, the CPU that is being used. Certainly, you know, different, I would say, platform providers, you know, offer a different number of channels. We kind of take that into account when we estimate the market size. But for us, the very fact that people are developing chips based on ARM that are in competition with the x86 platforms is a good thing. It creates tension in the market, competition in the market that is good for the rollout of higher speed RCDs and companion chip solutions. So we're kind of agnostic, but we see this in a positive way.

Thank you. Thank you for your question. Our next question comes from the line of Tristan Guerra with Baird. Your line is now open.

Hi, good afternoon. Is it fair to assume that the customized IP that you sold in the quarter, that it's more related to custom ASIC? And also when you talk about the contribution going from low single digit to mid to upper single digit this quarter, from new product, I'm assuming companionship is really the vast majority of that increase. And is that more on the Granite Rapid platform?

Yeah, to the second question, it's a combination. We introduced eight new products last year, mostly companion chips. The chips that we introduced this year are companion chips for the client space, mostly in the power management area. And, you know, different customers at different stages. So, you know, when we mentioned this low single digit going to mid to upper single digit, these are all these new chips that we introduced, mostly companion chips. Your first question was... Can you repeat your first question, please?

Customized IP. Yeah, yeah. It was regarding the customized IP and whether this was related to custom ASICs.

Yeah, mostly it's custom ASICs. It's people developing their own chips to address the demands of the AI market. There's a lot of interest now for AI inference in particular, which drives the need for AI chips for high-speed interfaces. So yeah, it's mostly for ASICs. ranging from startup companies that want to enter that market all the way up to more established companies that already have a footprint into that market.

Okay. And then just as a quick follow-up, what is typically the timeline between when you collect this customized IP versus the timing when the custom ASIC is ramping? And the reason I'm asking is because There is a number of hyperscalers that are at different stages of ramping custom ASICs over the next couple of years. And I think you've mentioned that, you know, that increase in customized IP was, you know, happening in the quarter, but not necessarily sustainable or lumpy. But shouldn't we see an increase medium term from customized IP revenue over the next, you know, in the medium term into next year?

Yeah, that's a good question. Typically, you know, our IT business is a licensing business. So our customers pay us when we deliver the IP, you know, for a license, you know, for one use or several use depending on the contracts. So we typically see the revenue, it depends, you know, 12 to 24 months before the products ramp into the market. So, you know, our current sales address chips that are going to be in the market in a couple of years from now. And that's why, you know, we do see demand for these, you know, leading edge technologies. You know, people are using, looking at HVM4, HVM4, PCIe7, you know, for the next generation of products. And we're going to be on that, I would say, leading edge, you know, as we move forward. Then it depends on how successful these customers are. They are customers that have been developing chips for many years and will continue on that path with us. And startup companies, there are more and more startup companies paying licenses to us as they move forward. Whether their chips are going to be successful or not is a different question. But again, it's important for us to have the revenue recognized by the time we sell the license. you know, when they actually decide to use these leading edge technologies into their products.

Great. Thank you very much.

Thank you.

Thank you for your question. At this time, apologies, we have a follow-up question from the line of Mary Hussini with SICK. Your line is now open.

Yes. Thanks for taking my follow-up. What I'm looking to next year, 2026 and 2027. I want to better understand how you're thinking about the opportunities associated with the client market, PC market versus CXL. It seems like CXL 3.0 is more like a late 26. If it doesn't push out again, would the incremental opportunity from PC market be enough, be large enough to offset if there is more push out in CXL adoption?

Thank you, Mehdi. The way we look at it is that you're correct. CXL may push out even further, but we do see MRD really being the solution that is going to be adopted for use case that has to do with memory expansion in particular. So on the data center side, you know, we have high expectations for the deployment of MRDIMM. As I said, you know, with revenue in the second half of 26 and 27, but I think that would address a lot of the use cases that CXL was supposed to address in terms of chip business. Now, clients are different, you know, clients, you know, there's not really a CXL market for client at this point in time or small, you know, for chips per se. But the client business for us, we really see this as an extension of our companionship market for the data center. As we said earlier, the technical requirements that we're going to find in high-end client systems are very similar to the ones that we currently find in data centers. So this is going to be a driver for SAM expansion for club driver chips and power management chips into the client business. So that's a different area of growth for us, you know, different than the MRVIM in the data center space. Thank you. Thank you.

Thank you for your question. At this time, there are no further questions. This will conclude the question and answer session. I would now like to turn the conference back over to the company.

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 great day.

Thank you. This now concludes today's conference.