Rambus Inc (RMBS) Q4 2021 Earnings Call Transcript

Thank you, operator, and welcome to the Rambus fourth quarter and full year 2021 results conference call. I am Desmond Lynch, VP of Finance and Investor Relations, and on the call with me today is Luc Seraphin, our CEO and Keith Jones, our Interim CFO. 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 855-859-2056. You can hear the replay by dialing the toll-free number and then entering ID number, 526-4419 when you hear the prompt. In addition, we are simultaneously webcasting this call, and along with the audio, we are webcasting slides that we will reference during portions of today's call. So even if you're joining us via conference call, you may want to access the webcast with the slide presentation. A replay of this call can be accessed on our website beginning today at 5 PM Pacific Time. Our discussion today will contain forward-looking statements, including our expectations regarding business opportunities, industry growth rates, 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, the company's ability to deliver long-term profitable growth, and the long-term sustainability of the company's increased product revenue and cash generated from operating activities, the company's outlook and financial guidance for the first quarter of 2022 and related drivers, the company's ability to effectively manage supply chain shortages, risks and potential adverse impacts related to or arising from COVID-19 and its variants, and the effects of ASC 606 and reported revenue among other things. These statements are subject to risks and uncertainties that are discussed during this call and may be more fully described in the documents we file with the SEC, including our 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may differ materially from our actual results, and we are under no obligation to update these statements. In an effort to provide better 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 a 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 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 the company's progress. We will continue to provide operational metrics such as license billings to give our investors better insight into our operational performance. The order of our call today will be as follows: Luc will start with an overview of the business; Keith will discuss the financial results; and then we will end with Q&A. I will now turn the call over to Luc to provide an overview of the quarter.

Thank you, Des, and good afternoon everyone. 2021 was a great year for Rambus, driven by the strong execution of our global teams and continued product growth. We delivered an excellent fourth quarter with $91.8 million in revenue, exceeding revenue and profitability targets for the quarter. It was also an outstanding quarter for cash generation. We set a 10-year high with $72 million in cash from operations in Q4, and a new annual record at $209 million for the full year. Our ability to generate strong cash from operations allows us to continue to invest in new products and to return value to stockholders. As we continue to scale the business, we benefit from a balanced and diverse portfolio of offerings and revenue contributions, such as Chips, Silicon IP, and patent licensing. Memory Interface Chips continued to record product revenue for the second consecutive quarter at $45 million, which is up 23% over last quarter's record. This brought the full year revenue to an annual record of roughly $144 million, growing the Chip business by 26% over 2020. We achieved key milestones throughout the year that drove the product business performance. We continue to focus on execution with our first generation DDR5 RCD. This product is in volume production and has a growing qualification footprint in next generation systems. As we mentioned last quarter, we were also the first to sample a second generation DDR5 RCD. We are sampling our second generation products to customers and have begun receiving pre-production orders for the second half of the year. Being first-to-market on DDR5 has given us an edge to gain share during the DDR5 transition cycle. We had a strong year; however, it is important to acknowledge the continued industry-wide challenges in semiconductor supply chains. We are working closely and proactively with our supply chain partners to minimize the impact of any disruptions and focus on our ability to meet the growing demand for our products. Despite these supply chain challenges, we delivered record results and expect the business to continue to grow in 2022. In addition to the record financial performance, the team continued to broaden the range of Rambus products and available market with the ongoing development of new DDR5 companionships and CXL Interconnect solutions. Let’s turn now to Silicon IP. Through a combination of disciplined execution and strategic investments to scale the business, we have grown to a run rate of over $100 million a year in bookings, and it continues to grow. We are leading in our chosen focus areas, including HBM, CXL, PCI Express and Security IP, and see a growing number of design wins across our target markets. Our Silicon IP business contributes to the company’s balanced revenue streams, diversity in the customer base, and bold relevance in the ecosystem. It also gives us the ability to leverage the solutions developed in the data center and the edge to address additional markets like automotive, IoT, and more. In closing, this was an exceptional year for the company. We increased our investment in ESG and are ensuring that we are working with environmentally conscious companies that share our values and commitments to the health and welfare of employees and the community. We successfully closed key patent licensing agreements, solidifying our foundation with sustained cash generation and continued investments. We returned $100 million to our stockholders through an accelerated share repurchase program. We acquired integrated Silicon IP companies, augmenting our world-class design team and product portfolio. We expanded our roadmap for next-generation data center solutions with the launch of the CXL initiative and the development of DDR5 Companionships, helping to double our time in the years to come. And finally, we extended our technology leadership with key product releases and performance milestones, including the production ramp of our DDR5 RCD, expanding our market share. I'm very proud of what the Rambus team has achieved. We said we would deliver profitable growth, and we did. With the expansion of our product roadmap into new Chips, the industry's transition to new memory and interface technology and the growing demand for state-of-the-art security technologies across a wide range of markets and applications, we are very excited about the prospects for 2022 and beyond. With that, I’ll turn the call over to Keith to discuss the quarterly financial results.

Thanks, Luc. Let’s begin with a summary of our financial results for the fourth quarter and for the full year 2021 on slide five. Once again, we delivered great results this quarter, with product revenues growing 23% and generating $72.2 million in cash from operations. The cash flow contributions is an all-time record for us in our evolution as a products company and is a clear testament to our success in profitably growing the company. Our ability to consistently generate cash has helped us both invest in our strategic growth drivers and consistently return capital to shareholders. Let me walk you through our non-GAAP income statement on slide six. Revenue for the fourth quarter was $91.8 million, exceeding our expectations. Royalty revenue was $32.9 million, while licensing billings was $66.6 million. The difference between licensing billings and royalty revenue primarily relates to timing, as we don't always recognize revenue in the same quarter that we bill our customers. Product revenue was $45.3 million, consisting primarily of our Memory Interface Chip business. As Luc mentioned, Memory Interface Chip revenue was a record for the company, despite the supply chain challenges seen in our industry, and we are delighted to see such strong demand from our customers. Contract and other revenue was $13.6 million, consisting primarily of our Silicon IP business. Total operating costs, including cost of goods sold for the quarter came in at $65.4 million. Operating expenses of $51.4 million were in line with our expectations. We expect to continue to grow investments and expand our product roadmap in the coming quarters as we further expand our product portfolio to help drive our long-term growth. We ended the quarter with a total headcount of 690 employees, which was relatively flat from the prior quarter. Under ASC 606, we recorded $1.9 million of interest income related to the financing component of fixed fee licensing arrangements, for which we have recognized revenue but not yet received payment. We incurred $800,000 of interest expense, primarily associated with our convertible notes. This was offset by incremental interest income associated with our cash and investment portfolio. After adjusting for non-cash interest expense on the convertible notes, this resulted in non-GAAP interest and other expense for the fourth quarter of $800,000. Excluding financed interest income related to ASC 606, this would have been $1.1 million of interest and other expense. Using an assumed flat tax rate of 24% for non-GAAP pre-tax income, non-GAAP net income for the quarter was $20.6 million. With disciplined execution and focus in a difficult industry-wide supply chain environment, we again delivered earnings above expectations. Now, let me turn to the balance sheet details on slide seven. We ended the quarter with cash, cash equivalents, and marketable securities totaling $485.6 million, up from the previous quarter as we generated cash from operations of $72.2 million. As we deliver on the topline and execute on operational efficiency, we expect to continue to deliver strong cash from operations in the future. At the end of Q4, we had contacted assets worth $258.6 million, which reflects the net revenue value of unbilled accounts receivables related to licensing arrangements, 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. At each renewal opportunity, we restructure our patent agreements in a manner that allows us to recognize revenue each quarter. Fourth quarter CapEx was $8.9 million, while depreciation was $5.7 million. We delivered $63.3 million in free cash flow in the quarter. Looking forward, we expect CapEx for the first quarter to be approximately $7 million. As a reminder, the forward-looking guidance reflects our current best estimates at this time, and our actual results could differ 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 we have reported historically, licensing billings closely correlate with what we had historically reported as royalty revenue under ASC 605. Now let me turn to our guidance for the first quarter on slide eight. Under ASC 606, we expect revenue in the first quarter between $91 million and $97 million. We expect royalty revenue between $30 million and $36 million, and licensing billings between $64 million and $70 million. We expect Q1 non-GAAP total operating costs, which include cost of goods sold, to be between $69 million and $73 million as we increase our investments and strategic initiatives and expand our product portfolio. Under ASC 606, non-GAAP operating results for the first quarter is expected between a profit of $17 million and $27 million. For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect approximately $1 million of expense, which includes $600,000 of interest expense related to convertible notes during 2023. We expect the pro forma tax rate to remain consistent at roughly 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 roughly $20 million in cash taxes each year, driven primarily by licensing agreements with our partners. We expect non-GAAP taxes to be between an expense of $4 million and $6 million in Q1. We expect Q1 share count to be roughly 115 million basic and diluted shares outstanding. Overall, we anticipate a non-GAAP earnings per share to range between $0.11 and $0.18 for the quarter. Let me finish with a summary on slide nine. Our financial results for 2021 showed great growth and sustained profitability, and continued investment in our long-term growth strategies. We saw our Interface Chip business drive record annual product revenue of $143.9 million, reflecting 26% year-over-year growth as we outpaced the market and continued to gain market share. With that being said, I’m pleased with our execution. This growth has been achieved during a challenging industry-wide supply chain environment. Our Silicon IP business continues to show great momentum and scale, as the business also had a record performance and an excellent year with an annual run rate in excess of $100 million. As a reminder, in 2021 there was approximately $50 million of our Silicon IP business that was reflected in our licensing billings. Our patent licensing business remains the backbone of our financial base. It continues to provide consistent and predictable financial results. Our ability to grow revenue profitably resulted in record cash flows from operations of $209.2 million for the full year. Our proven track record of cash generation helps us fund our strategic initiatives to invest in our product portfolio, make inorganic acquisitions, and return value to our shareholders through stock repurchase programs. Leveraging our strength with focused execution, we made great strides in 2021. This will serve as the foundation for future success as we are well positioned in the data center and cloud markets where we anticipate long-term growth. Before I open the call up to Q&A, I’d like to thank our employees for their continued teamwork, execution and resilience during these uncertain times. We truly appreciate your dedication and commitment as we all look forward to continued success in 2020.

Good afternoon everybody. Let me congratulate you on a strong finish to the year and what seems to be a good start to the current fiscal year. I wanted to start out by asking about some of the supply-demand dynamics on the chip side of the business, specifically the buffer chip. I'm curious if we are in a situation where your revenue is constrained by supply, and if so, to what extent. I know it's a week-by-week situation, and I'm trying to get enough product from your partners. If you can give us an update in terms of your visibility on that particular front as well.

Hi Gary! Thanks for your question. Yes, we have supply constraints for the buffer chip, yet we grew our revenue to 26% over the previous year, and in this last quarter in Q4, we grew 23% over the previous quarter. So we continue to grow and gain share in a market that was growing single digits, which is a testament to our capability. We could have generated an additional $2 million of revenue last year had we had the supply that we required. As you said in the question, we are working literally on a weekly basis both with our suppliers and with our partners to minimize any disruption from the supply chain and to maximize our revenues with our customers. We don’t have much visibility beyond 90 days and I think we are going to stay in a low visibility environment until the second half of this year. Unfortunately, this is what we are facing today. Despite the challenges, we are very happy with the demand. I think it’s driven by the fact that this generation is a better fit in terms of design wins, which has contributed to solid revenue as we started to shift DDR5 price and volume in anticipation of integrating DDR5 platforms launching in the market next year.

And Gary, to add to that, to Luc’s point, we are very excited about the demand that we're seeing. However, there is a noticeable difference between our demand forecast and our supply forecast. From a demand perspective, as Luc said, we are seeing great momentum from DDR5 and DDR4, and we are just really pleased with the traction we are making in the marketplace. However, from a supply perspective for our product business, we are constrained and that's how we have to manage the business. To add a little more color, if we take a look at the consensus for the analysts' models that we put out as part of the Q3 earnings process, those consensus product numbers are really in line with what we see for the full year 2022 from a product revenue perspective. We do see some differences within the quarters, but for the full year, that is clearly due to the supply constraints. That's why we're still a bit cautious, and we have good visibility for 90 days, as Luc discussed, but further out, it poses more challenges.

Great question, Gary. I think in Q4, the results might not reflect the broader market as this is the first quarter where DDR5 products were shifted to the market. There is a combination of unusually high demand for DDR5 during the Q4, driven by the launch platforms' anticipated demand. Over time, we expect things to normalize, but I would say Q4 is an outlier quarter in that sense.

Great. I’ll add my congratulations; a very solid quarter and guide. You know my first question is just a follow-up to the previous question on the product side. Specifically related to product gross margin, it was very strong in Q4. It seems like you've already answered this part—it sounds like better ASP was the reason. But beyond that, when you look at the mix of this year’s growth, it seems like you are suggesting 30%, 40% kind of growth, doable. What kind of product gross margin do you expect, and maybe you can talk about the components driving the gross margin. The product gross margin seems to be good.

Hi Sidney! On the gross margin side, you saw in Q4 we had a relatively high gross margin at 71%, which was due to having a bit more DDR5 mix during the quarter. However, as Luc mentioned, DDR5 is in its early stages of ramping, and we had favorable ASPs in 2021. Starting in 2022, we expect a normalization of pricing throughout the year. Given where DDR5 and DDR4 are relative to their product life cycles, overall, the blended gross margin is expected to be in the range of 60% to 65%, which we've previously outlined.

From a capital allocation perspective, what we've observed over time is that we've consistently returned around 45% of our free cash flow back to our shareholders. In 2021, we returned 55% with the $100 million accelerated share repurchase (ASR). While our history shows variability, we have been consistent regarding capital allocation. Additionally, regarding the convertible notes, we are closely evaluating all alternatives. This includes assessing our long-term capital structure, which will also incorporate M&A opportunities. We are deeply committed to returning capital to our shareholders while actively managing the convertible notes.

Hi Mehdi! From an OpEx perspective, I’ll refer to our guidance for the current Q1 quarter. We anticipate having some additional costs, due to seasonal payroll, which will contribute to the natural run rate of expenses. We are also continuing to hire as we look to expand our product portfolio, so hiring will be slightly incremental throughout the year.

Thanks Mehdi. The nature of Silicon IP is such that it is less susceptible to supply chain disruptions. Our customer base and design wins span a wider array of markets compared to our semiconductor product lines, evident from our diverse clients involving data centers, IoT, and automotive sectors. We aim to drive double-digit growth in the Silicon IP business, which represents a good contribution to our margins and revenue growth moving forward.

Hey guys! Thanks for letting me ask the question. Congratulations on the solid results. I just wanted to revisit the supply issues and ensure I understand the dynamics. To what extent are these direct supply issues from your end versus broader ecosystem challenges?

Yes, thanks John. Our issues are primarily from our supply chain, directly related to our operations. We are not experiencing the same issues inhibiting other markets. We are in a similar position to our competitors who are also facing supply chain challenges. Last year, we grew by 126% while the overall market only grew by about 5%, which reflects our effective management of the situation.

Thank you, Keith. Your first question comes from the line of Gary Mobley with Wells Fargo Securities. Your line is now open.

Got it. I appreciate the context, Kevin and Luc. Regarding your buffer chip business, I understand DDR5 currently forms a significant portion of this segment. Can you provide insight into its exit run rate by the end of the fiscal year? Additionally, how do you view your market share in DDR5 versus DDR4? Is it increasing?

Those are great questions, Gary. For Q4, it might not fully reflect the market dynamics since it's the first quarter where DDR5 products launched. There's a combination of heightened demand for DDR5 and the usual pre-launch order dynamics. We do expect this to normalize over time. As for the DDR4 vs DDR5 market share, we anticipate that the crossover in volume will happen around mid-2023, while the crossover in revenue may occur before then due to pricing dynamics.

Your next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open.

Thank you for the solid quarter and guidance. For the product gross margin that was strong in Q4, can you share expectations for future quarters and how you interpret product gross margin moving forward?

Hi Sidney! For Q4, we achieved a gross margin of 71% due to a higher DDR5 product mix, which we anticipate to normalize as DDR5 ramps. Historically, we have expected blended gross margins to be in the 60% to 65% range moving forward, reflecting mix and pricing dynamics.

From our capital allocation perspective, we consistently return about 45% of free cash flow back to shareholders. For 2021, we returned 55% through an accelerated share repurchase program, demonstrating our commitment to returning capital while considering convertible notes and M&A opportunities as part of our long-term strategy.

Hi Mehdi! Regarding OpEx in 2022, we foresee some additional seasonal payroll costs contributing to our typical run rate. Hiring to expand our product portfolio will also slightly increase costs throughout the year.

Thanks, Mehdi. Silicon IP has been less affected by supply chain issues, allowing our customer base to grow across sectors like data centers and automotive. We're pursuing strategies to drive double-digit growth in Silicon IP business while maintaining robust revenue growth.

Thanks for taking my question. Can you clarify how supply constraints are affecting your ability to meet demand versus broader industry constraints?

Yes, our supply issues mainly stem from our direct suppliers, and we've not encountered problems emanating from other market components at this stage. Our competitors face similar constraints, and we've managed to outperform the market by a significant margin amidst these challenges.

Congratulations! I recall you mentioned expecting improved supply in the second half of 2022. Was this optimism due to expected supplier improvements or other factors?

While we expect supply conditions to improve, we are not looking to add new suppliers but will continue to work with our existing suppliers. We find the second half of 2022 may present improved conditions as other markets place demands on similar technologies. Nonetheless, visibility remains limited beyond 90 days. In terms of CXL adoption, we’re seeing success through various engagements, mainly from IP sales and integrating controls into chips designed for CXL capability. We're also developing our own CXL chips targeting the CXL 2.0 Controller for the market launch in 2023. Engagements with cloud service providers on CXL-specific solutions are ongoing and should strengthen our position in the market.

Thank you for discussing your M&A strategy going forward. How do you plan to balance IP-focused acquisitions versus acquiring semiconductor companies with active market offerings?

The primary objective with M&A will always be to generate profitable growth. We are looking at opportunities in semiconductor companies or carve-outs that align with our current markets. We are also examining opportunities that fulfill similar roles to previous acquisitions but aimed at developing our IP offerings and increasing product revenue growth.

I was curious if you could provide any color on increasing OpEx in ’22 compared to ‘21.

Hi Mehdi! From an OpEx perspective, we'll have seasonal payroll costs affecting our Q1 numbers. Additionally, as we hire to expand our offerings, there will be incremental costs throughout the year.

Thanks Mehdi. Our silicon IP revenue mix is broadening. While our silicon product market grows relatively quickly, the diversity of our customers is beneficial since it is less affected by supply chain issues. The majority of our design wins span across various sectors, such as data centers, automotive, and IoT, and we are pushing for double-digit growth in our Silicon IP business.

There were numerous questions about ASPs and the Memory Buffer business as you move to DDR5. Can you discuss Server DRAM content growth and how your revenue aligns with this—do you see accelerating growth when compared to last year’s mid-single-digit growth?

It is challenging to correlate directly with the DRAM market due to its complexities. However, we look at our cycle and assess how we can convert DDR4 designs into DDR5 as the demand for quicker data handling escalates. Therefore, although our growth was over 20%, it may not correlate precisely with DRAM market share changes.

I can confirm that the demand appears strong, and while there are substantial supply challenges, we are experiencing significant momentum for both DDR4 and DDR5, which gives us positive expectations for our performance. However, quantifying the impact of supply constraints on revenue is more difficult as pricing dynamics vary.

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 Luc Seraphin.

Thank you, everyone, for joining us today and for your continued interest and time. We look forward to speaking to you again soon. Have a great day! Thank you.

Thank you. This now concludes today's conference. You may now disconnect.