Earnings Call Transcript - RMBS Q1 2024

Operator, Operator

Welcome to the Rambus First Quarter Fiscal Year 2024 Earnings Conference Call. As a reminder, this conference call is being recorded.

Desmond Lynch, Chief Financial Officer

Thank you, operator, and welcome to the Rambus First Quarter 2024 Results Conference Call. I am Desmond Lynch, Chief Financial Officer at Rambus, and on the call with me today is Luc Seraphin, our CEO. The press release for the results that we will be discussing today has been filed with the SEC on Form 8-K. 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 5:00 p.m. Pacific Time. Our discussions today will contain forward-looking statements, including our expectations regarding projected financial results, financial prospects, market growth, demand for our solutions and other market factors 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 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 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: Luc will start with an overview of the business. I will discuss our financial results, and then we will end with Q&A. I'll now turn the call over to Luc to provide an overview of the quarter. Luc?

Luc Seraphin, CEO

Thank you, Des, and good afternoon, everyone. In Q1, we continued our disciplined execution as we remain strategically focused on addressing the needs of traditional and AI servers. In the quarter, we expanded our market opportunity with the introduction of new leadership products and performed well across all of our businesses. With that, we delivered solid Q1 results and demonstrating our ongoing commitment to stockholder return, we completed a $50 million accelerated share repurchase which brings the total return of cash to our stockholders over the past 3 years to $350 million. With strong execution, we delivered first quarter product revenue of $50 million and also continued our investments in new products to drive future growth. As the accelerated pace of new compute platform rollouts continues, we have multiple generations of DDR5 RCVs progressing through different stages of qualification and production and the latest generation sampling to customers. We are, therefore, well positioned for the DDR5 product cycle and expect this to drive approximately 10% product revenue growth in the second quarter. Additionally, we are confident in the longer-term outlook for the data center beyond the current softness in the traditional server market. While we continue to see modest consumption of DDR4 customer inventory, the industry is moving in earnest to DDR5 and the transition is amplified by increasing demand for performance from generative AI and other advanced workloads. The rapid evolution of traditional servers requires the constant advancement of new products and architectures to address the growing memory performance requirements. As such, expanding our leadership product portfolio to meet these requirements is a key element of our long-term growth strategy. In line with that strategy, we just announced the expansion of our chip offering with the availability of our new family of DDR5 server PMICs, completing our memory interface companion chipset for DDR5 RDIMMs. This new product line includes the industry's first extreme current server PMIC that will enable high-bandwidth, high-capacity DDR5 modules for leading-edge servers in the data center. We are currently in qualification with major memory vendors and are receiving positive feedback. Power Management solutions are a critical and challenging component of today's server memory subsystems. In order to achieve the increased bandwidth and capacity of DDR5, the industry made a major change to the power management architecture by moving the PMIC from the motherboard to the individual memory modules. The resulting DDR5 server PMICs are required to deliver reliable power at the lower voltages and tighter tolerances of the latest DRAM chips while operating in a very challenging environment. We have built upon our memory subsystem expertise and proven track record of delivering robust module-based solutions to deliver a PMIC family optimized to efficiently power delivery under demanding noise, thermal, and space conditions. Given our heritage and mission to advance memory performance, we identified power management as a critical technology to unlocking higher memory bandwidth and capacity. We made the strategic decision to invest, build a world-class team and are now intercepting the market with leadership products to address the need. This new server PMIC product family amplifies our market opportunity and lays the foundation for our roadmap of future power management chips. As AI expands from training to inference, increasing demands and performance will extend beyond servers to client systems and drive the need for new PMIC solutions tailored for emerging use cases and form factors. Continued advances in the data center and AI are also driving momentum in our Silicon IP business, with strong design wins led by HBM, CXL, PCIe Express and security IP. With the industry's most advanced interface and security IP portfolio for AI, we are making great progress and are on track for our annual growth targets. As part of our continued leadership, we introduced the industry's first GDDR7 memory controller, which delivers the performance needed by the next wave of inference chips for Edge AI. The ever-increasing volume of data is pushing chip interface speeds and memory bandwidth requirements higher and higher. At the same time, the value of the data itself is also going up. And with that, so does the risk and impact of a breach. Our differentiated Silicon IP solutions offer chip designers top-of-the-line performance and advanced protection against attacks, making them essential to enabling faster and more secure SoCs for the data center and adjacent markets. As we look forward, generative AI and other data-intensive workloads will further accelerate the demands on performance and security across the computing landscape. We continue to focus on the ongoing scaling of memory capacity and bandwidth through novel memory form factors and architectures such as multi-rank solutions and serial attached memory that would be critical to improving efficiency and performance in computing systems from the data center to clients. In addition, ongoing advancements in security, including quantum safe solutions will be essential to protecting valuable hardware and data. As demonstrated in this quarter, through our newly introduced offerings, we continue to execute on our product roadmap for both chips and IP, unlocking new levels of system performance and expanding our market opportunity. Recent announcements by leaders in the AI industry serve as proof points of the importance of memory for system performance improvement with the latest systems featuring more than double the memory bandwidth and capacity. As we look forward, those requirements will only grow, and our strategy and roadmap are well aligned to address the market needs. In closing, Q1 was a solid quarter for the company that was achieved through disciplined execution of a clear strategy. We delivered on our commitments across the board and continued our innovation in the market. Our focus on high-performance products for the data center and AI positions us well to drive the long-term profitable growth of the company and our strong balance sheet enables us to deliver consistent return of value to our stockholders. As always, I'd like to thank our customers, partners and employees for their ongoing support. And with that, I'll turn the call over to Des to discuss the quarterly financial results. Des?

Desmond Lynch, Chief Financial Officer

Thank you, Luc. I'd like to begin with a summary of our financial results for the first quarter on Slide 5. We delivered solid results in the quarter as a result of the company's ongoing disciplined execution and focus on our strategic initiatives. We are pleased to have launched our new power management products, which demonstrate the translation of new product investments to expanded market opportunity. Continuing our strong track record of returning cash back to stockholders in Q1, we executed a $50 million accelerated share repurchase program that retired approximately 800,000 shares. Through a robust balance sheet, driven by our strong cash generation, we have returned a total of $350 million in cash to our stockholders over the last 3 years, which shows our consistent commitment to capital return. Let me walk you through our non-GAAP income statement on Slide 6. Revenue for the first quarter was $117.9 million, which was above our expectations. Royalty revenue was $47.5 million, while licensing billings was $63.2 million. The difference between licensing billings and royalty revenue mainly relates to timing as we don't always recognize revenue in the same quarter as we bill our customers. Product revenue was $50.4 million, consisting primarily of memory interface chips. Contract and other revenue was $20 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 $74.2 million, Operating expenses of $53.7 million were in line with our expectations as we continue to be disciplined in our expense management. And we ended the quarter with a total head count of 622. GAAP interest and other income for the first quarter was $4.2 million, which includes $200,000 of ASC 606 interest income. Using an assumed flat tax rate of 22% for non-GAAP pretax income, non-GAAP net income for the quarter was $37.4 million. Now let me turn to the balance sheet details on Slide 7. We ended the quarter with cash, cash equivalents and marketable securities totaling $391.1 million. This is down from Q4, mainly due to the $50 million accelerated share repurchase program that we completed in the quarter. Cash from operations for the quarter was $39.1 million. First quarter CapEx was $7 million, while depreciation expense was $6.1 million. We delivered $32.1 million of free cash flow in the quarter. Now let me turn to our guidance for the second quarter on Slide 8. As a reminder, the forward-looking guidance reflects our current best estimates at this time. We continue to actively monitor the macro environment and our actual results could differ materially from what I'm 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 to be between $130 million and $136 million. We expect royalty revenue to be between $55 million and $61 million and licensing billings between $61 million and $67 million. We expect Q2 non-GAAP total operating costs, which includes COGS to be between $80 million and $76 million. We expect Q2 CapEx to be approximately $13 million. Under ASC 606, non-GAAP operating results for the second quarter is expected to be between a profit of $50 million and $60 million. For non-GAAP interest and other income and expense, we expect $3 million of interest income. We expect the pro forma tax rate to be approximately 22%, with non-GAAP taxes expected to be between an expense of $12 million and $14 million in Q2. We expect Q2 share count to be 109 million diluted shares outstanding. Overall, we anticipate the Q2 non-GAAP earnings per share range between $0.38 and $0.45. Let me finish with a summary on Slide 9. I am pleased with the team's continued execution as we navigate dynamic market conditions in the short term. We are pleased to see continued momentum across all of our businesses, fueled by our leading-edge products in both chips and silicon IP. Our innovation, diversified portfolio and disciplined model continues to drive profitable growth and strong cash generation. Our solid balance sheet enables investments into market expansion opportunities in the data center and AI while consistently delivering value to our stockholders. Before I open up the call 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?

Operator, Operator

And the first question is from Gary Mobley with Wells Fargo.

Gary Mobley, Analyst

With the product revenue expected to increase about 9% sequentially. Is that an indication of the market turning more positive specific to register clock driver sales? And then maybe you can parse out some distinction between DDR4 and DDR5 and then related to the companion chip sales maybe you can share with us your latest view on the timing of ramp for those companions?

Luc Seraphin, CEO

Thanks, Gary, for your question. So yes, we are pleased with the execution for the first half of this year. We had solid results in Q1, and we expect, as you said, growth into Q2. We still see for the fourth quarter in a row, a slight decline of DDR4 inventories, which is a good sign. Our predominant sales continue to be DDR5 into the first half. But what we see going into the second half of the year is that we expect a modest recovery in DDR4 following the inventory digestion. We also expect a recovery in standard server demand with a refresh cycle coming on board. And we will start to see more contribution from our companions. The two companions that we already had sampled to customers in prior quarters, but also now with our newly introduced PMIC. So we do see growth in the second half based on these three main factors.

Gary Mobley, Analyst

Okay. I had a follow-up about your silicon IP business. You mentioned in your prepared remarks that you're on track for your fiscal year '24 targets. Refresh my memory. Is that $120 million in annual sales in that business? And maybe if you can give us a sense of how that business seems to be performing better than expectations? Is it driven by the memory and high-speed SerDes controller IP? Or is it driven by more sort of the security side of the business?

Desmond Lynch, Chief Financial Officer

Gary, it's Des here. We're very pleased with our performance in silicon IP. If you take our adjusted number for last year, which excludes the PHY divestiture. This was about $110 million. And what we've talked is growing the business at 10% to 15%, in line with our long-term targeted growth rate. What we've seen in the first half of the year, if you take our Q1 actuals and plus the midpoint of our guidance that we will be up double digits in the silicon IP revenue, which is really driven across all components of our portfolio. We're seeing strong performance by our security revenue really led by Root of Trust and MACsec solutions. And also on the interface side, we're also seeing nice growth across HBM, CXL and PCIe.

Luc Seraphin, CEO

Yes. What I would add to this, Des, is we've really worked on our silicon IP offering focus. So if you look at the type of IP we provide, they are really well targeted to AI type of applications. We had several generations of HBM in the market, HBM2, HBM2e, HBM3, HBM3e, which we announced in our Q4 of last year. We have PCIe from PCIe 3.0 to PCIe 6.0. We announced last quarter CXL 3.1. And on the security IP, as Des mentioned, with all of these data moving around into these fragmented architectures, the importance of security becomes more and more important. So last year, we refocused our IP portfolio. We're doubling down on that portfolio, and that explains the growth that we're starting to see with that very focused portfolio for AI in particular.

Operator, Operator

The next question is from the line of Mehdi Hosseini with SIG.

Mehdi Hosseini, Analyst

Two follow-ups from my end. Just double-clicking on silicon IP. It's been kind of flattish into the Q2. Should we expect additional incremental revenues so that you would have a growth on a Q-over-Q into the second half? And I have a follow-up.

Desmond Lynch, Chief Financial Officer

Mehdi, it's Des. That's a good question. As I mentioned to Gary a minute ago, we observed approximately 10% growth when comparing the first half of 2024 to 2023. We are performing very well. Luc provided some insightful details on the factors driving this growth. We anticipate that this trend will continue into the latter half of the year due to our expanded offerings that Luc discussed. We are also seeing strong traction in both the controller and security areas. Therefore, we expect to see continued growth in our silicon IP business as the year progresses.

Mehdi Hosseini, Analyst

Okay. So the first half to second half comment was more of an overall revenue, it wasn't just product revenue, right?

Desmond Lynch, Chief Financial Officer

The comment was relating to silicon IP revenue, Mehdi from near, the 10% growth. I think Luc also mentioned in his prepared remarks that if you take the Q2 guidance midpoint on the product side, we are seeing almost double-digit growth on the product revenue side as well. So we're performing very well in Q2 from there.

Mehdi Hosseini, Analyst

Sure. And with the higher mix of DDR5 should I also expect gross margins finally to show meaningful improvement in the second half of the year? Gross margin for product revenues.

Desmond Lynch, Chief Financial Officer

Yes. That's the way I would think of it, Mehdi. In Q1, our gross margins were approximately 61%. That was anticipated by us. As we move throughout the year, what we will see is a higher concentration mix of DDR5 on some of the new products that are coming out. And we'll continue to be disciplined in our ASP management. And as always, we will continue to drive product cost reductions to maintain a healthy gross margins. But overall, for the year, I would expect our product gross margins to be in line with our long-term gross margin target of 60% to 65% on the products.

Operator, Operator

The next question is from the line of Kevin Cassidy with Rosenblatt.

Kevin Cassidy, Analyst

Congratulations on the solid results. As we enter the second half of the year, could you provide an idea of the expected shipment mix for DDR5 RCDs across the first, second, and third generations?

Luc Seraphin, CEO

Thanks, Kevin. That's a challenging question. We have three generations of DDR5 being developed. There are various stages of qualification and production with different customers, making it a bit tricky to manage the backlog and inventory. However, we do see significant growth in DDR5. Generation 1 is fully in production, Generation 2 is ramping up, and we're preparing to ship parts for Generation 3. Depending on the modules and the customers, we have different qualification and production stages. As mentioned earlier, DDR5 remains small for the first quarter, and DDR4 also remains small for the same period. We anticipate a slight recovery for DDR4 starting in the second half, but we expect this trend to have a long tail. The majority of our business will continue to revolve around DDR5 across these generations.

Desmond Lynch, Chief Financial Officer

Kevin, maybe just to add on to what Luc said, regardless of what generation shifts on DDR5, we have a strong qualification footprint across all generations, and we're really pleased with our market position on DDR5.

Operator, Operator

The next question is from the line of Nam Kim with Arete Research.

Nam Hyung Kim, Analyst

My question is about PMIC and the other is on something unclear. Can you explain the reasons for introducing PMIC against current competitors and what your expected market share growth is in PMIC and RDIMM?

Luc Seraphin, CEO

Thank you, Nam. If I understood your question well, your question was why we're introducing PMIC against the incumbents and how we expect to grow share.

Nam Hyung Kim, Analyst

Yes. How does your PMIC compare to the existing PMICs in terms of competitiveness?

Luc Seraphin, CEO

Thank you, Nam. So yes, let me give you a little bit of color regarding the announcement we just made on PMIC. As the workloads for traditional servers and AI servers continue to increase, we believe that power management has become a critical component on the system performance of the DIMM. The power management chip distributes power in a reliable manner to different power domains that sit on the RDIMMs, and RDIMMs is one of the most dense electronic systems that you can find and you have to deliver that power. And these power management chips must demonstrate efficiency, how much power you use for the power you deliver, accuracy, and stability because of the tolerances of the devices on these DIMMs. But also a good behavior when you ramp up or ramp down power. So it's a very complex chip. And we thought that at Rambus, this is going to become a core competency in the long run. We have invested in power management for a couple of years now. We're still growing the team and the investments in that area. We are capitalizing on our deep understanding of the DIMM at the system level, which I think is really, really important. And as you saw in the announcement, we talked about the extreme PMIC, which is the name specified by JEDEC. But the extreme PMIC is actually a PMIC that goes into the most challenging DIMMs in terms of speed and density. And we targeted that because this is where we could show that we could have products that were better than our competitors by targeting the most difficult ones to do. We have sampled customers in some large quantities now. We are in the qualification process, and the feedback we have from customers on that most difficult PMIC to make is very, very positive. And in the long run, what this tells us is that these extreme PMIC performances and our ability to make them is going to trickle down to other applications for the high current PMIC or the low current PMIC, but also for PMICs that will be used in other systems down the road. So the first PMIC is the extreme PMIC. That's a very difficult one to make. It's targeting high density, high bandwidth DIMMs. And we've got really good results with customers, and this is what gives us confidence in this.

Nam Hyung Kim, Analyst

It sounds like the AI server, which you acquired very high bandwidth and high capacity, is that right? And what's your target market share in PMIC in the longer term?

Luc Seraphin, CEO

It is indeed the case that both a CPU and an AI server aim to maximize the number of DIMMs per channel while also focusing on density. Therefore, AI servers are a suitable target for the extreme PMIC. You are correct in that regard. Regarding market share, our long-term goal remains a 20% share once we achieve full production of our PMIC family. We will gradually work toward that goal by shipping initial volumes in the second half of this year and increasing production next year, ultimately aiming for a 20% share.

Nam Hyung Kim, Analyst

Okay. One more question, if I can, then I will be back in queue. DRAM prices have been increasing quite dramatically since December quarter last year. I'm just curious on RCD pricing going forward, did the RCD chip price usually just stable relative to RDIMM price? Or do you think there is some room to raise the price when RDIMM price are up quite significantly?

Luc Seraphin, CEO

Now typically, the RDIMM prices and the RCD prices are not correlated. The RDIMM prices grow with DRAM supply and demand situation. The RCD prices typically defined by the competitive environment on the RCD supply. So there's no correlation between the RDIMM prices and the RCD prices. The only thing I would add, though, is that when we move from generation to generation from DDR5 Gen 1 to DDR5 Gen 2 to DDR5 Gen 3, there's an uptick in pricing on the RCD, that has to do with the introduction of new technology. But as these technologies ramp into production, we see the standard price erosion on each one of those generations.

Operator, Operator

And our next question is from Mehdi Hosseini with SIG.

Mehdi Hosseini, Analyst

Yes, I have a couple of follow-up questions. When do you expect incremental PMIC revenue to start affecting the top line? Also, will PMIC be included in the product revenue?

Desmond Lynch, Chief Financial Officer

Mehdi, it's Des. As Luc mentioned, we're very pleased to announce our PMIC solutions today. We do expect to have a revenue contribution in the second half of the year, and that will continue to grow into 2025, as Luc mentioned into the production volumes then. You are correct, this will show up under product revenue, that's the right categorization for the PMIC revenue.

Mehdi Hosseini, Analyst

Okay. And then just a clarification on the product gross margin, 60% in Q1. I think I heard you saying that most of the products were for DDR5. Is there like a startup cost associated with your foundry partners? Or what is it that is adversely impacting your Q1 product gross margin? And I'm under the assumption that DDR5 has a higher gross margin than DDR4.

Desmond Lynch, Chief Financial Officer

Mehdi, it's a good question. As it relates to our product gross margins, we continue to manage these for the long term. And we do have a healthy gross margin profile. If you take last year 2023, for the full year, it was 63% on the gross margin side. In Q1, our gross margins on the product side were approximately 61%, which was down from 63% in Q4, maybe. The sequential decline in gross margin was driven by anticipated ASP erosion, which was in the low single digits. And we also did have some one-time manufacturing costs that were incurred in Q1. As a company, we have been and will continue to be disciplined in our ASP management, and we will continue to drive product cost reductions to maintain our healthy product gross margins. But overall, for the year, I would expect that our product gross margins will be in line with our long-term target of 60% to 65%.

Mehdi Hosseini, Analyst

Sure, if I could ask one more follow-up regarding the DIMM. What do you expect will happen if there is demand for DDR4, particularly for some lower in-server applications or possibly for inferencing? Are you planning to focus solely on DDR5, or do you foresee a situation where DDR4 still has some demand?

Luc Seraphin, CEO

We expect long-term demand for DDR5. Gen 1 is currently in production, Gen 2 has been launched, and we have customer orders for both Gen 2 and Gen 3. We introduced Gen 4 in December of last year, being the first to do so, and the industry is expected to continue developing DDR5-based solutions for data centers. This trend is likely to persist. Regarding DDR4, we anticipate a long tail of demand, although it is not expected to be high, with the majority of future sales for data centers being focused on DDR5.

Operator, Operator

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.

Luc Seraphin, CEO

Thank you, everyone, who have joined the call with us today. Thank you for your continued interest and time, and we look forward to speaking with you again soon. Have a great day. Thank you.

Operator, Operator

Thank you. This now concludes today's conference.