Rambus Inc. (RMBS) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Rambus Inc. Third Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will have a question-and-answer session later and instructions will follow at that time. And as a reminder, this conference is being recorded. Now, I’d like to welcome and turn the call to Mr. Rahul Mathur, Chief Financial Officer. Please go ahead.

Thank you, Candan, and welcome to the Rambus third quarter 2016 results conference call. I’m Rahul Mathur, CFO, and on the call with me today is Dr. Ron Black, our President and CEO. The press release for the results that we will be discussing today have been furnished to the SEC on Form 8-K. A replay of this call will be available for the next week at 855-859-2056. You can hear the replay by dialing toll-free number and then entering ID number, 95495228 when you hear the prompt. In addition, we are simultaneously webcasting this call, and along with the audio, we are webcasting slides that we’ll reference during portion of today’s call. So, even if you are joining us via conference call, you may want to access the webcast with a slide presentation. A replay of this call can be accessed on our website beginning today at 5 p.m. Pacific Time. In an effort to provide greater clarity on the financials, we are using both GAAP and non-GAAP pro forma financial presentation in both our press release and also on this call. Our discussion today will contain forward-looking statements regarding our financial guidance for the future periods including Q4 2016, prospects, product strategies, timing of expected product launches, demand for existing and newly acquired technologies, potential benefits of our recent acquisitions and the growth opportunities of the various markets we serve 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. Further, as mentioned, we will discuss non-GAAP financial results today and have posted on our website reconciliation of these non-GAAP financials to the most directly comparable GAAP measures in our press release and our slide presentation. You can view this on our website at rambus.com on the Investor Relations page under Financial Releases. The order of our call today will be as follows: Ron will start with an overview of the quarter; I will discuss our financial results including the guidance we issued in today’s press release; and then, we will end with Q&A. I’ll now turn the call over to Ron to provide an overview of the quarter. Ron?

Thanks, Rahul, and good afternoon, everyone. As this is Rahul’s first earnings call as Rambus, Chief Financial Officer, I’d like to formally welcome him to the Company. Many of you know Rahul from his previous positions in the industry, and we are pleased to have someone with such a strong focus on financial management and Investor Relations be part of our leadership team. We finished the third quarter with revenue of nearly $90 million, which exceeded the high-end of the guidance we provided of $84 million to $89 million. The strong quarter was due to a variety of factors including general market buoyancy that increased royalties on license deals based on unit shipments, as well as upsides in buffer chips, semiconductor IP cores, and software and architectural pattern license deals. As we outlined at our Analyst Day in September, we served two key market sectors, the data center and the mobile edge. Our solutions and technologies for the data center support the trends toward cloud computing by enabling data to move faster and more efficiently. At the mobile edge, our solutions and technologies help to provide the requisite security from chip-to-cloud-to-crowd. One of the most exciting parts of our growth strategy is that it expands our customer engagement beyond the traditional semiconductor space, allowing us to get closer to the consumer. This new proximity provides deeper insights into how our solutions and technologies can actually improve the consumer experience, which in turn allows us to continue to deliver on our tag line: Rambus, Makers of Better. To do so, we continue to expand our offerings which now include architecture patent licenses, semiconductor IP cores, software licenses and products, and physical hardware products like buffer chips. Simply put, we are flexible and adopting into the commerce to what our customers and partners need. Our architecture patent licensing program continues to be strong. Just this morning, we announced signing a license with NVIDIA for our DPA countermeasures to protect their visual computing products against side-channel attacks. And previously, we announced a license agreement with Xilinx, which is important because it expands our program beyond the historic DRAM and SoC segments. Particularly important, it also opens up the ability for us to collaborate with Xilinx on key technology platforms such as CryptoManager for secure provisioning and FPGA acceleration in the data center via our Smart Data Acceleration or SDA program. In our data center activities, we bolstered our product offering with the expansion of our memory buffer chip program through the acquisition of the Inphi Memory Interconnect Business, as well as semiconductor IP core business through the acquisition of the Snowbush SerDes. We are very fortunate to welcome such talent to the Rambus family, and I am happy to report that integration is going well with the teams racing forward on new designs and the clear goal to be the leader in the respective segments. Continuing in the semiconductor IP business, I am pleased to report that we now have our DDR4 PHY forwarded to the GLOBALFOUNDRIES, 14-nanometer LPP process node, which is a milestone because we are the first to have a DDR4 PHY on this process running at 3,200 megabits per second. On the SerDes side, we now have off the shelf designs at essentially all the major foundries and the team is racing ahead on various 56 gig designs for several customers. The other area in the data center that we are working on is FPGA acceleration via Smart Data Acceleration Research Program, which is designed specifically to improve performance on big data applications and help us to explore new technologies and architectures. We have the platform at a few lead customer partners and as reported at the Analyst Day, we are seeing impressive results. For instance, in some general purpose applications looking at large data sets, we have achieved anywhere between 95% and 24% reduction in latency versus SSD’s. [Ph] Also in September, we outlined a bit more of our exciting collaboration with Microsoft Research on cryogenic computing. Here we are looking at the feasibility of taking memory component into very cold environment to evaluate performance and energy efficiency. Of course, the work is also relevant for room temperature and like the SDA program, designed to give us insights into new technologies and architecture that can enhance performance and efficiency. Our next step is to build prototypes with the goal of demonstrating about nine orders of magnitude in performance improvements. Given Microsoft’s success in the data center, we are very pleased to be one of their partners. Turning to the mobile edge and our team of securing the digital economy, last week our Bell ID mobile payment’s team announced the Token Gateway solution for banks. With this solution, issuing banks can manage tokenization for various OEM pay mobile wallets with a single software platform, thus simplifying deployment and upgrading. We will see our team this week highlighting this and their other solutions in money2020, a key banking conference. The theme of securing the digital economy similarly applies to our smart ticketing group Ecebs out of Scotland, which has just initiated a pilot that eases host card emulation or HCE techniques on a mobile phone to purchase and utilize a ticket on the rail system in the UK. This wasn’t possible across the UK previously given all of the various regulations and standards in the country. But with our solution being part of the new ITSO standard being adopted across the UK, we believe it is the way of the future. Using a mobile device not only provides a better user experience but also reduces cost because it essentially eliminates the need for expensive ticket kiosks as the mobile phone is the kiosk. This pilot just kicked off two weeks ago and is already a great success. So, we look forward to expanding to more pilots and eventually general availability of the solution. Clearly, the integration of Bell ID and Ecebs as part of our security division has gone well and it’s exciting to see the vision of enabling infield applications with secure solutions starting to come to fruition. Ultimately, we see connecting all our solutions to provide the ultimate and security from chip-to-cloud-to-crowd. Indeed, the security division was pleased to showcase our CryptoManager at the recent Qualcomm 4G/5G Summit. If you recall, CryptoManager provides an embedded hardware root-of-trust during chip manufacturing. This hardware root-of-trust can be use to configure the chip and also later use throughout the ecosystem to improve security for infield application. And finally, just as our semiconductor IP cores have been gaining traction in the memory and SerDes space, so have our security semiconductor IP cores. For instance, we are seeing increased interest in our anti-counterfeiting cores, particularly in printer space. Here the profitability of big printer OEMs is increasingly dependent on the delay of cloning consumables that go into these printers, which is exactly what our CryptoFirewall core dose. To close my section, I am really pleased with the progress we’re making across the business to support our customers and partners in the data center and mobile edge. We are well-positioned to take advantage of the trends we are seeing in the market and the needs of the industry to have high-performing secure solutions. With that, I’ll turn the call to Rahul to walk everyone through the quarterly financial results. Rahul?

Thanks Ron. And thank you all for having me at Rambus. Over the past several weeks since joining, my enthusiasm for our Company and the opportunities we have ahead of us had simply grown each day. I generally believe we have a unique opportunity to leverage our decades for technology leadership as we take advantage of the trends we’re all seeing in cloud infrastructure, particularly the data center and mobile edge. I’m delighted to be part of such a vibrant focused and confident management team as we execute on our strategy. And with that, I’d like to turn to our financial results for the quarter. I’d like to remind everyone that for this call and for internal assessment, we use non-GAAP or pro forma numbers to discuss our operating results, as well as forward projections. We believe these numbers are more indicative of our performance since they exclude certain discrete items such as stock-based compensation, amortization, impairment and restructuring charges, as we believe these expenses or charges are non-cash or not indicative of long-term performance. As noted earlier, we have provided a reconciliation to the most comparable GAAP measures on our website in the press release and presentation. Our numbers for this quarter reflect the mid-quarter close of the Snowbush and Inphi Memory Interconnect Business transactions. Let me start with some highlights on slide five. Our revenue shows execution on our key initiatives and we see growth occurring through both, acquisitions and new product development. We closed the acquisitions of the Inphi Memory Interconnect Business and Snowbush IP assets, and these obviously had an impact on our quarterly financials. We also see many opportunities ahead of us. There is significant demand for our products and we’re well-positioned to take advantage of industry mega trends towards cloud computing, particularly in data center and mobile edge, as Ron mentioned. Now, let me take you through some revenue details on slide six. Revenue for the third quarter was $89.9 million, above the high-end of the updated guidance we gave at our Analyst Day of $84 million to $89 million, a 17% increase over the second quarter and up 21% from a year ago. The key reasons we’re above our guided revenue range is incremental license agreement signed at the end of the quarter, execution by our new businesses, and an element of conservatism. The growth from Q2 is driven by incremental licensing and from the acquisitions we closed midway through the quarter. Year-over-year growth was driven by memory products and security technology development products as well. Going into additional detail for the third quarter, our memory and interface revenue was $63.1 million, security was $22.5 million, and our lighting and display technology revenue was $4.2 million. Quarter-over-quarter, these numbers represent an increase of 16% for MID, 37% for our security division and a decline of 25% for LDT. Year-over-year MID revenue increased by 14%; our security division increased by 84%; and lighting business declined by 32%. Given the orders and backlog we have, we expect LDT to bounce back to Q4 levels -- bounce back in Q4 to Q2 levels. The increase in revenue from our memory and security divisions was driven by additional contract and other revenue and our acquisitions. As we look ahead, we’re on track to meet our internal revenue targets for each of our acquisitions in 2016. Now, let me walk you through our pro forma income statement on slide seven. As a reminder, the reconciliation to our GAAP financials is available in our press release and the earnings presentation. In addition to delivering solid revenue growth, we also kept our expenses lower than anticipated through efficient integration management. Cost of revenue plus operating expenses were what we refer to as total operating expenses, for the quarter came in at $60.8 million, at the lower end of our guided range of $62 million to $65 million, $10.3 million or 20% above the previous quarter, reflecting our acquisition. In terms of headcount, we ended the quarter with headcount of 773 as compared to 622 in the previous quarter and 527 a year ago. Again, the increase in headcount is related to the new employees we welcomed to Rambus through our acquisition to support our growth. Higher revenue and lower operating expenses led to operating income of $29 million, above the high end of the guidance $19 million to $27 million and an increase of 11.7% quarter-over-quarter and 5.7% from a year ago. We’re pleased with our execution on integration. After adjusting for non-cash interest expenses on the convert, pro forma interest and other expenses for the third quarter were $1.4 million as compared to $0.4 million in Q2 of 2016. Q2 included an FX gain related to the acquisition of Bell ID and Ecebs. Using the flat rate of 35% for pro forma pretax income, net income for the quarter was $18 million or $0.16 a share compared to $16.7 million last quarter and $17 million a quarter ago. We are proud of the solid execution from our team. Now, let me turn to the balance sheet details on slide eight. Overall cash defined as cash, cash equivalents and marketable securities were a $150.8 million, a decrease of $108.5 million from the previous quarter, largely related to a $122 million used for our acquisitions. During the quarter, we generated approximately $11 million in cash from operations. Excluding the impact of the acquisitions, our cash flow from operations was approximately $20 million for Q3 2016. We also saw accounts receivable increase $15 million to 26.4 million, this increase was again primarily related to higher revenue as a result of our recent acquisition and timing of payments in the quarter. In the first three weeks of the fourth quarter, we’ve already received $14 million in cash and expect strong operating cash flow in the fourth quarter. We also had $7 million of inventory exiting the third quarter most, of which is buffer chip inventory. While this isn’t large enough to be called out separately in our financial statement, it is the use of cash in the quarter and something we will manage going forward. Let me give you some additional details regarding the purchase accounting for our acquisitions. We completed the purchase accounting for Inphi and Snowbush during Q3 2016 and accordingly recorded the assets and assumed liabilities of these companies within our balance sheet at the respective fair market value as of the acquisition dates. The difference between the purchase price and the net assets acquired is attributed to goodwill. Intangible assets of a $165 million increased by $64 million quarter-over-quarter including roughly $50 million from Inphi and roughly $25 million from Snowbush, net of roughly $10 million of amortization. Goodwill of $208 million increased $45 million quarter-over-quarter including roughly $33 million from Inphi and $14 million from Snowbush. Overall, we believe we have a strong balance sheet with limited debt, and we expect to continue to generate consistent cash from operations. Now, let me turn to our guidance for the fourth quarter on slide nine. Our forward-looking guidance reflects our best estimates at this point of time and our actual results could differ materially from what I’m about to review. We expect revenue in the fourth quarter between $94 million and $98 million reflecting a full quarter of contribution from our acquisitions as well as the linearity of our base business. Now, given that a substantial portion of our revenue is related to licensing agreements, we don’t exhibit the same seasonality as other semiconductor businesses that have a larger mix of product revenue. Nevertheless, we looked over the past several years and did identify some high level trends that help explain our linearity over the course of the year. On average, we find Q4 up 2% over Q3, Q1 down 2% from Q4, Q2 down another 5% from Q1, and then Q3 up 5% on Q2. Of course, this would indicate no growth or decline, it does not reflect the impact of any acquisitions, but it is the rule of thumb to use as we try to model our quarters. Looking ahead to Q1, revenue therefore, while the base business may see a seasonal decline, this could be offset by growth from our acquisitions. Obviously, we’ll know more as we progress through the quarter. Now back to Q4, we expect Q4 non-GAAP total operating expenses, which again include COGS, to be between $65 million and $68 million. These expenses again reflect a full quarter from our acquired business and 1 million to 2 million of integration related expenses which will continue through Q4. Looking forward to Q1, we typically see almost $3 million of additional expenses related to payroll taxes and other expenses that impact most companies in the first quarter. Non-GAAP operating income for the fourth quarter is expected to be between 26 million and 33 million. We expect roughly a $1 million in non-GAAP interest and other income and based on the 35% pro forma tax rate we expect between $9 million and $11 million in taxes. We expect our share count in Q4 to be roughly 114 million fully diluted shares outstanding, which leads you to between $0.14 and $0.18 of non-GAAP earnings per share for the quarter. Looking ahead to 2017, our new acquisitions are ramping to our expectations and we’ll maintain our long term focus on profitable growth. Due to the changing dynamics of our businesses, we will no longer be issuing annual guidance but we’ll continue to provide quarterly guidance going forward. With that said, as we look at forecast from our sell side analysts that have included the revenue contributions from our recent acquisitions, we’re comfortable with their revenue estimates for 2017. Now, let me finish with the summary on slide 10. I’m pleased that we continue to make progress on our strategic initiatives. We’re focused on key technology megatrends, driving opportunities in the data center and mobile edge. We have executed well and are growing profitably through strategic acquisition and execution on key programs. We have a large, predictable, high margin revenue base and we have a strong balance sheet to support our strategic initiative. You can see demand for our product portfolio and we’re ready to execute. Now with that, I’ll turn the call back over to Candan, to begin Q&A. Candan, could we please have our first question?

Thank you. And our first question is from the line of Sujeeva De Silva with Roth Capital. Please go ahead.

In terms of the revenue, the 2017 outlook here, can you talk about the pipeline and how you guys see it now versus say three months ago and whether it’s different from your expectations, as it’s ramping up here?

I think we’re getting more visibility on the pipeline and filing in as exactly as we expected, which is why Rahul said that roughly $400 million out there that a lot of you have seems to be a reasonable one. We’re seeing strong demand I would say in all of the areas. With that said, there is lots of transitions in the buffer chip area and there is lots of things going on especially on the security side. So, it’s a bit hard to be very precise at this moment. But overall, the pipeline is going, I would say exceedingly well.

Fair enough, Ron. And then, you talked about some per unit variation in the numbers, which you haven’t seen as much in the past. Can you talk about what areas that comes from, is it traditional DRAM or is it some of the newest security or CryptoManager, any color there would help?

Sure. I think, Sujeeva, what you are referring to is the comments I made about linearity. And simply what that is, is really just the timing of different licenses and agreements that we have. As you know, we have a significant value associated with long-term licenses that we’ve signed and each of them has their own terms, whether it’s 5, 7, 10 or some other number of years. What we looked at over the past several years is really the renewal of those contracts and typically how they came in, and that’s a linearity that I shared earlier. Ergo what you saw is that typically Q4 is about 2% from Q3, Q1 down about 2% from Q4, Q2 down another 5% from Q1, and then Q3 up another 5% from Q2. As I mentioned earlier, that implies that we’re flat year-over-year. So, I would ask you to make your own estimate of whether you think will grow or how much. But that’s a bit of the seasonality we see just historically based on the timing of our agreements. Is that what you were looking for?

Yes. And then, the last question really is around the notion of technology licenses. And since you guys have done the play station a while ago and looking for some those to kind of come in, can you talk about, Ron, what the prospect of having project of that nature coming through here that is similar to the past technology licenses? Thanks.

So, the prospect is always high. In that particular case, it was a unique design that was implemented with a couple of strategic partners, specifically Sony and IBM. That’s exactly what we’re doing with both the STA project and the Microsoft project. These are the things where we’re collaborating with the industry to try to create unique solutions that have unique value to our customers and the ecosystem. So that’s exactly in line with what we’re trying to make happen in those spaces and why we’re so excited by both of them.

[Operator Instructions] And our next question is from the line of Paul Coster with JP Morgan. Please go ahead.

I did realize I’d not be able ask this question for much longer but what was the actual organic revenues this quarter versus that which is acquired and likewise in the 4Q; what do you estimate to be the contribution and the revenue level from the newly acquired businesses?

So, Paul, we don’t breakout specifically the revenue contribution from each of our acquired businesses for competitive and other reasons. As Ron and I both mentioned in our scripts, we actually saw a growth both in the base business that we had as well as the acquisitions. And it’s a combination of execution on not just product revenue but on licenses as well. As I mentioned earlier, we will see just some seasonal increase quarter-over-quarter from Q3 to Q4. But, as you can gauge that wouldn’t account for all of the increase in terms of the revenue guidance that we gave for Q4. But, I would tell of the delta, there is the portion of that from the acquisitions because we have them for a full quarter and there is also a portion of that just because our base business continues to perform very nicely. But unfortunately, we are not going to break out individual units that way.

You expressed some comfort with the guide that was in the analyst estimates for 2017, at least from a revenue perspective, I am guessing, or was it more than revenues, was it also from an earnings perspective; can you just elaborate there? And also, in some of the gross margin, the new mix of business and how it evolves over the course of 2017, what do you think it will do to your gross margins?

Sure. And we did get a little comfort on the numbers that analysts have for us in 2017. Obviously, there is still a lot of ground to go between now and then. And so, it’s a little more difficult to predict exactly how the quarters will play out. In terms of your question, certainly, we gave the comfort on the revenue line and I think also I tried to give you a little feedback on what Q1 could look like, just from a revenue perspective. So, then, based on the linearity you could see how the remaining quarters might ramp. From an OpEx perspective, again, I mentioned I’d expect OpEx to be a few million higher in Q1 than what we have in Q4 because of payroll taxes and other statutory pieces. But as expected, OpEx would be roughly flat or come down maybe a couple million dollars a quarter over the course of the year. And given a relatively flat interest and other income and the same pro forma tax rate, you’d get to earnings which again is pretty comparable to what most people have out on the street. And then, the second part of your question was about gross margin. I think look, we have one, if it’s not the healthiest gross margins in the industry. Now, what happens is our product revenue ramps, even though, those products have very strong gross margins and very attractive gross margins, as Ron alluded to I have worked for multiple companies that would love to have those gross margins, they are still lower than the licensing base that we have. So, what I would expect is that over time, you can see some small degradation of those gross margins as those businesses ramp in revenue. So, that’s by design.

And our next question is from the line of Matt Robison with Wunderlich. Please go ahead.

Can you talk a little bit about, in the buffer chips, how we should think about the Inphi piece versus what you were working on before the acquisition and the way that generations work out? I think there is some -- I’ve been getting some questions about decline in Inphi revenue base. And maybe if you can give us a little bit of color as to how that -- how you might be able to help that, that’s going to be just Inphi improvement or some of the initiatives you had from before are going to start to kicking ahead of that? Then, I have got a couple CFO questions after that.

Okay. Sure, Matt. So, as we are articulated I think at the Analyst Day and I think even on the previous call when we announced the acquisition, in both of these cases, what we are looking to do is take the best of the best and put things together. With respect specifically to the buffer chip, clearly we are continuing to ship the buffer chips from Inphi because they were out in the market ahead of us and we would never turn off a customer as we were migrating. And our intention is to converge the roadmaps, which we have done and internally to ensure that we have optimum on both sides. The Rambus team is particularly innovative and they have a lot of great idea such that this company was founded on with all the patents that they have. And the Inphi team has basically invented the space; they were the leaders in from DDR2 and DDR3. So, we’re really trying to take the best of that manufacturing knowhow and the best of the innovation and put them together on the converged roadmap what the team is working proactively on. With respect to the other part of your question -- what was the other part of your question, Matt?

I think, I guess the comments that you made from prior calls and the Analyst Day, just trying to clarify where the -- when the convergence results in some growth in the overall buffer chip business?

So, the convergence results in growth as we continue to win new designs. So, maybe speaking about, there is two transitions that are going on. There is a platform transition from Intel and then there is a DDR3 to DDR4 transition in the buffer chip space. So, we should see more growth in the second half where we have a strong position and we’re qualified on the platforms and a strong offering on DDR4. However, at DDR3 last for long time, again, as I mentioned, the Inphi team was a leader in that and we will have a strong position in that. So, the challenge in forecasting the details and why Rahul mentioned that we’re not going to give annual guidance on the quarter, it’s really hard to detect now what that transition is going to be. For instance, part of the increase in some of our forecast this past quarter as we shift to more DDR3 than we had anticipated that we were going to go. So, it’s really Intel platform evolution, it’s DDR3 to DDR4, we’re certainly positioned well on DDR4 in the new platforms in the second half of this year and we’re positioned very well on DDR3.

Are you starting to ship the DDR -- the organically developed chip ship?

Well, we ship the converged product. So, yes, we’re shipping DDR3, DDR4 and DDR2 historic stuff.

Well, there is pretty significant uptick in deferred revenue. Can you give us a little bit of accounting background for that?

Absolutely. The reason you have an uptick in deferred revenue is because we’re shifting to more and more product revenue. And what happens, because we’re recognizing revenue on a sell-through basis is that as we ship it in to our distributors, we collect cash, but we don’t count revenue until we sell it through to the end user customers. So the balance there is reflected as deferred revenue on the balance sheet. It’s something that we look at, because we need to actively monitor what’s going to happen at the end use customer and in terms of how that’s sold through for our revenue recognition. So, that’s really what’s driving the delta.

Okay. So that product category you’re talking about there is -- if it’s going in the distribution, this component type product -- and so, it’s not really a revenue recognitions type of software kind of consideration, as you might see for Bell ID or Ecebs?

So, Matt, you’ll actually see a little of both. You will see both the combination of that delta between sell and sell-through from a product perspective as well as the software fee. But I think from a delta for this specific quarter, I think that the product piece might have been a bigger driver of it. So, you will see both.

Can you give CapEx and depreciation?

Absolutely. So, CapEx for the third quarter was $1.2 million, depreciation was about $3.4 million. Going forward, I’d expect about $2 million of CapEx for Q4 and about $4 million of depreciation for Q4. If I look forward to 2017 on a CapEx basis, I’d expect anywhere from $1.5 million to $2 million a quarter, so about $7 million for the year. On a depreciation basis, I’d expect about $3 million a quarter, so about $12 million for the year.

And our next question is from the line of Gary Mobley with Benchmark. Please go ahead.

I had a question about reporting the IMI revenue or whatever the current naming is as of the memory interconnect business. And I was thinking it’s about $40 million, just about $40 million perhaps for 2017 in revenue or you can start breaking that out into a separate line item?

I don’t think we will, the reason why is because operationally we combine that with our existing business. So, what we have is complementary products that we’re looking at and we’ve also combined the teams as well. So, I think we will look at it just from an internal tracking perspective just to make sure that its performing the way that we anticipated at time of the acquisition. But in terms of how we’re running the business, it wouldn’t make sense to do so.

The sequential spike in contract revenue, is that all driven by Snowbush and IMI; is that where the revenue is recognized within for Q3?

So, it’s a combination in Q3. We actually -- as Ron mentioned, we did better on revenue across almost all of our businesses.

Okay. I’ll ask it; I’ll see if I get an answer, but the spike in licensing, I think it’s maybe related to one specific contract. Was that Xilinx in Q3?

From a licensing standpoint, we had across the board, I mentioned in the prepared remarks, some of our licensing are actually unit volume based. So, I think that’s part of what Sujeeva had asked previously. And we had a very interesting nice buoyancy to that. So, some of our customers are shipping at variety of different segments across a broad base that is actually higher than we had anticipated. And then we did close a couple of deals besides, as you noted. So, it’s just a broad case.

It’s understandable that the pace of acquisitions recently has put a damper on share buyback. But as we look forward in 2017 with strong cash generation or what not and seemingly a fairly decent net cash position, what are your considerations for reinitiating some share buyback?

So, I am going to follow the same pattern that we responded to this call previously as well. Our preference from deployment of capital is strategic strong acquisitions of real businesses, not hacking team and talent or strategy; we have that and it’s coming on. Those happen when they happen. As I’ve said to the team, the only way to guarantee something in time is if you’re willing to overpay, which we’re not going to do. So, we continue to prefer that. However, in the event that we do not see nice acquisitions that are affordable that working us from a culture and from a product and customer fit, then obviously we’ll consider stock buybacks or dividend in that order.

Last question from me, you’ve mentioned a couple of times since announcing the Snowbush acquisition, I think you mentioned at the Analyst Day as well, but you sort of gone under tight wraps, development of some type of networking integration circled within the Snowbush team. Can you give us a sense of where that stands or perhaps when you might be willing to share more details with respect to that particular product roadmap?

Yes, sure. So, we were -- it’s still a bit kind of a secret note, for lack of a better term, for specific reasons that we’re working with the driving customer; they have more options, they are asking us to build out more products, so that we really don’t want to tip our hand. The products will be taping out next year and there maybe a little bit of revenue at the end of next year that’ll probably mostly be 2018 thing. We like this because from a qualitative aspect, it had a lot of the let’s say characteristics of the buffer chip. Small sets of customers, so reasonable channel costs, good gross margins; it is complementary to our SerDes technology as opposed to the DDR technology. So, something where our core capability is in licensing and innovation, licensing cores actually facilitate doing it. It’s a great driving customer. We see several other customers that would likely adopt it. And in this kind of networking and storage space which we don’t participate in, this is a perfect entrée. We can look at adding capabilities to it over time. So, it’s a perfect fit for us.

And our next question is from the line of Atif Malik with Citigroup. Please go ahead.

First, Ron, good job as a team in signing up licensing agreements with NVIDIA and Xilinx. Can you kind of give some progress update on A, the microprocessor, the big microprocessor maker and what progress the team has made in terms of licensing that customer over the September quarter and then also an update on the work that the team is doing with Tsinghua University on the storage-class memory? And then, I have a follow-up.

Well, unfortunately, I can’t give you any specifics on anything. Obviously, we’re talking to many companies out there about our broad licensing program. One of the reasons we were excited about Xilinx is it expanded into the FPGAs where we only had done small license with small players. So, I think that bodes well for us finding extended partnerships. With respect to Tsinghua University, I’m really excited about our resistive RAM program. We continue -- we expanded our sales team in Greater China with some industry -- strong industry players. We have this -- a broad partnership that we’re working on. It remains in the same position where we’re doing test chips together. We’re proving out the feasibility of it in embedded applications. We don’t think that this class of storage-class memory or in fact any class of storage-class memory is ready for prime time in terms of being chips for replacement of flash type applications. But we think that we’re on a good track to doing that. I see the segments that are first maybe to be adopted would be things like smart cards where you don’t need high temperature capabilities; that’s a next step in it and you have relatively small arrays. And we are just going to continue to work on that and try to expand the collaboration and ultimately license the technology and get more people to use it in real world applications.

Great. And then as follow-up, lighting displayed technology sales are down sequentially also year-over-year basis. Is this an area of focus for the Company moving forward or are you going to be thinking of restructuring it?

So, we are very happy with the lighting business. Clearly, we’ve described it as somewhat of adjacent business because it’s not aligned with the rest of the Company. We think it’s very interesting business. We have close relationships with a variety of customers. The design time and cycles in lighting is slow relative to the classical semiconductor and software businesses. So, it takes time to evolve it. We have new customer interest in Asia and Europe and the team is executing well. Having said that, it doesn’t align precisely with the Company, the team knows that and they know that there is opportunities to create shareholder value that will step up and do that. So, it’s a great business but things can happen.

And in the interim, Atif, the business is operating well. The revenue from that business has grown. We had a bit of the step down in Q3; I expect it to bounce back in Q4. The business is either cash flow neutral or generating cash for us and continues to perform very well. I’m proud of the people we have in that group.

And our next question is from the line of Delos Elder with Jefferies. Please go ahead.

I’m asking on behalf of Mark Lipacis. I kind of wanted to get some clarity or elaboration on the DPA countermeasures business, perhaps on terms of dollars but maybe terms of the penetration of the customers that you are targeting and any detail on how fast that particular product is growing?

Sure. So, we don’t breakout the dollars, at least I don’t think we have in the very long time. The DPA countermeasures, the broadest place where it’s deployed is in smartcard technology specifically for banking and SIM cards where I think on the order of 7 billion chips a year shipped with our technology and licensing. Of course, the royalty rate per device is very small, so the amount of money that we get is relatively small because of the SIM card is $2; you can’t charge $1 for this class of technology. With respect to other areas besides the smartcard and financial institutions or FinTech, there is strong interest in a few different areas, one is all sorts of defense contracting applications where we have an increasing number of customers interested in that area. There is a lot of interest interestingly in networking equipment where some of the specifics in networking -- there is a lot of counterfeiting. We mentioned in printers the cores that we use for anti-counterfeiting solutions in printers have strong DPA capabilities in them. There is interest in mobile. I think we are going to find more interest in mobile devices as things like postcard emulation are there. Some of the things already in mobile devices like secure elements with NFC, those people are licensing. So, we have many licensees in that space already. So, it’s a very broader applicability. Having said that, in terms of the things that you hear about a lot of cyber security, this is obviously very, very different; those are very big issues at data center level and software exposures. This is more of an embedded security capability, so inherently a smaller revenue opportunity.

Thank you. And I have one more. Could you elaborate on the printer cartridge opportunity, the timeline there, the hurdles you are expecting to overcome, I don’t know when a good time will be to expect revenue? I guess how can we think about this opportunity that decides the TAM and your share there?

So, I don’t have the numbers right off my head. But there is already printer revenue today and last year. What we have done is win new customers and continue to engage more partners in this. So, we see it growing fairly substantially over the next couple of years.

And our next question is a follow-up from Matt Robison with Wunderlich. Please go ahead.

Yes, just kind of following the question, discussion you’re just having, pretty impressive the last couple of security related press releases. I was wondering to -- has there been any catalyst that is causing these deals to come together and to what degree have you drained the pipeline for those kinds of deals; are we done for a while or is there more to come?

It’s a very broad question, Matt, but let me take to shot at it. So, there is a lot of complexity in our technology, which is what makes it rather unique and sticky, once it’s designed in, but it takes time for customers to understand it, understand how it works, understand how our solution is there, and for us to prove the total cost of ownership. So, there is a latency in designing them in. I think the reason we are seeing more interest in security is that security is really important than there is more exposures and more hackings as we go every single day. So from our standpoint, what we are really doing though is in the security division is moving from what was just an embedded security solution to solutions that even touch end consumers and have security as requirement and trying to do that connection from chip-to-cloud-to-crowd. So, we have really good demand in all elements of that business whether it be the historic embedded security piece including the architecture and patent licensing for like DPA, the core -- the security core, the semi conductor IP cores for it, the software that we sell whether it’s in ticketing or in mobile payments. So, it’s really across the board and really nice increasing backlog. And I think having more security breaches unfortunately will make our solutions even more interesting.

Thank you. And ladies and gentlemen, this concludes our Q&A session for today. I’ll turn the call to our CEO, Ron Black, for closing statements.

Thank you. As you can see, we are well-aligned with the needs of the industry and have the right programs in place to capitalize on the trends driving technology choices. Thank you for your continued interest and time. Have a very nice day.

Ladies and gentlemen, this concludes our program for today.