Rambus Inc. (RMBS) Q2 2017 Earnings Report, Transcript and Summary

Welcome to the Rambus Second Quarter and Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of the prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Rahul Mathur, Chief Financial Officer. You may begin your conference.

Thank you, Karen and welcome to the Rambus second quarter 2017 results conference call. I am 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 the toll-free number and then entering ID number 36458130 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 portion 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 P.M. Pacific Time. In an effort to provide greater clarity in our financials, we're using both GAAP and non-GAAP pro forma financial presentations in both our press release and also on this call. Our discussion today will contain forward-looking statements regarding our financial guidance for future periods, including Q3 2017 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 amongst 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're under no obligation to update these statements. Further, as mentioned, we will discuss non-GAAP financial results today and have posted on our website a reconciliation of these non-GAAP financials to the most directly comparable GAAP measures in our press release and our slide presentation. You can see these 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 business, 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. We delivered a strong second quarter and I'm pleased with the progress we are making across all of our businesses. We continue to build upon our positive momentum from the start of the year. From a financial perspective, we delivered revenues of $94.7 million, up 24% year-over-year and our non-GAAP diluted net income per share was $0.14. Our IP business remains strong with key renewals and new customers signed and we continue to receive important ongoing validation from the market that our technologies are solving the important problems in the Data Center & Mobile Edge. In this quarter, we closed material customer and partnership agreements with notable names like Cybertrust, Synopsys, Google and Interac. We had a positive quarter in our Memory and Interface division, with progress in our patent and technology licensing programs, signing key renewals and new agreements. I'm also pleased to share that we closed the company's largest high-speed interface technology agreement today with a large semiconductor company. Expanding on our Server DIMM chipset family, we announced the industry's first production, JEDEC-standard DDR4 Non-volatile Register Clock Driver or NVRCD. The NVRCD chip is sampling now and builds upon our existing high-speed chip and signaling expertise to enable non-volatile server memory modules to combine the performance of DRAM with the persistence of storage-class memory, delivering high performance and reliability of data for next-generation enterprise and data center systems. For IP cores, we were pleased to partner with Samsung on the development of our 56 gig SerDes PHY. As we discussed on our previous call, the PHY is built on Samsung's cutting-edge 10-nanometer LPP FinFET process to bring power and performance-optimized interconnects to data center and networking. In addition, we announced the availability of our silicon-proven PCI Express 4.0 SerDes PHY that has been pre-validated with PLDA's PCI Express controller and Avery Design's verification IP for a complete pre-verified PCI Express subsystem. The solution enables easy integration and offers high performance, power efficiency and flexibility for today's most challenging networking and data center applications. Turning to our Security Division, we were pleased with the continued momentum in our mobile payments, ticketing, and cryptography businesses. Having secured hundreds of billions of payment and ticketing transactions to-date, these businesses have a strong foundation for continued market leadership. For payments, we teamed with Google and Interac to enable Android Pay in Canada. Interac Debit is one of the most popular payment methods in Canada and our collaboration on the token service provider solution with Interac with allow millions of consumers to enjoy secure mobile payments using Android Pay in Canada. Our ticketing continues to make good progress with the first public pilot of our HCE mobile ticketing solutions with Strathclyde Partnership for Transport, or SPT, Scotland's largest regional transport partnership. For cryptography, we've expanded our ecosystem of security customers and partners to better meet demand and accelerate the adoption of our provisioning solutions with two key announcements: the first had Cybertrust, a subsidiary of SoftBank Technology Corp. procure our CryptoManager infrastructure and software to deliver security provisioning and security services for connected devices, spanning from enterprise, multifunction printers to connected cars. The second announcement, our collaboration with Synopsys to deliver secure key provisioning for their DesignWare tRoot Hardware Secure Modules with Root of Trust. Both partnerships will leverage our CryptoManager infrastructure and software for key provisioning to enable the secure, remote life cycle management and updates of connected devices. We've spoken previously about our solutions to provide security from chip to cloud to crowd, and by expanding the CryptoManager platform to manage trusted relationships and identify -- and identity access across the lifecycle of an SCC. We made strong progress in this program and now commercializing CryptoManager in-field device management capabilities. Slide four highlights the security architecture, showcasing the solutions and services we monetize throughout the device life cycle from chip manufacturing to reoccurring end-user services in-field. Foundationally at the chip level, over 9 billion license chips per year employ our DPA countermeasures. Our CryptoManager platform, including our root of trust cores and infrastructure, has been deployed with Qualcomm and others with over 1.5 billion chips configured in 2016. And lastly, this quarter also marked the launch of our in-field IoT device management service as part of our CryptoManager platform for turnkey secure device connectivity, monitoring, and provisioning. This service is a natural evolution of our secure management solutions and complements our strategy of delivering security from chip to cloud to crowd. Taking a closer look at the service for chip makers and OEMs, CryptoManager IoT device management can be implemented with a hardware root of trust for the highest level of security or with a software agent for increased flexibility and leverages a secure appliance to provision the keys to devices. The security-as-a-service is designed to work with leading cloud platforms and features an intuitive device monitoring dashboard and API to provide out-of-the-box connectivity to IoT service providers and device manufacturers. As part of the launch at IoT World in Santa Clara, we featured live demonstrations with both Qualcomm and STMicroelectronics processor chips, showcasing neutral authentication and communication. We look forward to sharing our progress and we'll provide updates on ecosystem partners and pilot customers throughout the year. In closing, we executed well and now have a product and service portfolio that allows us to leverage our expertise in memory and signaling while expanding our security offerings to drive value in-field. The progress we have in development are poised for growth in the future, while today, we focus on executing to plan. Additionally, we continue to drive partnership agreements with industry leaders to expand our reach. With that, I'll turn the call to Rahul to discuss the quarterly financial results. Rahul?

Thanks Ron. Before I go through our financial results, I'd like to remind everyone today's call and for internal assessment, we use non-GAAP or pro forma numbers to discuss our operating results and forward-looking 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 that these expenses or charges are non-cash and are not indicative of long-term performance. And with that, I'd like to turn to our financial results for the quarter. Let me start with some highlights on slide seven. As Ron mentioned, we had a strong quarter. We delivered solid revenue growth of 24% year-over-year towards the high end of our guided range. We are typically down 5% seasonally in Q2, but this was offset by strength in our business. We achieved another quarter of disciplined cost management without sacrificing investment in our growth initiatives and again delivered solid pro forma EPS. We continue to leverage our high margin historic businesses to fuel growth in adjacent areas where we have strong technical and market expertise with a focus on memory and security. Our Q2 revenue and profitability shows the continued execution on our key initiatives. Now, let me talk you through some revenue details on slide eight. Revenue for the first -- for the second quarter was $94.7 million towards the high end of the guidance we provided of $90 million to $96 million. Our strong revenue performance was due to strength in our licensing program and strong execution by our Security businesses. Going into additional detail, our Memory and Interface revenue was $67.4 million, Security was $23.4 million, and our Lighting and Display Technology revenue was $4 million. As you can see in the detailed revenue charts in the appendix of our webcast deck on slide 16, we are changing how we report revenue to help our investors more easily track our performance. Year-over-year, MID revenue grew by 24%, and our Security Division grew by 42%. The increase in revenue from our Memory and Security divisions was driven by our continued execution on our acquisitions and our strong licensing programs. We have a diversified revenue stream and as we look at fiscal 2017, we remain on track to meet or exceed current revenue projections for the fiscal year. Let me walk you through our pro forma income statement on slide nine. Along with our solid revenue performance in Q2, we continue to actively manage our expenses without sacrificing growth. Cost of revenue plus operating expenses or what we refer to as total operating expenses for the quarter came in at $69.3 million at the midpoint of our expected range. We ended the quarter with headcount of 790, roughly flat with 784 in the previous quarter and up from 622 a year ago. Again, the year-over-year increase in headcount is related to the new employees we welcomed to Rambus through acquisition in 2016 to support our long-term growth. Revenue and operating expenses led to operating income of $25.4 million. After adjusting for noncash interest expense on our convertible debt, pro forma interest and other expenses for the second quarter were $1.4 million, roughly flat with Q1. Using a flat rate of 35% for pro forma pretax income, net income for the quarter was $15.6 million or $0.14 a share, $0.01 better than the midpoint of our guidance. Now, let me turn to the balance sheet details on slide 10. Overall cash, defined as cash, cash equivalents, and marketable securities was $168 million, down $19.7 million from the previous quarter as $25 million in cash from operations was offset by the $50 million accelerated share repurchase we announced on May 1st. Second quarter CapEx was $1.6 million and depreciation was $3.3 million. In 2017, we expect to make additional capital investments to help fuel our growth specifically at some of our international facilities and for our chip programs. As a result, I expect we will have roughly $8 million of CapEx for the year, with another $4 million or so in the second half. Correspondingly, I expect depreciation of roughly $3 million per quarter. As we expected, we saw a consolidated operating cash flow in the second quarter and as we announced, we repurchased 3.2 million shares in the quarter through our accelerated share repurchase program. Our ability to generate cash positions us nicely in the current industry environment. Overall, we have a strong balance sheet with limited debt and expect to continue to generate strong cash from operations in the future. Now, let me turn to our guidance for the third quarter on slide 11. As a reminder, our forward-looking guidance reflects our best estimates at this point in time and our actual results could differ materially from what I'm about to review. We expect revenue in the third quarter between $96 million and $102 million, which represents our typical seasonal growth. We expect Q3 non-GAAP total operating expenses, which includes COGS, to be between $67 million and $71 million, roughly flat with Q2. Over the course of the year, we expect total operating expenses to stay roughly flat even as revenue grows. Non-GAAP operating income for the third quarter is expected to be between $25 million and $35 million. We expect roughly $1 million in non-GAAP interest and other income and expense and based on a 35% tax rate, we expect between $8.5 million and $12 million in taxes. We expect our Q3 share count to be roughly 113 million fully diluted shares outstanding, which includes roughly 200,000 shares of dilution related to the $138 million convertible debt due in the third quarter of 2018. This leads you to between $0.14 and $0.20 of non-GAAP earnings per share for the quarter. Looking ahead to the rest of 2017, we remain focused on ramping our acquisitions as they continue to deliver to our expectations as well as maintaining our long-term focus on profitable growth. While we do not issue annual guidance as we look at consensus estimates from our sell-side analysts, our Q3 guidance, combined with our typical 2% seasonal growth in Q4, would indicate full year revenue slightly higher than current consensus estimates. Let me finish with a summary on slide 12. As I look at the quarter, we are proud of the solid execution by our team and the progress we continue to make on our financial and business initiatives. Our strategy remains unchanged. We continue to execute well and are growing profitably through strategic acquisitions and execution on key programs. We have a large, predictable, high margin revenue base, and we have a very strong balance sheet to support our strategic initiatives. With that, I'll turn the call back over to Karen to begin Q&A. Could we please have our first question?

Thank you. [Operator Instructions] Our first question comes from the line of Suji Desilva with Roth Capital.

Hi, Ron, hi Rahul. Congratulation on the results and the progress here. First question on the partnerships, the Cybertrust partnership, is that your first working arrangement with a subsidiary of SoftBank? And did you coordinate with the parent ARM and -- parent organization, perhaps the ARM acquisition in that effort?

So, that is our first partnership with SoftBank. I certainly look forward to more of them. The specific group that we're working with is part of their technology group and it's not coordinated with anybody. It's just we work broadly and they have a fantastic position especially in Japan.

Excellent. Very helpful there Ron. And then on the third quarter growth, can you kindly specify what you think the segment-by-segment growth is across Security, MID, and maybe specifically would give us what the buffer chip was in the second quarter and the outlook there to give some color there?

Sure. So, typically, what we see in the third quarter is about 2% growth quarter-over-quarter. I think you'll see some growth both on the Security side as well as on the Memory side. Most likely, you'll see a little more on the Memory than you'll see on the Security side. In terms of the buffer chip, I would expect our buffer chip stays roughly flat quarter-over-quarter. If you look at the detail we provided in our earnings call -- in the deck that accompany the call, specifically on slide 16, we've kind of changed the way that we classify our product revenue to make it easier. And just talking about the buffer chip, we do continue to execute on the program, and we believe we have leadership products that the market is responding to taking a little longer than we hoped to help manage the transition between product cycles. So, while we -- it's difficult for us to predict the dynamics of the market, we do anticipate to continue gaining market share. And one of the nice things about having a broad revenue portfolio, like we do with not just the buffer chip, but the Memory products as well as the Security products, is that it allows us to really have a kind of broad based portfolio to compensate for any delays in adoption.

So, just to clarify, Rahul, the product revenue is, today, the buffer chip revenue and it will grow over time with other products, is that the way to interpret what you said?

That is the way to interpret it. I mean, obviously, there are other things that we do in each of our programs that may go into licensing or other pieces. So, it's not pure just in terms of the overall program, but I think that is the simplest way to look at it.

Great. And then my last question, I'll step back in the queue here. Both the AR and the deferred revenues went up on the balance sheet. I'm wondering if you're getting more visibility with some of these partnerships you have, where you're getting upfront payments that you recognize ratably just to understand the drivers of the balance sheet changes there. Thanks.

Sure. So, AR did go up, and it's really just timing of payments, I mean, those payments we've already received in the beginning of Q3. So, it's really nothing more than that. I think our DSO -- well, I would expect it to come down next quarter. I think it was 25 last quarter, 35 this quarter, and I expect it to continue to trend down. From a deferred revenue perspective, deferred revenue does continue to grow and I think that does -- leaves you to the growth that we're anticipating in our business. I would caution you though that it's very difficult to build your intuition on deferred revenues simply because we have so many different contracts and so many different types of contracts in terms of some that are annual or multiyear as opposed to just period versus period. So, it's just something that -- it's a good indicator as it continues to grow, but it's hard to build intuition or metrics on deferred revenue as a predictor of what's going to happen in the future.

Excellent. Nice job on the quarter. Thanks guys.

Thank you, Suji.

Thank you. And our next question comes from the line of Gary Mobley with Benchmark.

Hi guys. Congratulations on some solid execution. I wanted to follow-up with a question on a comment, Rahul, you made about how the dual in-line memory chipset business is maybe taking a little bit longer than you expected. Could you give us a sense of where we're at on the revenue for this particular product line for fiscal year 2017 and as well perhaps where you see the business going beyond that? And it seems as though your Security side of the business is making up for any delay in the ramp there, is that a fair characterization?

Sure. So, let me just give you a little more detail. I think probably six months or more, we probably anticipated something in the $35 million to $40 million range on that Server DIMM chipset for 2017. And with some of the transition delays that we're seeing, that ramp has probably been pushed out a couple of quarters. So, I think it's been roughly in the $5 million or $6 million per quarter range and that's kind of what we look at continuing if you look at $6 million plus per quarter going out for the rest of 2017. Now, that doesn't change how we feel about the program. That doesn't change our -- the share that we've got in the subsequent generation. It's just a question of timing and adoption. And one of the things that you mentioned, Gary, is something that I actually am very encouraged by that any given Sunday, when you have a broad portfolio, you're going to have some things that are doing a little better and you're going to have some things that aren't executing exactly as you anticipated. And really, between having the chip business, between having the licensing business, the security initiatives, all the other growth, long-term growth initiatives we have as well, what it allows us to do is smooth out that growth. And as you mentioned, we are doing very well on some of the security initiatives. And some of the things that Ron talked about in his prepared remarks, I think, position us very well for future growth.

Okay. Ron, I wanted to get your opinion on something. As you probably are aware, there were some -- there was some speculation that the company has put itself up for sale. And I don't expect you to comment on that specific news item. But relating to this, in your view of creating shareholder value, how do you see things unfolding? And where is the priority as we look into 2018? And as we sit here today and look at the portfolio of companies, which do you think are performing the best relative to expectations and I think, conversely lowest and might need more attention?

Yes. Obviously, I can't comment on that rumor or that policy now too and people will always be looking at the business as we continue to execute. That's kind of a normal situation. As I said in the prepared remarks, I'm pretty happy across the Board with everything that we're doing. I think we're executing together as a team. The team is focused. Each piece of the business is doing relatively well. There is the portfolio effect that Rahul just went through. So, I won't belabor that, but I think we're executing.

Okay, that's it from me. I'll hop in the queue. Thanks guys.

Thank you. And our next question comes from the line of Paul Coster with JP Morgan.

Thank you for taking my question. Any [Indiscernible] to the NRE revenues and year-on-year sequential comparison, Rahul?

I'm sorry, Paul, I had a bit of difficulty understanding your question. I think you're asking if there was anything in terms of NRE revenues for--

Yes, yes.

So, what I would tell you is that we continue to have very active dialogues with different partners and I think you may be referring to some of the future initiatives that we have. And what I'd tell you is that if you look at the different things that we have in the pipeline, we're really excited about the progress that we're making. I think one of the things, in particular, that we're really excited about is the program that we're doing with Microsoft and just the growth there, the progress we have. And again, as you know, this is specifically regarding the cryogenic memory program. What I will say more broadly is that one of the things that we like to focus on, even though we don't share specifics on any joint development program for obvious reasons, is we like to invest in programs where we have partners investing alongside with us. And what that means is not just they have their own internal teams but, as you mentioned, NRE as well. And that has been a part of our revenue growth quarter-over-quarter and I expect that it will continue to maintain. So, no, very pleased there, but as you can imagine, we don't break that out specifically.

And Ron, regarding the CryptoManager initiatives, are you in a position to sort of quantify the opportunity and the time to, let's say, materiality for Rambus?

Yes. So, what we plan to do on IDM is to be in the position to be at pilot by the end of the year, which would -- depending on how the pilots go, will allow us to have more substantial revenue in the next year and, of course, more the year thereafter. The go-to-market strategy here, as we described in the prepared remarks, is to make it work with the cloud provider. So, you look at this as a secured channel. So, we're not going to standing up solution for every possible vertical. We're going to be actually leveraging the existing infrastructure of those cloud providers who are already, right, selling to the IoT service provider. So, I think it's the most effective and efficient way that we can go to market.

Okay. Thank you very much.

Thank you, Paul.

Thank you. And our next question comes from the line of Atif Malik with Citi. Atif, your line is open; could you check your mute button?

Sorry about that. First question for Ron. Ron can you update us on your work with Tsinghua University on the storage-class memory, where you guys stand? If I remember it correctly from last year's Analyst Day, the idea behind this was that maybe, it could result into a potential licensing opportunity with them or you can sell it as a start-up to China. Can you just update us where you stand on that project?

Yes. We continue to work very closely with -- on the project. This is the resistive RAM project. We are improving, along with their help, the technology. And we have bigger plans, but I'm not at liberty to describe them at this point, but stay focused.

Okay. And as a follow-up, Rahul, if you talk about the operating margins. Your target model is 37% to 40%. You're at 27% Q1. Can you walk us through what will it take to get to that kind of target model operating margin from here?

Sure, absolutely. What I'll tell you, Atif, is that each of our businesses has a slightly different profile. And I think the key thing that will help us get to that operating margin profile is really just the revenue growth that we anticipate not just in the back half of this year but next year as well. What you see is that we have a base business. That includes our licensing cores and lighting that provides roughly $290 million to $300 million of revenue per year. And what we're doing is we're leveraging that historic base business to fuel growth in other areas. So, if you look at the growth in the other areas, what you'll see is that you have the buffer chip business, which we talked about earlier, and those margins are in the 50% odd range, which is very good margin for a chip business. And the good news is because we continue to invest in that program, so as that business grows, I don't anticipate making significant additional investments in the program. So, you may have seen improvement in operating margin, which would support the targets that we're talking about. Same thing happens for us on the Security and other businesses as well. Those businesses -- as you know, in Software businesses, you can have margins in the 70%, 80%, 90% range, but what also happens is you have a larger infrastructure you have to support. And so those operating costs can be in the 30-plus range, but it still gets you to roughly a 40% odd incremental operating margin. So, what I see is that as we have this portfolio growth initiative, no matter which ones strike at that particular time, incrementally, the operating margins are accretive to what we're posting now. Now, obviously, the company has gone through a transition through our acquisitions, which have shown a lot of revenue growth and has -- will show profitable growth as well, but there's been some pressure on the operating margins by design as we've added in some new portfolios. But really, as we continue to execute it is when you'll see that accretion in the coming years and I'm really excited about the profitability that we're poised to post.

Okay. Thank you.

Thank you. [Operator Instructions] At this time, there are no further questions. This concludes our question-and-answer session. I'd like to turn the call back over to Dr. Black for any additional comments.

Thank you, Karen. As I hope you can see, we feel that we're very 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 again for your continued interest and time. Have a very nice day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect.