Rambus Inc. (RMBS) Q4 2018 Earnings Report, Transcript and Summary

Welcome to the Rambus Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference 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, Christine. And welcome to the Rambus fourth quarter 2018 results conference call. I'm Rahul Mathur, CFO. 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 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 8397247 when you hear the prompt. In addition, we are simultaneously webcasting this call. And along with the audio, we’re webcasting slides that we will reference during portions of today's call. So, even if you are 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 5:00 p.m. Pacific Time. Our discussion today will contain forward-looking statements regarding our financial guidance for future periods, including Q1 2019 and beyond, prospects, product strategies, timing of expected product launches, demand for existing and newly acquired technologies, the growth opportunities in the various markets we serve, and changes that we will experience in our financial reporting due to our adoption of the new revenue recognition standards that started in Q1 2018, 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 are under no obligation to update these statements. In an effort to provide greater clarity to our financials, we are using both GAAP and non-GAAP financial presentations in both our press release and also on this call. We 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 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: Luc will start with an overview of the business; I will discuss our financial results including our guidance for future periods; 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?

Thank you, Rahul, and good afternoon, everyone. This is my second earnings call as CEO of Rambus and as we embark on the New Year, I would like to share some insights on the strategy for the Company going forward before moving into specifics for Q4 and 2018 as a whole. For 2019, our top priorities as a company will be centered around three primary objectives. The first will be to refocus our product portfolio around our core strengths in semiconductor, namely high-speed and chip-to-chip interfaces; memory buffer chips; and embedded security cores and provisioning software. We will target leading edge, high-growth markets like data center networking, artificial intelligence, machine learning, IoT, and automotive. These are markets that demand both increasing levels of performance and security, positioning Rambus as an ideal choice for high-speed interfaces and embedded security solutions. We are aligning the research priorities in Rambus labs on innovation and patent development in these key areas as well. Our patents remain foundational to our industry. By reinforcing our commitments in invention and advancing semiconductor technology, we enhance our value and relevance in our target markets and create a platform for investments in product development. The second objective will be to optimize the Company for operational efficiency and profitability, leveraging synergies across our businesses, and customer base. There is significant overlap in our ecosystem of customers, partners and influencers. By focusing on hardware and software solutions for secure connected semiconductors. We are able to bring better value to our customers and improved profitability for the Company. And finally, the third objective is to leverage our demonstrated ability to generate cash and reinventing ourselves to organic and inorganic growth to amplify our market and technology position. These priorities will set the foundation for the Company moving forward, emphasizing operational excellence and will enable Rambus to further its position as a global semiconductor leader in high-speed interfaces, memory buffer chips, and embedded security cores. With that, we've already taken the first steps toward these objectives in my first few quarters as CEO. Rambus had another solid performance in Q4 and a strong year overall for 2018 with continued execution from our product teams and the record annual product revenue for IP cores and memory buffers. In Q4, we delivered results in line with expectations with GAAP revenues of $68.5 million under ASC 606 and generated $35.1 million in cash from operations. For the full-year, we delivered revenues of $231.2 million under the ASC 606 and generated $87.1 million in cash. For reference, our fourth quarter revenue under the prior ASC 605 accounting standard would have been $102 million with the full-year at $401.1 million, which excluding the lighting business we shut down in Q1, is up 6% year-over-year. We executed well with systematic increases in customer wins in our product groups and continued technology leadership and strategic programs. Our licensing programs remained strong with new deals and renewals closed in Q4, including an agreement with Broadcom as well as Nvidia and Phison, which we mentioned on our previous call. Turning now to our product teams. Q4 was another positive quarter for server DIMM chips as we continued to make steady gains in market share for DDR4 and closed out 2018 with record revenue of $36 million, in line with our target of $35 million to $40 million for the year. Looking forward to 2019, we remain confident in our ability to continue to gain market share for the current generation server platform and anticipate even greater share on the upcoming CPU refresh as we have more than twice the number of OEM and data center qualifications versus the previous generation. We believe this strong market position at the time of new product introduction for Intel's next CPU will outweigh the potential near-term softness for the memory market and for strong gains in market share for our server DIMM chips in the second half. With that we expect to continue the growth that has been demonstrated year-over-year and anticipate the revenue range of $50 million to $70 million for the buffer chip program in 2019. In addition to the steady growth in DDR4, we maintained our leadership position for next generation DDR5 server DIMM chips and are now shipping customer samples at the top-end speeds for both the RCD and DB chips. We are leveraging our head staff in product development with samples being validated by our partners, and continue to have strong collaboration with the memory vendors, as well as the broader ecosystem. Turning now to our high-speed IP cores business. It has been growing at an impressive compound annual growth rate of greater than 50% over the past four years. We continue to gain traction in high-growth, high-performance applications, including artificial intelligence, machine learning, graphics, wired communications and wireless infrastructure. We closed out the year with record revenue, fueled by wins with Tier 1 customers in data center and communications segments worldwide. Competing against industry players like Cadence and Synopsys, we continued our leadership position in high-end and high-bandwidth SerDes and memory IP cores in advanced process nodes with the tape out of the industry’s first GDDR6 memory PHY in a leading-edge process node. As demand for high memory bandwidth extends beyond graphics, we see expanding customer engagements in a wide range of high performance applications. In Q4, we closed a substantial number of design wins with top tier customers worldwide, which sets us up nicely for healthy growth to continue in 2019. Moving over to our Cryptography business, 2018 saw the importance of semiconductor device-level security grow in the industry, resulting in increased traction and opportunities for our embedded security cores and provisioning capabilities in market segments like IoT, automotive, networking and government. We launched the programmable CryptoManager Root of Trust, which combines our deep security expertise with a modern open architecture, RISC-V, to create an easy-to-consume, secure processing core and have ongoing engagements with semiconductor manufacturers, OEM and cloud providers. In Q4, we closed the year with the great win at Micron and announced that our CryptoManager platform would be used to securely provision Micron’s Authenta secure memory product line. This is a key milestone as it showcases our ability to combine our device level provisioning solutions with third-party cores to extend our market share and enable new level of protection for connected devices. As we enter 2019, we are focused on delivering best-in-class embedded security cores and provisioning capabilities, which can be deployed independently or as a complete platform. We believe our CryptoManager programmable secure core and provisioning platform will play an increasingly important role in securing special purpose computing use cases at the edge, driving increased customer interest across our target segments including automotive, artificial intelligence, machine learning and government. In summary, Q4 was another strong quarter that closed out at solid performance for 2018. For 2019, we are renewing our focus on our core areas of expertise and are poised for success in our target markets and year-on-year growth in product revenues. We are creating the foundation for future profitable growth as we continue to fuel innovation, rollout products, improve operational efficiency and generate cash. With that, I’ll turn the call to Rahul to discuss the quarterly financial results. Rahul?

Thanks, Luc. I'd like to begin with our financial results for the quarter and the year. Let me start with some highlights from slide six. As Luc mentioned, we continued to see progress and delivered solid financial results, in line with our revenue expectations and at the high end of our earnings expectations. As you know, we've chosen to adopt the new accounting standard ASC 606 using the modified retrospective method, which does not restate prior periods but rather runs the cumulative effect of the adoption through retained earnings at the beginning balance sheet adjustments. As a result, any comparison between fourth quarter or full-year 2018 results under ASC 606 and prior results under ASC 605 is not the best way to track our Company's progress. We are required to present a footnote that presents our 2018 results as if we continue to recognize revenue under the old standard. To make this transition easier to the readers of our financial statements, we presented our results under both ASC 606 and ASC 605 through 2018. This way we can have a meaningful discussion regarding the performance of our business instead of focusing on accounting changes. Going forward, we'll only be able to report results and give guidance under ASC 606 but will continue to provide additional operational metrics such as licensing billings to give our investors better insight into our operational performance. Under our new accounting standard ASC 606, we delivered fourth quarter revenue of $68.5 million. Under ASC 605, we would have delivered revenue of $102 million. Under ASC 606, we delivered non-GAAP diluted net income per share of $0.09. Under ASC 605, we would have delivered non-GAAP diluted net income per share of $0.28, at the high-end of our expectations. We ended the year with cash and cash equivalents and marketable securities of $277.8 million, up $30 million from the previous quarter due primarily to cash from operations of $35.1 million. We delivered solid results, while continuing to leverage our high-margin historic businesses to fuel growth in adjacent areas where we have strong technical and market expertise with the focus on memory and security. Now, let me talk to you through some revenue details on slide seven. Revenue for the fourth quarter was $68.5 million under the new revenue accounting standard, higher than our expectations of $56 million to $62 million due to the structure of licensing agreements signed within the quarter. Revenue would have been $102 million under ASC 605, in line with our expectations. For the full year, excluding the lighting business we shut down in Q1, our business was up 6%. As we've mentioned previously, the new revenue recognition standard has a material difference in the timing of revenue recognition for our fixed fee licensing arrangements. Our licensing business continued to perform well as the foundation of our success is core to our initiatives in both memory and security, and we'll continue to generate cash in years to come. Going into additional detail under ASC 605, our memory and interface revenue would have been $82.8 million and our security business revenue would have been $19.2 million. Our overall security business was down year-over-year as we restructured contracts in our pipeline to improve the overall long-term value. And we saw one-time true-up in both fees and forecast with an anti-counterfeiting customer of our cryptography products group. As we expected, revenue for our payments and ticketing business was between 25 and $30 million for the full year. We expect that business to grow to $35 million to $40 million in 2019. As we announced last quarter, we are evaluating strategic options for that business, but this business is still part of our operating results. We expect that business to be roughly break even in 2019. So, regardless of which strategic option we choose, if any, I don't expect a significant impact to the Company's overall profitability in 2019. Let me walk you through our non-GAAP income statement on slide eight. Along with our solid revenue performance in Q4, we once again beat our profitability targets on a non-GAAP basis. Cost of revenue plus operating expenses or what we refer to as total operating expenses, for the quarter, came in at $61.6 million. We ended the quarter with headcount of 796, down from 814 in the previous quarter, as a result of our refocus on a core growth initiatives. Over the course of 2018, we expect to invest in headcount to support our growth initiatives in our memory and security businesses. Revenue and operating expenses under ASC 605 led to operating income of $40.4 million. We're pleased with the operating margin expansion we delivered in 2018. We recorded $6.1 million of interest income under ASC 606 related to the significant financing component for our fixed-fee patent and technology licensing arrangements for which we have not yet received payment, but recognize revenue under the new accounting standard. We incurred $0.6 million of interest expense, primarily related to the convertible notes we issued in Q4 2017. This was offset by incremental interest income related to the return on our cash portfolio. After adjusting for non-cash interest expense on our convertible notes, this resulted in non-GAAP interest and other expense for the fourth quarter of $0.5 million, up from Q3. Using an assumed flat rate of 24% for non-GAAP pre-tax income, non-GAAP net income for the quarter would have been $30.3 million under ASC 605 or $0.28 per share at the end of our guidance. On an apples-to-apples basis, under ASC 605, our earnings per share in 2018 was 35% higher than 2017. Now, let me turn to the balance sheet details on slide nine. We're very pleased with the strength of our balance sheet. Cash, cash equivalents and marketable securities totaled 277.8 million, up $30 million from the previous quarter due primarily to cash from operations of $35.1 million. We expect to maintain our ability to generate solid cash flow from operations in 2019. This will be an important metric to monitor as we adopt ASC 606. As a result of adopting ASC 606, at the end of Q4, we had contract assets worth $674 million, which reflects the net present value of unbilled AR related to licensing arrangement for which the Company has no future performance obligations. I expect this number to continue to trend down as we bill and collect for these contracts. It's important to note that this metric doesn't represent the entire value of our existing licensing arrangements as several customers have royalty-based agreements that allow us to recognize revenue each quarter under ASC 606. As a reminder, Rambus has invested in technology R&D throughout our history, and our patent portfolio continues to be amongst the strongest in our industry. As part of our strategic planning cycle, we've renewed our focus and investment on patent generation with an emphasis on key technology challenges facing the industry in the years to come. Our patents are foundational to our industry and provide a strong platform for our investment in product development and innovation. As we look forward to our significant patent renewals in the future, we should note that while our typical licensing agreements provide 5 to 10 years, our patents are valid for 20 years, and we remain confident in our ability to continue to renew with our partners at favorable economic terms in the future, as we've demonstrated historically. Fourth quarter CapEx was $2.9 million and depreciation was $2.6 million. For the year, CapEx was $10.8 million and depreciation was $10.7 million. Looking forward, I expect roughly $3 million of CapEx for the first quarter and roughly $11 million for the full-year of 2019. I also expect depreciation of roughly $2.5 million for the first quarter and roughly $10 million for the full-year of 2019. 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 first quarter on slide 10. 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. To provide our investors and analysts additional transparency through our account and transition, we've been providing financial outlook as if we were still under ASC 605. Going forward, we'll only be able to provide financial outlook under ASC 606. Future revenue under ASC 606 could be volatile from period-to-period due to the timing and structure of our licensing arrangements. We will continue to focus on leveraging our vast patent portfolio to maximize the value for our business as well as provide the best economic structure for our customers. To offer additional transparency, we've also been providing information on licensing billings, which is an operational metrics that reflects the amounts invoiced to our licensing customers during the period, adjusted for certain differences. The differences between licensing billings and royalty revenue under ASC 605 are primarily related to timing as we don't always recognize revenue the same quarter we bill our customers. As you see in the supplemental information that we provided on slide 17 of our earnings deck, on an annual basis, licensing billings closely correlates with what we reported as royalty revenue under ASC 605, given this timing lag. We'll continue to provide license billings as another operational metric to help our investors understand the underlying performance of our Company. With that said, under the new ASC 606 revenue standard, we expect revenue in the first quarter between $41 million and $47 million. Under ASC 606, we expect royalty revenue between $18 million and $24 million. We also expect license billings between $73 million and $79 million. We expect Q1 non-GAAP total operating expenses, which includes COGS, to be between $62 million and $66 million, up from Q4 spend due to the regular FICA and our employee-related expenses that come back in the first quarter. Over the course of 2018, we kept operating expenses roughly flat as revenue grew, providing leverage to our financial model. I expect total operating expenses which include COGS related to our buffer chip business to grow through 2019 as we ship more product. We continue to expect that our buffer chip business will grow to $50 million to $70 million in 2019. However, as we've mentioned previously, we have limited visibility in the first quarter due to macroeconomic issues, inventory and the supply chain and trade concerns with China. This could cause softness in buffer chip shipments in this first quarter. While we cannot control the macroeconomic environment, we are very pleased with our continued share gain, representing several consecutive years of 50% or higher growth. Under the new 606 revenue standard, non-GAAP operating results for the first quarter is expected to be between a loss of $20 million and $13 million. For non-GAAP interest and other income and expense, which exclude the interest income related to ASC 606, we would have expected a $1 million expense, which includes $0.6 million of interest expense related to the notes due in 2023. Based on the new tax legislation passed at the end of 2017, we expect our pro forma tax rate in 2019 to remain consistent with our 2018 pro forma tax rate of roughly 24%. The 24% is higher than the new statutory rate of 21%, primarily due to higher tax rates in our foreign jurisdictions. As a reminder, we pay roughly $20 million of cash taxes each year, driven primarily by our licensing agreements with our partners in Korea. Under 606 and based on the 24% tax rate, we expect GAAP taxes to be a benefit of $6 million and the tax provision of $4 million in Q1. We expect our Q1 share count to be roughly 110 million basic and diluted shares outstanding. This leads you to between a non-GAAP loss of $0.18 and $0.12 for the quarter. While we do not issue annual guidance, looking ahead to 2019, as we’ve disclosed previously, we have structural set downs in the number of our long-term licensing agreements which impacts our 2019 revenue, even though one of these agreements steps back up in 2020. In balance, we expect the growth we seen in our product programs to offset these structural steps down and we’re comfortable with the current consensus analysts’ expectations on the top-line and the bottom line for each quarter of 2019. Through our focus on our core business, we also expect roughly flat cash flow in 2019 as we maintain our strong cash flow and continue to invest in product programs that are growing nicely. Let me finish with the summary on slide 11. We are proud of the solid performance by our team and the progress we continue to make against our strategic initiatives. While we understand that the adoption of ASC 606 adds a level of complexity to our financial reporting, it's important to reiterate that the underlying financial strength of our business remains strong. In closing, we are refocusing our product portfolio around core strengths in the semiconductor industry, improving our operational efficiency and profitability, leveraging synergies across businesses and our customer base and using our strong balance sheet to support our strategic initiatives. We continue to generate solid cash from operations and remain very well positioned for continued success as we head into 2019. With that, I'll turn the call back to our operator, Christine, to present Q&A. Could we please have our first question?

Thank you, Rahul. [Operator Instructions] Your first question comes from the line of Gary Mobley from Benchmark. Your line is open.

Hey, guys. A lot of information. I want to start with the buyback or if the different legal aspect of buyback. Cash position has grown and I know you did an ASR earlier this year. But I'm just where you stand with respect to the buyback and should we read into the fact that shares repurchased in the quarter may be indicative of something in the M&A pipeline?

Hi, Gary. Thanks much for your question. As you know that over the last several years or so, we've returned about 40% to 50% of our free cash flow back to our shareholders, and we've been using the share buyback in order to go do that. What we did in Q4 is we actually spent some time with our Board looking at our overall capital structure and what we want to do with cash and debt and equity, the other components as well. And what I’d expect is that we’ll continue to generate strong cash from operations. And if there's nothing near term from acquisition perspective, then yes, you should absolutely expect us to continue to return capital to our shareholders through buyback program.

And given that your headcount, personal headcount has been trickling down, and just given the guidance that you gave for the first quarter, perhaps some modest growth off that base. Is it possible that we could see operating margin expansion on a non-GAAP ASC 605 basis versus 2018?

I think, absolutely you’re correct, Gary. If you look at over the last couple years, we had a much higher operating margin, again on a like for like ASC 605 basis. And with the acquisitions that we made in 2016, we made the decision to go into these products businesses, which will help us grow, both on our top-line and bottom-line, and that's what you've seen over the last several years. So, what you've seen is that, you have seen that growth from I think about a 32% operating margin up to about a 34%. I think current consensus estimates have that being roughly flat. But, as our payments and ticketing business is roughly break even, if we end up finding a strategic option for that business, then you could see operating margin again grow by another 3%. What I also like about our product businesses Gary is that our infrastructure and investments for those businesses is already built into our model. So, as we continue to grow, either on the buffer chip or the IP core side or on the cryptography products, that incremental gross margin has a pretty strong follow through into operating profit and operating margin. And so, as we grow on the top-line, you'll see operating margin expansion through there as well.

Okay. A question for Luc. You didn't mention for the buffer chip business expanded footprint of roughly 2 times the size, and I'm assuming that perhaps is tied with Intel's latest generation super processors. And I'm wondering, if delay in Intel's ramp of 10-nanometer might have any impact on the timing of the ramp in the buffer chip pipeline?

Thanks for the question, Gary. First of all, we’ve increased share year-over-year ‘18 over ‘17 on the Skylake platform. So, we’ve increased our footprint with all OEMs and customers on the Skylake platform when we're coming late to market. For the new platform Cascade Lake or the new processor, Cascade Lake, we have a footprint that is twice as big as what we had in Skylake. And we track this ramp for Cascade Lake, and we have confidence that with the second half of the year, we will continue on that growth path that we are on. And we feel confident with $50 million to $70 million revenue for this coming year.

Your next question comes from the line of Suji Desilva from Roth Capital. Your line is open.

So, maybe a little bit related to Gary's question but perhaps a little different. The recent kind of data center uncertainty that Intel has called out in video with the preannouncement today. Can you just talk about how we should think about that in the context of what's going on with the memory buffer business? I know Rahul, you talked about limited visibility, but any color you could have as to how you and those data points overlap would be helpful to understand for the go-forward?

Sure. What we see is that there's uncertainty in the macroeconomic environment. The question is about the supply chain in general and the levels of inventory. So, we see some potential softness, I would say lack of visibility into Q1. But, our traction on the design win front is still very, very strong. And we think the effect it’s going to have on us is going to be maybe softness in Q1 but as I said, we feel confident based on what we see with our customers that our revenue is going to continue to grow in 2019 overall, as I said to the $50 million to $70 million range.

Okay. That's helpful. And then, maybe on the strategic options for the security payments and business, can you just give us some color as to what the process is like and what the environment is like, just have some understanding of the appetite in the marketplace for this kind of asset? Any color there would be helpful.

What I'll tell you is, we've been delighted just with what we've seen as a response to the announcement we made in October. There's been a lot of inbound interest from different partners, investors, different options in terms of that business. So, we're going through a process, I think towards the end of Q4, we looked at having advisors that would help us go through that. So, what I expect is that likely somewhere in the first half of this year, we'll have an idea of what strategic option we’ll choose, if any, in terms of this business. But, as we've talked about previously, not just on this call, but on previous calls and other times, this is a very exciting business. I think, what we're doing there with tokenization in particular, has a lot of traction in the marketplace and in the security software marketplace as well. Just one of the things we've learned over the last year or so is that that business was going in ways that was further and further away from our semiconductor core as the announcement we made in October. But, to answer your question, yes, we've had a lot of very exciting conversations about different options for that business.

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

Great, thanks for taking my question. The lack of ASC 605 disclosure is certainly going to make things a little more complicated, but maybe just for the first quarter of this practice and see if we can get some help here. If you were to report revenue under ASC 605, and let's say if your revenue and billings is just like the same, just like last quarter, should we just add up the guidance for billings and loyalty and then put in our own assumption for chipset revenue or am I double counting something here?

Hi, Sidney. Thanks a lot for your question. And yes, we can understand how the difference between 605 and 606 can be a little confusing. If you go back to slide 10 in terms of our deck, what we've shown as our outlook under ASC 606 and then we've also provided a little more clarity in the table to the right of it. And if you look, again, and this is what we've presented historically, I think it's on slide 17, right now, historically under ASC 605, what we've reported as licensing billings, again that's an operational metric that reflects the amounts that we've actually invoice to our partners adjusted for certain differences, but our licensing billings historically has been very close to what we reported as royalty revenue under ASC 605. Right? So, I think the difference in 2017 was nothing; the difference over $300 million in fiscal year 2018 was just about $2 million. So, it's been a very accurate way to look at what we previously reported under royalty revenue. So, coming back to slide 10, the guidance that we gave for the quarter under ASC 606 has total revenue of $41 million to $47 million; of that, royalty revenue is $18 million to $24 million. However, licensing billings, which some folks use as a proxy for royalty revenue is about $55 million higher than what we've given from a royalty revenue perspective. So, I think that's one way to look at what our actual cash flow might look like going forward under 606.

Okay. T hat's helpful. I'll have to go through the numbers myself. But, maybe a follow-up question is, in the past you've talked about recurring revenue; it’s about $50 million in core and it's about $220 million for patent licensing. How should we think about the current environment impact of that revenue stream? And maybe broadly, what would cause them to move up or down more meaningfully other than the scheduled step down that we’ve talked about on the memory side?

Sure, Sidney. And just for a little bit of background, I refer to the backbone of our Company as being between patent licensing and core. And that backbone historically has been roughly $300 million as you just called out. It's usually been about 250 on the licensing side, about $50 million in cores. And as we’ve talked about previously, we have a number of structural step downs in certain license agreements. I think we had several partners who were looking to manage their cash flows in a certain time in the industry. And so, what that results in is a step down for those patent licensing agreements through 2019. Now, as Luc talked about, we have some really interesting growth happening on the product side -- IP cores, buffer chip as well. And so, I think the net delta on that backbone of 300 is probably about $15 million of a headwind for us in 2019. So essentially the product growth will offset any declines in patent licensing until upto about $15 million. So, instead of being roughly 300, you’d expect that to be closer to kind of 285 in 2019. Does that help you in terms of additional color?

Yes. That's helpful. Thank you. If I can squeeze in one more. You guys bought the assets from Diablo, and my understanding is that Diablo has long history in enterprise SSD market. What are your plans as it relates to the assets you acquired from them, and will it be licensing those IP or do you have plans to enter in new SSD market by actually making those SSDs?

That's a great question, Sidney. Let me give you some context. Diablo was an early pioneer in NVDIMM technologies. And we acquired the patented innovations to broaden our portfolio in the hybrid DRAM and flash memory markets, and it complements our product offering. For people, we are not very visible on that but we already had activities in hybrid memory systems. When we refocused our R&D efforts, one of the key areas of focus was hybrid memory system. We also have as part of our buffer chip sales, a small portion of our sales going to NVDIMM systems. So, this is something that is not new to us. But, the acquisition of Diablo strengthens our portfolio for patent and brings technology that we think is going to be useful for future systems -- future memory systems. And these hybrid memory systems, they combine DRAM and non-volatile memory like flash or other memory such as 3DX. And they design to offer the cost effectiveness of non-volatile solutions with the performance of DRAM. And we think that in the future, the benefits are reliable to handle large datasets like the ones that we can find machine learning type of applications. So, overall, this was a good acquisition for us. It strengthens our portfolio of patents. And it continues to build on adjacent focus areas around DIMM technologies.

Great. Thank you very much.

Thank you, Sidney.

Next question comes from the line of Mark Lipacis from Jefferies. Your line is open.

Hi. Thanks for taking my question. The first one on the CryptoManager Root of Trust. Luc, I was wondering, can you help us understand what does the blue sky scenario for this business? And is there a chance that the business model evolves? And maybe you could just review that business model to the extent that you're selling a product versus like maybe some kind of transactions or something like that? That's the first question. I have a follow-up.

Yes. That’s a great question. I think, one thing that happened in 2018 was the recognition in the market that more and more applications require security to be handled at the silicon level. I think that understanding -- that happened in 2018 and that was good for us. We are well-positioned in that space because of our history with our initial customer where we provision more than 1 billion chips per year. So, we have the strong position there. That recognition in the market has translated in new design wins. We've announced in Q4 the design with Micron, whereas they do provision their own core with provisioning system. And that's going to be a great inroad into application such like IoT. Now, the big vision is that more and more applications in more and more segments will require this secure embedded into the silicon. And although we kind of talk about it today, we have more and more engagements with a large number of customers in different segments that actually requires to either provide a complete solution or part of the solution to do so. Again, 2018 was pivotal. Customers did realize that they needed embedded security, which has translated to us into new customer wins like one we announced in Q4 and a lot of activities with new customers going forward. We've changed our product line to take the benefits of these opportunities in the sense that we moved our architecture to RISC-V that gives our customers the programmability that they didn't have on previous versions. And we've decoupled the provisioning system from the cores so that we can address applications such as the one we have with Micron. Now, from a business model standpoint, the current business model is we sell cores, like we sell cores like standard IP cores, license fees and NRE. And then, when it comes to the provisioning system, it depends on the customers. It depends on the customers; it can be volume based, for example, that really depends on customers. But we hope that when these applications become pervasive, the revenue will grow at the same rate.

Okay. Thank you. That’s very helpful. And is there -- when you talk about these three kind of areas of focus, it sounded like one of them was a refocus of R&D on IP. Is that a change from the past or is that kind of an extension of what you've already been doing? It sounded like, was there kind of a refocus towards patent development or is that -- is this just something that you've been doing and you're just kind of refocusing to segments?

It's a combination. We think that -- as we said earlier, we don't want to invest in programs that do not have customer traction. So, we’ve eliminated programs that didn’t give us customer traction. We’re refocusing on memory technology and high-speed interface and embedded security, because we believe that there is future there. Patent licensing program is important to us. We continue to invest in invention for our patent licensing program, so that we're in strong position for the renewals. Remember, the patents have a long life. Some of the patents we have today, will still be valid at the time of renewal, and we're continuing to invest in new inventions for those areas. We believe it’s foundational for the long-term growth of our business and we also believe it’s foundational for our product development. That's why we eliminated those areas where we didn't have customer traction but was far as huge from our core. And we want to refocus on what we’re good at to support growth both our patent licensing programs for the renewals as well as supporting our product initiatives that show -- the growth that we show between ‘18 and ‘19.

That's helpful. Thank you. And then, last question, Rahul. Did you say that OpEx would grow through the year? Is that if only if revenue is grow, like in the scenario revenues were flat but OpEx grow any way or is that [multiple speakers] business? Sorry.

I think that's more on the DIMM business because our total operating expenses include COGS related to that business. So, that and our total operating expenses will grow. As Luc mentioned, I think we've done a nice job of refocusing our Company. And I think our total operating expenses excluding COGS -- or OpEx excluding COGS should be roughly flat. It kicks up in Q1 because of the normal employee-related COGS. One of the things I'm actually quite proud of as what Luc just talked about and he and I were actually working on this before he became CEO as well, really helping to refocus and be better at understanding where we invested. And so, what you've seen just from us from operating income perspective over the last several years is very nice growth on operating income, despite roughly flat revenue as we optimize our portfolio.

That's helpful. Thank you.

Your next question comes from the line of Atif Malik from Citigroup. Your line is open.

Thanks for taking my questions as you cover few questions. Rahul, you talked about long-term licensing agreement coming down this year and then stepping back up in 2020. Why does it step up in 2020 and what visibility do you have?

Sure, Atif, and thanks for your question. So, one of our key licensing arrangements actually had a provision in it where our partner had a certain number of quarters during which they could step down their payments of their choosing. And I think our partner negotiated that years ago to help them manage cash flow through any cycle. So, they elected to take that step down where the impact amongst those several quarters really hits us in 2019. And that's the bulk of the difference of that backbone dropping from 200 to 285 is almost entirely explained from there, although there's a bunch of moving pieces. Now, the provision says that it sets down for a number of quarters but then once that’s finished, it steps back up. So, that step up is just purely contractual to come back up in 2020 and beyond.

Got it. And then, Luc, going back to Sidney's question, Diablo Technologies, it sounds very interesting. Can you just talk about how much you paid for it? And does, it improve your leverage in licensing, signing up Intel as a licensee as they are using non-alter memory on a DIMM for their server Purely Platform?

So, Atif, it’s Rahul. I’ll take a portion of that. The consideration there was relatively immaterial in terms from a total dollar amount for our Company. And I think we may have mentioned, we actually just took assets. So, there's no liabilities or anything else that came across with the patent portfolio. I'll ask Luc to speak a little on the other parts in terms of -- is there an opportunity for us in the future.

For Diablo, yes. [Indiscernible] in Q4 and in the future. Again, this was a great deal for us in terms of acquisition; it supports licensing program going forward; it strengthens our licensing portfolio but it also strengthens our ability to give value to our customers on the product side. Again, we will continue to look at these type of opportunities when they are adjacent to what we do, support our product growth and support our licensing program.

Okay. And one final one. You talked about $50 million to $70 million sales of buffer chip this year. What is the size of the market, and where you think can take your market share?

Yes. The size of the market is about $350 million, roughly. So, we continue to gain share. We continue to gain share because over the last two years we've improved the competitiveness of our products. We've improved the footprint of our design wins and we’ve improved the quality of our products. The market is not growing at the pace that we are growing, but we're gaining share in that market, substantial share. We grew share from ‘17 to ‘18, and we have confidence we’ll continue on that trajectory in ‘19 going from $36 million we did in 2019 to anything between $50 million and $70 million in 2019.

Thank you.

[Operator Instructions] 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 the Company.

So, as you can see, we continue to demonstrate our technology leadership and ability to execute across the Company. We have renewed our focus on our core expertise and look forward to an exciting 2019. Thank you for your continued interest and time. And have a very good day.

Thank you. This now concludes today's conference.