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…

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…

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.