Rambus Inc. (RMBS) Q4 2019 Earnings Report, Transcript and Summary

Welcome to the Rambus Fourth Quarter and FY 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. [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, Christine, and welcome to the Rambus fourth quarter 2019 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 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 3576589 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'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 5:00 p.m. Pacific Time. Our discussion today will contain forward-looking statements, including our financial guidance for future periods, products and investment strategies, timing of expected product launches, demand for existing and newly acquired technologies, the growth opportunities of the various markets we serve, the expected benefits of our merger, acquisition and divestiture activity, including the success of our integration efforts, and the effects of ASC 606 on reported revenue 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 comments. In an effort to provide greater clarity in the financials, we're using both GAAP and non-GAAP financial presentations in both our press release and also on this call. A reconciliation of these non-GAAP financials to the most directly comparable GAAP measures has been included in our press release in our slide presentation and on our website at rambus.com on the Investor Relations page under Financial Releases. 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?

Thanks Rahul, and good afternoon everyone. 2019 was a year of tremendous progress propelled by strong execution across the company. Guided by our strategic objectives we continue to focus on our core strength in semi-conductor to optimize the company for operational efficiency and to leverage our strong cash generation to reinvest for growth. As a result, we had an excellent performance in Q4 and exceeded expectations with revenue of $59.9 million delivering $224 million for the full-year. We also continued to strengthen our balance sheet generating $35.4 million in cash from operations in the fourth quarter. This brought our total cash from operations for the year to $128.5 million, which is up $41.4 million or 48% over 2018. In 2019, we redefined our perimeter with significant M&A activity throughout the year focusing the company on silicon IP and Chip Solutions for the semiconductor market. We ended the year strong completing both the sale of our payments and ticketing business to Visa, as well as the purchase of the Secure silicon IP and Protocols businesses from Verimatrix, formerly INSIDE Secure. Much like the purchase of digital controller company, Northwest Logic earlier in the year, the INSIDE Secure teams and offering augment our portfolio and expand our market position in datacenter, AI, networking, and automotive. As we have mentioned previously, neither acquisition materially impacted our 2019 results, but we expect both to have a positive impact on the business and be accretive to revenue and earnings in 2020. In addition, to the successful closing and integration of our acquisitions, we continued to execute and demonstrate success across our product lines throughout the year. 2019 was the second consecutive year of record revenue from products with combined results from our chip and silicon IP businesses delivering over 64% growth year-over-year from 2018. Memory Interface Chips was the fastest growing segment of the business, with revenue almost doubling year-over-year. Driven by increased OEM and data center qualifications, we saw steady gains in our DDR4 memory interface chip market share and delivered the third consecutive quarter of record revenue. Silicon IP also delivered record revenue in Q4 and drove sustained growth throughout the year, up 29% from 2018. We had numerous design wins at Tier 1 SoC customers across our target markets for both interface and security IP solutions. Most recently, we announced the win at Enflame for both our HBM2 PHY and controller as part of their next-generation AI training chip. In addition, the team continued to build out our portfolio of solutions, addressing the fast growing and demanding applications in AI and 5G and data center with the launch of our comprehensive PCIe Gen 5 interface solution in Q4. In closing, Q4 was a fantastic quarter. We delivered record revenue from both chip and silicon IP and robust cash from operations. For 2019, we executed on our strategic objectives and successfully realigned the company around our core strength in semiconductor, while strengthening the product portfolio. Now looking forward, we will continue to capitalize on high-growth market trends favorable to Rambus, with market share gains for chips, alongside the memory cycle upswing and growth in the strong semi IP market capitalized by AI and 5G, we will be very well positioned for continued success in 2020 and beyond. 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 fourth quarter. Let me start with some highlights on Slide 6. As Luc mentioned, we continue to execute on our product businesses and delivered solid financial results above our revenue and earnings expectations. We've adopted 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 as a beginning balance sheet adjustment. Any comparison between our results under ASC 606 and prior results under ASC 605 is not an accurate way to track our company's progress. We will continue to provide operational metrics such as licensing billings to give our investors better insight into our operational performance. We delivered revenue of $59.9 million and licensing billings of $63.8 million. Revenue was higher than our expectations due to strong buffer chip sales. We have a very strong balance sheet and ended the year with cash, cash equivalents, and marketable securities of $408 million, up from the previous quarter. For the year, cash from operations was $128.5 million, up nicely from last year with $14.9 million of capital expenses, free cash flow for 2019 was $13.7 million. Our continued execution on our strategy and our operational discipline has yielded excellent financial results and a strong balance sheet that afford us the flexibility on our strategic initiatives. 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 chip and Silicon IP. Now, let me talk you through some revenue details on Slide 7. Revenue for the fourth quarter was $59.9 million, above our expected range due to market share gains in our buffer chip business. Royalty revenue for the fourth quarter was $19.4 million, while licensing billings was $63.8 million. The difference between licensing billings and royalty revenue primarily relates to timing as we don't always recognize revenue the same quarter we bill our customers. Going into additional detail, our product revenue was $26.6 million, consisting primarily of our buffer chip business. Our contract and other revenue was $13.9 million, consisting primarily of our silicon IP business. As we expected due to the timing of the close, our acquisition of the silicon IP secure protocols and provisioning business from Verimatrix did not have a material impact on the fourth quarter. For the year, our product revenue was $72.9 million, almost doubling year-over-year. Similarly, our contract and other revenue was $41.7 million, up 29% year-over-year. Our growth of these areas underlies the benefit of our focus and strategy. We recorded $0.9 million of revenue and $2.3 million in operating costs and expenses associated with our payments and ticketing business in Q4 prior to the sale to Visa. Let me walk you through our non-GAAP income statement on Slide 8. Along with our solid revenue performance in Q4, we met 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 $62.3 million. This was towards the high end of our expectations due to higher COGS related to record buffer chip revenue. With higher revenue and disciplined execution on spending, our profit was nicely above our expectations. We ended the quarter with headcount of 685, down from 840 in the previous quarter, primarily due to the divestiture of our Payments and Ticketing Business. We added approximately 65 employees through our acquisition of the silicon IP secure protocols and provisioning business from Verimatrix. Under ASC 606, we recorded $4.5 million of interest income related to the financing component of our fixed fee licensing agreements for which we've recognized revenue, but not yet received payment. We incurred $0.6 million of interest expense related to the convertible notes 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 income for the first quarter of $5.5 million. Excluding the interest income related to the significant financing component related to ASC 606, this would have been $1 million. Using an assumed flat rate of 24% for non-GAAP pre-tax income, non-GAAP net income for the quarter was $2.4 million. Now, let me turn to the balance sheet details on Slide 9. We are very pleased with the strength of the balance sheet. Cash, cash equivalents and marketable securities totaled $407.7 million, up significantly from the previous quarter as cash from operations of $35.4 million and the proceeds from the sale of our Payments and Ticketing Business to Visa was offset by cash used for the acquisition of the silicon IP secure protocols and provisioning business from Verimatrix. Year-over-year, we've grown cash by $130 million. Our strong balance sheet allows us the flexibility to invest strategically in our patent portfolio and our growing product programs, as well as provides firepower for additional inorganic activity. At the end of Q4, we had contract assets worth $528 million, which reflects the net present value of unbilled AR related to licensing agreements toward 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 agreements as several customers have royalty-based agreements that allow us to recognize revenue each quarter under ASC 606. As the sale of our payments and ticketing business did not close until October 21, at the end of Q3, we classified that assets and liabilities for this business as held for sale. The net carrying amount of this business as of the third quarter was $86.5 million, considering assets, liabilities and cumulative translation adjustments. After considering the $75 million purchase price and transaction costs, we recorded a recovery of $1.9 million in Q3 that offset the impairment charge in our Q2 GAAP results. In Q4, we recorded another recovery of $7.7 million upon the sale of this business, which resulted in a cumulative year-to-date loss of $7.4 million after considering the net carrying amount of this business of $86.1 million and net proceeds of $78.6 million. Fourth quarter CapEx was $6.4 million and depreciation was $4.9 million. Full-year 2019 CapEx was $14.9 million and depreciation was $15.2 million. As I mentioned earlier, we delivered $113.7 million of free cash flow in 2019. Looking forward, I expect roughly $16 million of CapEx for the first quarter and roughly $26 million for the full-year of 2020, half of that total amount is related to the relocation of our headquarters facility. I also expect depreciation of roughly $5 million for the first quarter and roughly $20 million for the full-year of 2020. 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 current best estimates and our actual results could differ materially from what I'm about to review. In addition to financial outlook under ASC 606, we've also been providing information on licensing billings, which is an operational metric that reflects amounts invoiced to our licensing customers during this period, adjusted for certain differences. As you see in the supplemental information, we provided on Slide 15 of our earnings deck, licensing billings closely correlates with what we have historically reported as royalty revenue under ASC 605. With that said, under ASC 606, we expect revenue in the first quarter between $44 million and $50 million. We expect royalty revenue between $7 million and $13 million. We also expect licensing billings between $60 million and $66 million. We expect Q1 non-GAAP total operating expenses, which includes COGS, to be between $64 million and $68 million. Under ASC 606 non-GAAP operating results for the first quarter is expected to be between a loss of $24 million and $14 million. For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we would have expected $1 million in income, 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 2020 to remain consistent with our 2019 pro forma tax rate of roughly 24%. The 24% is higher than the statutory rate of 21%, primarily due to higher tax rates in our foreign jurisdiction. As a reminder, we pay roughly $20 million of cash taxes each year, driven primarily by our licensing agreements with our partners in Korea. We expect non-GAAP taxes to be between a benefit of $6 million and $3 million in Q1. We expect our Q1 share count to be roughly 115 million basic and diluted shares outstanding. This leads you to between a non-GAAP loss per share of $0.15 and $0.09 for the quarter. Looking ahead to 2020, I expect Q2 down 2%, because of our typical seasonality and then modest growth in Q3. I expect Q4 to be roughly flat with Q3 due to the structure of our licensing agreements. As we've communicated previously, structural step downs in several of our long-term licensing agreements impacted our 2019 revenue. Last year our excellent product growth and operational efficiencies offset these structural step downs. In 2020, we had the last of structural step downs under our current license agreements, after which patent licensing billings will level off. As we look to the future, I expect subsequent revenue growth in our product businesses to provide growth on both the top line and bottom line. We expect to deliver gross margins in the 55% to 60% range. From an expense perspective, we expect COGS to move in line with product shipments through the year. We anticipate operating expenses will come down gradually through the year due to the operational efficiencies we've already implemented. All told, these changes reflect $5 million of higher revenue and $0.02 of higher EPS than current analyst consensus estimates and expectations for 2020. Let me finish with a summary on Slide 11. We're proud of the solid performance by our team and the progress we continue to make against our strategic initiatives to drive long-term profitable growth. We've had a significant amount of M&A activity as we refocused our company and are very pleased with our execution on organic and inorganic growth. While we understand that ASC 606 added a level of complexity to our financial reporting, it's important to reiterate that the underlying financial strength of our business remains strong, reflected in our demonstrated ability to generate cash. We have refocused our product portfolio around Rambus' core strengths in the semiconductor industry, improved our operational efficiency and profitability, generated solid cash from operations and leveraged our strong balance sheet to support our strategic initiatives. We continue to focus on our core markets and are well positioned for 2020 and beyond. With that, I'll turn the call back over to Christine to begin the Q&A. Could we please have our first question?

Thank you, Rahul. [Operator Instructions] Your first question comes from the line of Sidney Ho from Deutsche Bank. Your line is open.

Great. Thank you and congrats on the solid results and guide. My first question is, your licensing billing is better for both Q4 results and Q1 guide. Can you talk about what's driving the upside other than maybe timing of some of the contracts? And related to that, I appreciate you going through – Rahul, going through the quarter-by-quarter for the next few quarters, but as you kind of look past beyond – look past 2020, I think you talked about being – licensing billing being roughly flat after seeing structural stepdown in 2020. Are there any other stepsdowns that we should be aware of going forward and what type of licensing structures are you seeing in recent deals?

Sure. Thanks, Sidney. And let me see if I can answer your question. First, in terms of the trends of licensing billings and back and forth, it's really just related to the structural agreements that we signed over the last several years. Our existing agreements all have disparate terms and conditions in terms of how we bill and invoice our partners. In some cases, they are royalty based and that will show up in our reported revenue. In other cases, they're fixed payments that are consistent on a quarterly basis and that may just show up in our licensing billings. And in other cases, the payments are structured in a stair-step faction either going up and down or coming – going straight or even coming down in some cases. In any case, I wouldn't read too much into the quarterly changes between royalty revenue and licensing billings. I'd refer you back to the guidance that we provided at our Analyst Day, where I think we said at the midpoint licensing billings for us in 2020 would be about $230 million. So, that's what I kind of anticipate over the course of this year. If I recall your other questions, you specifically talked about what that may look like going forward. As I mentioned in prepared remarks, after 2020, we expect this to be very stable over the next several years. We now see the last of the structural changes in 2020 and that was part of the quarterly guidance that I gave in my prepared remarks where I expect Q4 to be roughly flat with Q3, otherwise I would have expected Q4 to be up nicely from Q3 due to increased product revenue. Looking forward, most of our licensing billings are related to the three big agreements with the DRAM industry, and I think we can talk certainly there in terms of our expectations for renewals out in the future, but we feel very confident about our patent portfolio and the investments we make there and our ability to maintain that very profitable business for us in the future.

Great. That's super helpful. My follow-up question is on 5G infrastructure, in the past, you talked about benefiting from the deployment of 5G infrastructure, especially based on the PCIe Gen 5 interface. Can you give us an update on that market? What you're seeing there, especially after a very strong build in the second half of last year? And do you have any issues, given the big portion of that build is coming from one big Chinese customer there?

Yes. Hi, Sidney. This is Luc. So we continued to see traction from the 5G infrastructure development and deployment. And as we explained in earlier calls, the reason is that we are further down in the value chain. We actually provide IP to people who build the chips for that 5G infrastructure. We kind of see the revenue before the others do. One of the things that has happened to us over the last year is the acquisition of Northwest Logic allowed us to develop a complete solution for 5G. We have combined our PHY with their controller to have a complete 5G PCIe Gen 5 solution and we continued to see traction with several customers as we move forward.

Okay. Maybe one last question. Sticking with the 5G chipset side – memory chipset side. I think you mentioned revenue in the $75 million to $95 million range, and that's up from roughly $70 million in 2019, which doesn't seem like a lot of growth. How much DDR5 revenue are you expecting in the 2020 outlook? And can you talk about your market share expectations based on the design wins – design win activities for the next generation 40 nanometers and 10 nanometer server products? Any color would be helpful. Thanks.

Yes. Great question, Sidney. So, I think the revenue from DDR5 is going to be very modest in 2020. We will see the very initial shipments toward the end of the year in the volumes. So, 2020 is still going to be a DDR4 market for buffer chip. The growth will depend on a couple of factors. We see the upswing of the market after a soft year last year, in general terms. In addition to that, the speed of the growth will depend on how fast the market is going to transition from, you know, the current Intel platform to next generation platform. So, we certainly see growth potential for our business, which we give you – we gave you – we just gave you guidance.

Great. Thank you so much.

Thank you, Sidney.

Your next question comes from the line of John Pitzer from Credit Suisse. Your line is open.

Yes. Good afternoon guys. Thanks for letting me ask the question. Well, I guess, for my first question, I think you said in your prepared comments that the Verimatrix acquisition added very little to the calendar fourth quarter. I'm wondering how we should think about its contribution both to the calendar first and to the full-year?

Sure. That's a great question, John. And yes, because of the timing of the close, there was minimal impact to our Q4 financial statements regarding the Verimatrix acquisition. What we said at our Analyst Day is that we expected roughly $20 million of revenue associated with that acquisition in 2020. And I think both that, as well as the acquisition of Northwest Logic, we said would be marginally accretive for us in 2020. Right now, I would just simply anticipate a roughly linear trend in terms of how much additional revenue we'd see in 2020 associated with that acquisition of the Verimatrix assets. So, I'd say anywhere from $4 million to $5 million a quarter through 2020. Hopefully, that helps answer your question.

It does. And then maybe as a follow-up to Luc, just given the cash flow generation of the business model. Should we think about 2020 as being another year of additional tuck-in acquisitions or is this a year where you, kind of, try to rationalize and exploit the acquisitions you did last year? And if the former – how should we think about the acquisition strategy and potential targets?

Yes. Thank you, John. So, in terms of rationalizing the acquisitions we just made, we're moving really fast, the integration of both companies is going quite well and fast. And I think both are up and running, I would say, at this point in time. So, we're quite pleased with that. It went really, really fast in terms of integration and focused on growing the business. Now, we will continue to look very actively at possible acquisitions to strengthen our position either in the memory interface arena or in the embedded security arena. This is very, very active activity that we had internally. And because we do have this ability to generate cash, we have the ability to move fast if any of these opportunities comes to us with a high level of interest. So, we will continue to do what we do, and we've been very fast in integrating the two we did last year, so no change there.

Thanks a lot, guys.

Thank you.

Thank you, John.

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

Hi, Luc. Hi, Rahul. Congratulations on the progress you're showing in the strategy of focusing on the core, so congrats on that. Rahul, I just wanted to sharpen my pencil here on some of the – maybe the 605 kind of equivalent numbers here. Fourth quarter 2019, I was getting $104.3 million and EPS around $0.28, $0.29. Does that sound like it's in the ballpark?

So, Suji, we can't produce 605 numbers anymore, but I think what you're doing is you're substituting licensing billings for what we reported as royalty revenue. And I think when you make that substitution and run it through, I'd get the same numbers that you would get.

Great. And most importantly, for the guidance, I think you're coming in – it's implying something around $100 million, a slight sequential decline, and $0.23 as you start out the year. I think that's kind of – I want to just make sure that that's also ballpark. It sounds reasonable as well.

Yes. And again, that's not numbers that we provide, but if I were to do the same math that you did, I'd get in the same place. And that decline is really just seasonal between the Q4 and Q1. We were delighted with our Q1 results, both on the top line, as well as from a cash perspective.

Okay. Fair enough. And then switching to some of the business segments, the silicon IP business up 29% year-over-year. How much of that is organic versus inorganic? Was that all organic? And if so, what's a more normalized growth opportunity that's sustainable for that business? It sounds like it's on a tear really from a design ramp perspective. So, curious how that can flow through the next year or two?

Yes, no, that's a great question. So, as I mentioned, we had minimal revenue from the assets we purchased from Verimatrix. We did have a couple million dollars of revenue associated with the acquisition of Northwest Logic that closed in Q3. I think even without the acquisition, though, it was a very strong growth year-over-year, and we're very pleased with the performance. Our memory IP business has grown very nicely over the last several years and delighted with that growth rate. And I think we have a great opportunity to have growth in our security business as well. Looking forward, I would expect both of those to continue to grow. And with the acquisition of those businesses, we could be in a similar growth rate in 2020 over 2019.

Yes, that's helpful color there. And then on memory buffer, you started to talk about this, but where – what do you think your share is now? And where do you think it can go as you ramp up here in 2020? Obviously, the size of the market would be a factor there. And then is there any concentration in your current revenue run rate from a hyperscale customer or two? Or is it diversified kind of from the end customer perspective, not the memory customers?

Yes, great question, Suji. Look, we estimate our share in 2019 to be around 15%, and it keeps growing. We'll surely go to 30% when we go to DDR5, because we were the first in DDR5, so we expect to have at least one-third of the market. And between now and then, we will continue to increase share. In terms of the structure of our customers, over time, our end customer profile has diversified. So, the risk to the business has diminished. As we grow the business, the end customer has diversified, and as such our risk has diminished in that area.

Okay, great. Congrats again guys. Thanks.

Thank you, Suji.

Your next question comes from the line of Gary Mobley from Wells Fargo Securities. Your line is open.

Hi guys. Congrats on a strong quarter, strong finish to the year. Rahul, I wanted to go back to some of your comments about fiscal year 2020 guidance. If I recall correctly, at your Analyst Day in September, you gave sort of preliminary 2020 outlook, which included billings of $230 million contract and other revenue of $80 million and product revenue of $85 million for a total of $395 million. I just wanted to clarify, you're suggesting that perhaps now we're starting the year out and maybe just looking $5 million better. And if so, where does it come from in that three different categories?

Sure. And again, Gary, we don't add those numbers up, because that wouldn't be something you do it from a GAAP perspective, but what I said in our prepared remarks is we think we're going to be about $5 million better than where our current analyst estimates are. And I think that's going to come predominantly from buffer chip and silicon IP. As I mentioned previously, the structure of our patent licensing agreements are fairly set. So, those are largely predictable, but I think it's going to come from buffer chip and potentially the silicon IP businesses.

Okay. I want to switch gears and talk about the profitability of everything other than your patent licensing business. And so, in the just reported fourth quarter, using that billings number as a substitute for royalties, you would get to roughly non-GAAP operating income of $42 million. In years past – in quarters past, even maybe as recently as the midpoint of this past year, I would imagine that 90% of your operating profit came from the patent licensing side, but seemingly, now you're getting a lot – much larger contribution presumably from your buffer chip business. So, can you speak to the profitability of that business, where it sits today, where you see it materializing in 2020?

Yes. So, I'll start. Thanks, Gary. We're pleased with the performance of our buffer chip business as we grew the business and that business would become profitable. And this is a high leverage business. So, we can marginally invest in that business to continue to generate growth. As we move forward and look forward, that business is going to continue to be profitable and more profitable. On the IP side, what we've done over the last year is, we have refocused our portfolio of offerings on to products and solutions that show high demand in the market. We mentioned earlier the PCIe Gen 5 solution using our PHY and our controller. So, by focusing the portfolio and making portfolio decisions, we're going to accelerate the profitability of that IP business. That's the way to look at it.

Okay. And related to that, I think in the second half of fiscal year 2019, your product gross margin was around 65%. And that's about 10 percentage points higher than the first half. And so, I'm curious to know how much of a trend line is the buffer chip business running, compared to what you had most recently been guiding for? And can you give us sort of an update on how you view the gross margin profile of that business in 2020?

Sure, Gary. That's a great question. I think what I mentioned in the prepared remarks is I expect that gross margin for our product business to be in the 55% to 60% range in 2020. We had some quarters with particularly high margins, and that's just simply a function of product mix, as well as how much we were shipping. I think as we become larger and larger and I hope to beat the estimates that we provided today, but as we become larger and larger, then any small variation in mix will have a muted impact in terms of what the gross margins look like, but I feel pretty comfortable with the 55% to 60% gross margin. And as Luc mentioned earlier in your question about leverage on the product portfolio, because we have that product portfolio and as we ramp, there's minimal incremental investment, and so there's a pretty nice fall-through then to the bottom line. And I think that's what you saw also in Q4.

Okay. I had a sort of final off-the-wall question about IP protection. So, as part of the phase one US-China trade agreement, we had some IP protection clauses built into the trade agreement. So, I'm wondering if that changes any enforceability of your patents as it relates to some of the developers of China memory.

So, Gary, it's an interesting question. I think it's something that's still continuing to develop in terms of really what's going to happen with China and the trade balance. The way I look at it is that we are unique in that our direct exposure to China is actually relatively small, though, obviously, anything that impacts our customers long-term will impact us. I think for us, China is actually an opportunity from a patent licensing perspective. What we see is, as the tech industry in China continues to grow and diversify and we're making great progress in our business areas, that it becomes an opportunity. Now specific to licensing, China is investing tens of billions of dollars in the semiconductor industry. And as the industry grows, so does our relevance and opportunity in the market. So, there are strategic options we have for patent licensing, and I think engaging earlier will actually yield benefits to us, as well as our partners. I think one of the things that we see is that for our partners, taking an early license provides credibility and allows them to compete in the global marketplace. So, all told, we're actively engaged in China and continue to monitor the geopolitical environment, but we remain optimistic that our business will continue to grow. I think one of the things that I would see is that if we are able to announce a license agreement in China – typically, our license terms are five years to seven years, and that's an early demonstration that the ongoing global relevance and validity of our portfolio will be there for many years to come, well beyond the terms of our existing licensees. And I think that would be a nice external validation, but to what you said earlier, I think we also continue to monitor what happens from a global macroeconomic perspective, but continue to invest in our portfolio and feel we're going to be very well positioned to take advantage of China, as well as to continue to maintain our patent portfolio renewals going forward.

Okay. Thank you, guys and again congrats to a strong finish to the year.

Thank you, Gary.

Thank you.

At this time, there are no further questions. This concludes the question-and-answer session. I would now like to turn the conference back over to Luc for closing remarks.

Thank you for your continued interest and time, and have a very good day. Thank you.

Thank you. This now concludes today’s conference.