Rambus Inc. (RMBS) Q1 2020 Earnings Report, Transcript and Summary

Welcome to the Rambus First Quarter and Fiscal Year 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Rahul Mathur, Chief Financial Officer. You may begin your conference.

Thank you, operator, and welcome to the Rambus first quarter 2020 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 9761889 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; risks and the potential adverse impacts related to or arising from the coronavirus or COVID-19; 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 statements. 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 our -- the most directly comparable GAAP measures has been included in our press release and 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?

Thank you, Rahul and good afternoon everyone. Before we discuss our results for the first quarter, I wanted to take a moment to provide an update on the impact we are seeing from COVID-19. It is clear that we are in unprecedented times as the industry navigates the uncertainty created by the coronavirus. Our top priority has been the health and safety of our global workforce, customers and partners. And I'm extremely proud and humbled by the collective commitments patience and ingenuity demonstrated by all Rambus employees in this challenging time. While we cannot predict the long term with certainty, the current increased demand in our target markets combined with the strength of our balance sheet makes me optimistic about the opportunity ahead of us. The Rambus business model is naturally resilient to the near-term financial effects of COVID-19 with a patent-licensing business that is highly predictable due to the long-term nature of our agreements. This provides us financial stability and strong cash generation to weather these turbulent times. From an operational standpoint, we are on track to deliver on all of our customer commitments. We have been able to maintain a very high level of productivity, with product design, development and delivery continuing throughout this transition to a remote work environment. Finally, the almost universal shift to learning and working from home has placed a tremendous strain on the global data infrastructure in terms of increased bandwidth, capacity and security. With increasing requirements for faster and safer hardware are accelerating demand for Rambus IP and chips in the data center, cloud and 5G. As a result, the number of design starts and customer demand for our IP and chips remains strong, creating some tailwinds for the business. The company's focus on our core strength in semiconductor, emphasis on operational efficiency and strong cash generation has built an enduring foundation for growth even in this challenging environment. Turning now to our results. This combination of factors coupled with our continued execution has translated into an exceptional first quarter. We delivered $64 million in revenue, exceeding the high end of expectations and outstanding cash generation from operations of $37.3 million, further strengthening our balance sheet. The licensing team continues to make great progress, as highlighted by last week's announcement of our DRAM patent license agreement with CXMT. This agreement is a great demonstration of the ongoing relevance of our portfolio, as the term extends well beyond our existing agreements. While the near-term impact of the deal on revenue will be small, due to how nascent the DRAM market is in China, we are optimistic about the potential long-term impact as the market grows. Our product teams had a tremendous performance with record revenue from both silicon IP and chip businesses. The silicon IP business delivered record revenue in the first quarter, augmented by multiple Tier one SoC design wins and strong execution from last year's acquisitions. We introduced three industry-leading products to deliver and protect data: the 112-gig XSR chiplet interface, an HBM2E memory solution with integrated PHY and controller and 800-gig MAX SoC security IP solution. This strengthens our position in the fast-growing and critical markets of data center, cloud AI and 5G with additions to both the high-speed interface and security IP portfolios. Memory Interface Chips continues to be the fastest-growing segment of the business, delivering its fourth consecutive quarter of record revenue. The growth was driven by ongoing gains in market share and was bolstered by the increased demand for memory in data center and cloud that is being echoed by other players in the industry. Emphasizing excellence in quality and delivery, data center and OEM qualifications continue to increase for the DDR4 memory interface chipset and the company remains well positioned as the first mover for the industry transition to DDR5. In closing, COVID-19 has introduced a great deal of uncertainty into the market but the global shift in increased remote collaboration has also presented us with an opportunity for upside. The resilience of our business model, ongoing ability to execute and increased demand for our products across the critical markets of data center, communications, AI and 5G, give us confidence in our ongoing ability to generate cash, further strengthen our balance sheet and reinvest in our future. Our innovations and products are well aligned to near and long-term customer demand, giving us the stability and flexibility to position ourselves for success throughout the rest of the year 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 first quarter. Let me start with some highlights on Slide 6. As Luc mentioned, we continue to execute in our product businesses and delivered excellent financial results above the high end of our revenue and earnings expectations while continuing to strengthen our balance sheet. 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 non-accurate way to track the 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 $64 million and licensing billings of $67.1 million. Revenue was higher than our expectations due to strong buffer chip sales. We have a very strong balance sheet and ended the quarter with cash, cash equivalents and marketable securities of $435.4 million, up from the previous quarter due to cash from operations of $37.3 million. Our continued execution on our strategy and our operational discipline has yielded excellent financial results and a strong balance sheet that affords a flexibility on our strategic initiatives. Now let me walk you through some revenue details on slide 7. Revenue for the first quarter was $64 million well above the high end of our expected range due to market share gains in our buffer chip business. Royalty revenue for the first quarter was $19.7 million, while licensing billings was $67.1 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 $30.7 million, consisting primarily of our buffer chip business. Our contract and other revenue was $13.6 million, consisting primarily of our silicon IP business. As a reminder, in Q4, we recorded $0.9 million of revenue associated with our Payments and Ticketing business prior to the sale to Visa. So this reflects record results in Q1 for both buffer chip and silicon IP. Our growth in these areas illustrates the benefit of our focus and strategy. Let me walk you through our non-GAAP income statement on slide 8. Along with our excellent revenue performance in Q1, we also exceeded our profitability targets. Total operating expenses including COGS for the quarter came in at $63.5 million. Operating expenses of $51.9 million were lower than our expectations due to lower spending on employee-related expenses such as travel. With higher revenue and disciplined execution on spending, our profit was nicely above our expectations. We ended the quarter with head count of 665, down from 685 in the previous quarter primarily due to attrition. Under ASC 606, we recorded $4.4 million of interest income related to the financing component of our fixed-fee licensing arrangements for which we have recognized revenue, but not yet received payment. We incurred $0.6 million of interest expense 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 income for the first quarter of $5.6 million. Excluding the interest income related to the significant financing component of ASC 606, this would have been $1.2 million. Using an assumed flat rate of 24% for non-GAAP pre-tax income, non-GAAP net income for the quarter was $4.7 million. Now let me turn to the balance sheet details on slide 9. Over the past several years, we have built a very strong balance sheet. Cash, cash equivalents and marketable securities totaled $435.4 million, up significantly from the previous quarter, primarily through cash from operations of $37.3 million. At the end of Q1, we had contract assets worth $487 million, which reflects the net present value of unbilled AR related to licensing arrangements 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 agreements as several customers have royalty-based agreements that allow us to recognize revenue each quarter under ASC 606. First quarter CapEx was $4.5 million and depreciation was $4.8 million. We delivered $32.8 million of free cash flow in the quarter. Looking forward, assuming construction is resumed, I expect roughly $12 million of CapEx for the second quarter and roughly $23 million for the full year of 2020, half of which is related to the relocation of our headquarters facility. I also expect depreciation of roughly $5 million for the second quarter and roughly $20 million for the full year 2020. Our strategic refocus on our core markets and operational efficiencies have set a solid foundation for our company. Our limited debt and predictable high-margin licensing business have put us in a position to come out of the current environment stronger than ever. We continue to build cash and have limited debt. Due to the predictability of our licensing agreements, we expect to maintain our ability to generate solid cash from operations in 2020. With a disciplined financial approach that has built capital, while investing in growth, we have the liquidity to weather any sustained weakness and are well positioned to take advantage of any uncertainty in the market both organically and inorganically. Furthermore, our historical and ongoing investments in technology R&D have helped us build a patent portfolio that is foundational to our industry and positions us well for our licensing renewals in the upcoming period. Our recent license with CXMT demonstrates that the ongoing billing and long-term relevance of our portfolio extends well beyond the length of our current agreements. Long-term, we are optimistic about the licensing opportunities in China that we don't expect significant financial benefit from this royalty-bearing agreement in the near-term. Now, let me turn to our guidance for the second 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 the period adjusted for certain differences. As you can see in the supplemental information we provided on slide 14 of our earnings deck, licensing billings closely correlates with what we have historically reported as royalty revenue under ASC 605. As Luc mentioned, we saw tailwinds in the form of increased demand in data center and infrastructure and had a fantastic first quarter. While we are optimistic about the potential for these trends to continue, we are remaining conservative in our guidance for Q2 due to the lack of visibility and uncertainty created by COVID-19 and as we continue to monitor inventory status in the industry and supply chain. With that said, under ASC 606, we expect revenue in the second quarter between $50 million and $56 million. We expect royalty revenue between $9 million and $15 million. We also expect licensing billings between $57 million and $63 million. We expect Q2 non-GAAP total operating expenses, which includes COGS to be between $62 million and $66 million. Under ASC 606 non-GAAP operating results for the second quarter are expected to be between a loss of $5 million and $15 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 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 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. We expect non-GAAP taxes to be between a benefit of $1 million and $3 million in Q2. We expect our Q2 share count to be roughly 116 million basic and diluted shares outstanding. This leads you to be between a non-GAAP loss per share of $0.03 and $0.09 for the quarter. I'd like to provide some additional context as to how we developed our guidance for the quarter. We are fortunate to have a strong base of predictable, recurring patent license agreements and our guidance reflects some of the structural step-downs we've discussed previously. In our product businesses, we continue to be actively engaged with our partners on chip design activity and have backlog that represents approximately 80% of our expected chip and silicon IP revenue for the quarter. Our Q2 guidance, therefore, reflects a combination of our structural step-downs and conservatism in an uncertain environment. We continue to manage costs carefully and invest in our R&D programs that travel and other activities are limited. While we have reasonable visibility for Q2 and are encouraged by the engagement with our partners given the uncertainty surrounding the global macroeconomic environment with COVID-19, we don't yet understand how our end markets will be impacted in the second half of this year. While we don't provide guidance beyond Q2, and demand remains robust due to the resilience of our model, even if Q3 and Q4 were 10% lower on the top-line than what we expected in January, I expect the same overall profitability for the year due to our strong performance in the first half. Let me finish with a summary on slide 11. We are proud of the excellent performance by our team and the progress we continue to make against our strategic initiatives to drive long-term profitable 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 strength in the semiconductor industry, improved our operational efficiency and profitability, generated solid cash from operations and leveraged our balance sheet to support our strategic initiatives. We continue to focus on our core markets and are well-positioned to come out of the current environment stronger than ever. Before I open up the call to Q&A, I would once again like to thank our employees, customers and partners. Everyone please stay safe and take care of yourself and your families. Your health is more important than anything what we'll discuss on our call today. With that, I'll turn the call back to our operator to bring Q&A. Could we please have our first question.

Thank you, Rahul. [Operator Instructions] Your first question comes from the line of Suji Desilva with Roth. You may now ask your question. Suji, your line is now open. You may now ask your question.

Oh sorry about that. Luc, Rahul thanks for the well wishes from you guys. And I hope the Rambus family is doing well as well. So, on the guidance, Rahul if I take your numbers and try to adjust to what I would think the non-GAAP is, I get to 1Q results actuals of $111.4 million and EPS of $0.32. Is that about where those numbers will fall out?

So Suji I think what you're doing is you're substituting licensing billings, for what we normally report as royalty revenue.

Correct.

And obviously that's not GAAP. And those aren't numbers that we can provide. But if I were to do the math then I get the same math that you did for Q1.

Okay. Just to make sure, I covered this all. The guidance seems to be leading to something closer to $101 million and $0.25. I want to make sure that also sounds reasonable.

Yeah. On the same basis, I think what you're doing is, you're replacing our guidance for royalty revenue with licensing billings. And if I were to do the same math, yes I get the same numbers.

Okay. Appreciate that, Rahul. And then on the business itself, the memory buffer, I don't know if you've guided the full year or not. If you did I missed it, what it might be in 2020. I know the visibility is lower. But, can you talk about the linearity here? Are you depending on cloud spending? It's been stronger near-term? Is it expected to continue or take a pause or digestion? Any color there, would be helpful.

Yeah, Hi Suji, this is Luc. Yeah. We had a great quarter in the first quarter for our buffer chip business. Our product revenue was $30.7 million in the first quarter, which was much higher than the same quarter a year ago. So we see continued gain in market share on our side. And we see demand going up, at least in Q1 and Q2, for server memories. And that's as you said, due to the increase in demand for work-from-home and learn-from-home environments. So we did see an uptick and increased market share on our side. So, that led us to very good results in Q1. We're very optimistic about Q2 in the numbers that, Rahul just shared with you. And in the long run, we continue to see high demand for data centers type of memory modules. Of course with the uncertainty of COVID-19, Q3 and Q4 may be a bit turbulent given the possible impact on supply chains. But we remain confident with that business going forward, for Q2 and in the long run.

Okay, Luc. Appreciate that color. And then maybe more broadly, that's one example of what's happening with COVID the remote work learn, straining the infrastructure and being something of a benefit for your business for lack of a better term. Can you talk about other qualitative examples? You talked about the cores and things like that. Just any color, anecdotally would be helpful.

I think some markets will resist better than others, to the COVID-19 crisis. Everything that has to do with, building infrastructure will be more resilient than markets in the automotive space or consumer space for example. And a lot of our IP be above and beyond our chip business, a lot of our IP actually goes into infrastructure chip development, for 5G or AI. So high-speed interface, designs with our customers continue to be very relevant. Our security business continues to be very relevant as well. And as you noticed, we announced three new products this quarter that will strengthen our position in those markets. This was 112-gig, XSR, PHY and controller HBM2 controller and 800-gig MAX SoC in the security space. So all of these markets are going to resist better than others and we do develop IP that goes into chips that serve those markets. And again, Q3, Q4 may be a bit turbulent. But in the long run both our products and our end markets are going to be more resilient to the crisis than other products and other markets.

Okay. And then one last quick question on the new China DRAM agreement, if you can provide the color. Historically with Samsung Hynix and Micron, you had to kind of go back to kind of a more flattish licensing structure then variable on average. With this new customer given the geography and the opportunity for upside in DRAM if they can gain share, did you negotiate a variable component here that would benefit you? Or did you not -- were you not able to? Or can you discuss that?

Hey, Suji, it's Rahul. As I mentioned in prepared remarks, this is a royalty-bearing agreement. So as CXMT continues to grow, then I'd expect to see our billings from CXMT continue to increase as well. As I mentioned in the prepared remarks, there's still going to be a relatively small portion of the industry on the near term. But we are very optimistic about the licensing opportunity in China over the long term. And as I mentioned earlier, what this also does is gives us a lot of confidence, because it's essentially an independent third-party validation about the strength of our licensing portfolio well beyond the existing renewals and extensions in our current contracts with the other large DRAM providers.

Absolutely. All right. Thanks. Appreciate the color, guys.

Thanks, Suji.

Thank you.

Your next question comes from the line of Sidney Ho with Deutsche Bank. You may now ask your question.

Hi. This is Jeff on for Sid. Congrats on the big results in a tough market environment. Can you talk a little bit about what the biggest headwinds you're seeing from COVID? And has there been any changes in the customer behavior?

HI, Jeff, it's Rahul. Thanks for your question. So I think from a headwind perspective, it's been interesting, because we've seen a pretty robust business across the board. As we mentioned, we reported record results both in our chip business, as well as our silicon IP business, because of the strength that we see in data center and some of the other key markets. We've continued to see a fairly robust design activity cycle, through our silicon IP business, so that's been strong as well. I think if we have seen any weakness, it's been in any of our businesses which have more of a short-term sales cycle. So you could see that in some of our silicon IP businesses in the coming quarter and I think that's reflected a bit in our guide for Q2. Does that help to answer your question?

Yes. Sounds, good. Thank you. And just as a follow-up, can you give us a ballpark of how much of your revenue is generally fixed regardless of the environment? And how much could be more variable?

So between fixed and variable, I think, one way to look at it is that, we ended the quarter with about $487 million on our balance sheet regarding the unbilled contract asset. And one way to look at it again, if you look at our press release, what we reported from a royalty revenue perspective was about $19.7 million. So that's royalties under ASC 606 where there is a performance obligation. So for example it's related to shipments. What we reported in licensing billings on the other hand was about $67.1 million, so that includes any agreement where there's no performance obligation. So if you look at the difference there between $67.1 million and $19.7 million, I don't mean it to put you through a quiz, but that difference is about $45 million. So $45 million, $47 million a quarter at least in Q1 was the difference there, which you could attribute to agreements where there's no performance obligation, where it's just billing and collecting. Now, as I mentioned in our Analyst Day in September, we had given a range of licensing billings from the $220 million to $240 million range. So about $230 million for the year. So that kind of gives you an idea of where we expected the year to come out, at least in September. And I think the other number is to also give you an idea of how much is you would call fixed versus variable. Is that helpful?

Yes. Great. Thank you very much.

You're most welcome.

Your next question comes from the line of Gary Mobley with Wells Fargo. You may now ask your question.

Hey, guys. Let me extend my congratulations on a strong start to 2020, given the circumstances. I wanted to ask about perhaps what you didn't say so far on the call and that is some reiteration of your buffer chip sales. I think that guidance midpoint previously for 2020 was $90 million and $400 million in overall revenue. Are you hesitant to, sort of, reaffirm that number or raise it higher simply, because you're worried about some of the data center guys pulling forward capacity or some inventory out there of dual in-line memory modules?

Hey, Gary. Thank you very much for your comments and it's a great question. As I mentioned, our guide for Q2 reflects a combination of some of the structural step-downs we have in our licensing agreements, as well as a bit of conservatism, just based on everything we see and read externally from a macro environment. The demand from our partners continues to be very robust. So, I think the cautiousness that you heard, when I talked about the second half is really just that, is that I think we're in an environment where you have less visibility. And as I mentioned in the prepared remarks, we do look at what the inventory looks like both in the supply chain and across the industry. And so that kind of also helps frame how we look at the second half. But let me be clear, everything that we're getting from our customers is very positive.

Okay. I wanted to touch base on the CXMT license agreement and to the extent you're willing to talk on behalf of each party involved in the license agreements. I was curious to know, whether this relates to their desire for domestic consumption for DRAM? Or if this was driven largely by their desire to move outside of the China market?

Hi, Gary, this is Luc. It's actually both. I think everyone investing in DRAM technology has so large investments to face that, they have to address the global markets. And therefore, they need to be able to address their domestic market probably first and then the global market. But the important aspect of this agreement is twofold. One is that, it's a royalty-bearing agreement. So although, we expect revenue to be low at the beginning because these technologies take time to mature and ramp in production. When it goes into production, our royalty stream is going to be growing with their revenue. And the second thing is that, it shows the strength of our patent portfolio, because the terms of this agreement extend well beyond the terms of the current agreements, we have with DRAM vendors. So strategically that's an important step for us to have that agreement with CXMT.

Okay. On the idea of patent strength, I'm curious if you could address, the topic of one of your big three patent licensees coming out for renewal this year and sort of the prospects of getting that across the goal line?

Hi. It's Rahul. I'll tell you we are very confident that, we have a renewal with Micron. I think that's coming up in the fourth quarter and we're very confident that, they'll renew for a bunch of reasons. One is that, if you look at the terms of that agreement Micron is substantially larger than they were when we signed into that agreement about five, six years ago. And so it just wouldn't make sense for them to necessarily come back to do some sort of renegotiation. And we think, it's a pretty attractive license. And then after that you would have Samsung coming up for a renewal in 2023, and then Hynix in 2024. So, we have fairly good visibility between the DRAM industry on a typical year. And of course Gary, as we've talked about sometimes there's ups and downs. But on a typical year, we got about $150 million a year from our DRAM industry. I think one thing that, if you look at is that, our patent portfolio continues to grow. I think we're now at 2,900 plus patents and applications. And that's part of our worldwide portfolio, which includes patents in multiple jurisdictions. And as you were talking to Luc about earlier, the license that we have with CXMT is actually a patent license to our worldwide portfolio not just China. So we continue to file and we have new relevant patents that continue to be issued. And I think that's important as well. But we are very confident about the future of our licensing business in the long-term.

All right. Thank you, guys. Again congrats.

Thank you, Gary.

Thank you, Gary.

Your next question comes from the line of Mark Lipacis with Jefferies. You may now ask your question.

Hi. Thanks for taking my questions. Could you review a bit on the product side like, how your supply chain is set-up? Like, what are the major centers for packaging and testing? One of the things that, we heard is that as this virus has spread from China to Malaysia and the Philippines that, there is also issues in the supply chain there. And I was wondering, if you could just give us a framework for thinking about where you guys where the major operations are centered. Have you encountered any issues you anticipate? Does your guidance anticipate any supply chain disruptions on the product side? That's the first question. I had a follow-up.

Yeah. Hi, Mark, this is Luc. That's a great question. As we said earlier, we had a record quarter in Q1. One of the reasons we had a record quarter is that, we could continue to shape in high volumes and upsides to our customers. And one of the reasons is that our supply chain has been quite resilient. We -- our supply chain is mainly located in Taiwan and Korea. So all of the issues that were impacting Malaysia and Philippines we've been kind of immune to those, and that allowed us to continue to ship without any issues. And as over the last four quarters, we continue to gain market share. We've also built a resilient supply chain by building some strategic buffer of stock, if you wish, in critical places of our supply chain so that we could serve the upsurge of demand, which has happened during this crisis. So again, I think our supply chain is based in countries that have been very literally impacted Korea and Taiwan. And we had built some strategic inventory across the supply chain to deal with upsurge in demand. So that put us in a very strong position for Q1 and for Q2 as well.

That's very helpful. So, the other -- the second question I had was, Luc you used the expression potential for turbulence in the second half of the year. And I think everybody is extremely empathetic to that idea. Sometimes the turbulence is a broad expression. It could be issues on the demand side or on the supply side. Is there -- when you talk about turbulence, is there also embedded in that an idea that there's a potential that because demand was so high that there may have been double ordering or pulling orders ahead into the first half of the year from the second half of the year? Is there any way that you guys can determine that if you even suspected that that was the case?

That's a great question, Mark. I think when I talk about turbulence, let me explain what I meant. I think the whole supply chain ordered a little more than they would usually do as an insurance policy, because supply chains are very complex and anything that breaks in the supply chain can impact the rest of the supply chain. And it's not necessarily the chips themselves or the materials that goes on the modules. It can be a gas that a factory needs to have to manufacture their products. I think the whole supply chain inbound and outbound have been a bit prudent and have ordered a little more than they would usually do. But we don't see situations, at this point in time, where we see double bookings or overhauling of chips. That's not the case for the time being. What we see is a combination of higher demand in the short run, because of the work-from-home and learn-from-home environment. And at the same time, the whole supply chain taking a kind of an insurance policy by building a little more than they would usually do in order to protect themselves against potential incidents in the supply chain. And that's why Rahul was talking about Q3, Q4 saying that we are optimistic that, at the same time, we are prudent about what we guide. Rahul, you want to add something to that?

That sounds -- yes.

Okay. That's great. May I ask just one last follow-up?

Of course, sure.

Yes. So last week the Department of Commerce announced some additional restrictions on sales to China Russia and Venezuela I believe associated with military end markets applications and having to do with civilian exemptions. Can you share -- I assume that you guys had a chance to review that at least on a preliminary basis. Can you share with us your views on how that might impact Rambus?

Yes. We continue to monitor those new rules and restrictions very, very closely and make sure that we comply to them. Our business is not exposed to those as we understand today, but we continue to monitor the situation. In the case of CXMT this is a kind of opposite situation where our DRAM partner in China is actually paying us for patents not for technology. So they're paying us for the right to actually develop their own products including our ideas. So we're not exporting anything. We're just giving them the right to use inventions that we invented ourselves.

Got you. That’s very helpful. Thank you very much.

Thank you, Mark.

[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.

Thank you. Before we end our call today, I'd like to give a special thank you to everyone on the global Rambus team for their continued dedication during this challenging and unprecedented time. Our focus on the ongoing well-being of our employees, coordination with our partners to ensure the integrity of our supply chain and commitment to customers have been and will continue to be critical to our success. Thank you to everyone who has joined us today for your continued interest and time. We hope each one of you stays safe and healthy and look forward to speaking with you again soon. Have a great day.

Thank you. This now concludes today's conference. You may now disconnect.