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Edited Transcript of RMBS earnings conference call or presentation 24-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Rambus Inc Earnings Call

Los Altos Jun 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Rambus Inc earnings conference call or presentation Monday, April 24, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Rahul Mathur

Rambus Inc. - CFO and SVP of Finance

* Ronald D. Black

Rambus Inc. - CEO, President and Director

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Conference Call Participants

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* Atif Malik

Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment and Specialty Semiconductor Analyst

* Gary Wade Mobley

The Benchmark Company, LLC, Research Division - Research Analyst

* Matthew S. Robison

Wunderlich Securities Inc., Research Division - Analyst

* Paul Coster

JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies

* Sujeeva Desilva

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Rambus Q1 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to CFO, Rahul Mathur. You may begin.

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Rahul Mathur, Rambus Inc. - CFO and SVP of Finance [2]

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Thank you, and welcome to the Rambus first quarter 2017 results conference call. I'm Rahul Mathur, CFO. And on the call with me today is Dr. Ron Black, our President and CEO. The press release for the results that we will be discussing today have been furnished to the SEC on Form 8-K. A replay of this call will be available for the next week at (855) 859-2056. You can hear the replay by dialing the toll-free number and then entering ID number 99301279 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 p.m. Pacific Time.

In an effort to provide greater clarity in the financials, we're using both GAAP and non-GAAP pro forma financial presentations in both our press release and also on this call. Our discussion today will contain certain forward-looking statements regarding our financial guidance for future periods, including Q2 2017 prospects, product strategies, timing of expected product launches, demand for existing and newly acquired technologies, potential benefits of our recent acquisitions and the growth opportunities of the various markets we serve, among other things.

These statements are subject to risks and uncertainties that are discussed during this call and may be more fully described in the documents we file with the SEC, including our 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may differ materially from our actual results, and we're under no obligation to update these statements.

Further, as mentioned, we will discuss non-GAAP financial results today and have posted on our website a reconciliation of these non-GAAP financials to the most directly comparable GAAP measures in our press release and our slide presentation. You can see 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: Ron will start with an overview of the business; I will discuss our financial results, including the guidance we issued in today's press release; and then we will end with Q&A.

I'll now turn the call over to Ron to provide an overview of the quarter. Ron?

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Ronald D. Black, Rambus Inc. - CEO, President and Director [3]

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Thanks, Rahul, and good afternoon, everyone. The first quarter of the year was another good one for us and I'm pleased with the progress we're making across all of our businesses. Revenues were $97.4 million, up 34% year-over-year. Our memory and security businesses are doing well, and our revenue was at the high end of the guidance we provided. Rahul will go through the financial details in a few minutes, but we are off to a good start for the year and our acquisitions continue to execute to our expectations. We made substantial progress in our Memory and Interfaces Division this past quarter. Our licensing program remains robust, and we continue to extend our portfolio beyond the DRAM market, including a signed agreement with Western Digital to utilize both our memory and security technologies with a particular emphasis on Flash memories.

Expanding our IP core solutions, we introduced our High Bandwidth Memory PHY solution, targeting networking and data center applications and designed for system that require low latency and high bandwidth memory. This solution, which is available on GLOBALFOUNDRIES 14-nanometer FinFET process technology, is fully compliant with the JEDEC HBM2 standard and meets the needs of today's most data-intensive tasks by delivering data rates of up to 2,000 megabits per second per data pin and a total bandwidth of 256 gigabits per second. Just as a reference, that is greater than 10x higher bandwidth than existing DDRM, (inaudible) solution shipping today.

On the SerDes side, we were pleased to be a key partner in a multi-company collaboration, where Samsung taped out a 14-nanometer network processor utilizing its 14LPP process technology and our high-speed 28 gig SerDes solution. This was an important collaboration and is the first product to come from Samsung's I-Cube solution that they are expecting to be adopted into applications, such as computing, server and artificial intelligence in the near future. Also during the quarter, we introduced the availability of our 56 gig SerDes PHY on cutting-edge FinFET process technology and partnered with Samsung to develop it on their 10-nanometer LPP process node. Our server DIMM chipset is on track, and we are shipping product to key customers in the data center.

And in our Emerging Solutions Division, we continue our project with Microsoft to help define memory system requirements for quantum computing, enhance memory capabilities, reducing energy consumption and improving overall system performance utilizing memory at cryogenic temperatures. We are excited about the progress we're making on this program with Microsoft as we have expanded our collaboration and started development of a prototype system to optimize memory performance at cryogenic temperatures.

Our investment in these technology initiatives will help provide the foundation for long-term growth. Turning now to our Security Division, we were pleased with our continued momentum as Q1 was an excellent quarter with the launch of our Unified Payment Platform at Mobile World Congress in Barcelona. This platform enhances payment security and reduces costs for retailers by easily integrating payment cards, gift cards, loyalty points and coupons into a single mobile wallet and shopping app for a seamless shopping experience for consumers. What is so compelling about the solution is that it securely converts and manages digital value to enable consumers to pay with credit, points and coupons in a single transaction and transform in that manner how they shop and pay. By using tokenization, the risk of card on file fraud is reduced by replacing key account information with temporary data. As you can see, we have launched a comprehensive platform and one that we're very excited about and we'll be sharing updates on throughout the year.

In closing, we are making good progress across all of our businesses, and our acquisitions continue to execute to our expectations. We also have exciting programs that allow us to leverage our expertise in memory and signaling while expanding our security offerings into consumer-facing and consumer-driven interactions. The programs we have in development are poised for growth in the future, while today we focus on executing to plan.

With that, I'll turn the call to Rahul to walk everyone through the quarterly financial results. Rahul?

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Rahul Mathur, Rambus Inc. - CFO and SVP of Finance [4]

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Thanks, Ron. Before I go through our financial results, I'd like to remind everyone that for this call and for internal assessment, we use non-GAAP or pro forma numbers to discuss our operating results and forward-looking projections. We believe these numbers are more indicative of our performances since they exclude certain discrete items, such as stock-based compensation, amortization, impairment and restructuring charges, as we believe that these expenses or charges are noncash or are not indicative of long-term performance. As noted earlier, the reconciliation to our GAAP financials is available in our press release and in our earnings presentation and posted on our IR website.

And with that, I'd like to turn to our financial results for the quarter. Let me start with some highlights on Slide 6. Revenue grew very nicely 34% year-over-year, another proof point that our acquisitions continue to execute to our expectations. We delivered flat quarter-over-quarter revenue, which is positive considering our historically seasonal decrease in the first quarter. We continue to leverage our high margin historic businesses to fuel growth in adjacent areas, where we have strong technical and market expertise with a focus on memory and security. We have a solid quarter, and our Q1 revenue and EPS performance shows the continued execution on our key initiatives. We also continue to make progress delivering profitable growth. While we achieved another quarter of disciplined cost management without sacrificing investment in our growth initiatives, we delivered pro forma EPS on the high end of our guidance.

Let me talk you through some of the revenue details on Slide 7. Revenue for the first quarter was $97.4 million at the high end of guidance we provided of $93 million to $98 million. Our strong revenue performance was due to strength in our licensing program, execution by our newly acquired businesses and partly as a result of an existing partner choosing to accelerate payment into the last day of the quarter that we had anticipated to come in Q2.

Going into additional detail, our memory and interface revenue was $70.6 million, security was $23.2 million and our lighting and display technology revenue was $3.6 million. Quarter-over-quarter, these numbers represent an increase of 3% for memory, a flat security business and the $2.1 million seasonal decline we anticipated in our lighting business due to timing of royalty payments. Year-over-year, MID revenue grew 32% and our Security Division grew by 65%. The increase in revenue from our Memory and Security Divisions was driven by our continued execution on our acquisitions and our strong licensing program.

As we look to 2017, we remain on track to meet our internal revenue targets for each of our acquisitions.

Now let me walk you through our pro forma income statement on Slide 8. Along with our solid revenue performance in Q1, we continue to actively manage our expenses. Cost of revenue plus operating expenses, or what we refer to as total operating expenses, for the quarter came in at $66.8 million, at the low end of our expected range, without compromising our ability to invest in programs that we expect to drive long-term growth. We ended the quarter with headcount of 784, roughly flat with 767 in the previous quarter, and up from 626 a year ago. Again, the increase in headcount is related to the new employees we welcomed to Rambus through our acquisitions in 2016 to support our long-term growth.

Revenue and operating expenses led to operating income of $30.6 million, again at the high end of our guidance of $23 million to $31 million and an increase of $0.5 million quarter-over-quarter.

After adjusting for noncash interest expense on our convertible debt, pro forma interest and other expenses for the first quarter were $1.3 million even with Q4. Using a flat rate of 35% for pro forma pretax income, net income for the quarter was $19.0 million or $0.17 a share as compared to $18.7 million last quarter.

Now let me turn to the balance sheet details on Slide 9. Overall cash, defined as cash, cash equivalents and marketable securities, was $187.6 million, an increase of $15.4 million from the previous quarter. During the quarter, we generated approximately $18 million in cash from operations. First quarter CapEx was $1.9 million and depreciation was $3.4 million. In 2017, we expect to make additional capital investments to help fuel our growth, specifically at some of our international facilities and for our chip programs. As a result, I expect we'll have roughly $12 million of CapEx for the year with another $5 million-or-so in the second quarter. Correspondingly, I expect depreciation of roughly $3.5 million per quarter. As we expected, we saw solid operating cash flow in the first quarter and our ability to generate cash positions us nicely in the current industry environment. Overall, we believe we have a strong balance sheet with limited debt, and we expect to continue to generate strong cash from operations in the future.

Now let me turn to our guidance for the second quarter on Slide 10. As a reminder, our forward-looking guidance reflects our best estimates at this point of time and our actual results could differ materially from what I'm about to review. Also, given that a substantial portion of our revenue is related to licensing agreements, we don't exhibit the same seasonality as other semiconductor businesses that have a larger mix of product revenue.

As a rule of thumb to use as you model our quarters, looking back over the last several years, on average, we find Q1 down 2% from Q4, Q2 down another 5% from Q1, Q3 up 5% on Q2 and then Q4 up 2% over Q3. We expect revenue in the second quarter between $90 million and $96 million, which represents our typical seasonality. As I mentioned earlier, our guidance was impacted as a result of an existing partner choosing to accelerate payments into Q1 we had anticipated in Q2. We expect Q2 non-GAAP total operating expenses, which includes COGS to be between $67 million and $71 million. Over the course of the year, we expect total operating expenses to stay roughly flat, as a reduction in our functional group operating expenses will be offset by higher COGS related to our expected revenue growth.

Non-GAAP operating income for the second quarter is expected to be between $19 million and $29 million. We expect roughly $1 million in non-GAAP interest and other income and expense. And based on a 35% tax rate, we expect between $6 million and $10 million in taxes. We expect our Q2 share count to be roughly 115 million fully diluted shares outstanding, which includes roughly 1 million shares of dilution related to the $138 million convertible debt that we have due in the third quarter of 2018. This leads you to between $0.10 and $0.16 of non-GAAP earnings per share for the quarter.

Looking ahead to the remainder of 2017, we're very focused on ramping our acquisitions that they continue to deliver to our expectations as well as maintaining our long-term focus on profitable growth. While we will no longer be issuing annual guidance, as we look to forecast from our sell-side analysts, we continue to be comfortable with their revenue and earnings estimates in aggregate for the subsequent quarters and full year of 2017.

Let me finish with a summary on Slide 11. As I look in -- at the quarter, we are proud of the solid execution by our team and the progress we continue to make on our financial and business initiatives. Our strategy remains unchanged. We continue to execute well and are growing profitably through strategic acquisitions and execution on key programs. We have a large predictable high-margin revenue base, and we have a strong balance sheet to support our strategic initiatives.

With that, I'll turn the call back to our operator to begin Q&A. Could we please have our first question?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Suji Desilva with Roth Capital.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [2]

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In terms of the second half, the visibility you have here, can you talk about what some of the key programs or products give you -- are that give you visibility into the statements about being comfortable with consensus?

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Ronald D. Black, Rambus Inc. - CEO, President and Director [3]

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Yes. Sure, Suji. I'll give a high-level one and then Rahul could chime in and add some. I think it's the same discussion that we've been having for really the last several quarters. As you know, the base business, we're very lucky to have, is exceedingly profitable, really solid and we're continuing to close licensing agreements most notably in new spaces, which is great. We had Xilinx before. And now, we just did Western Digital. So that's still solid, but that base is not a fastly growing business. And the growth areas are really around the acquisitions that we had. So we're looking kind of half of the expected growth to be on the payment side and ticketing and the other half to be on the buffer chip and everything just keeps on tracking. Rahul, do you want to add anything?

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Rahul Mathur, Rambus Inc. - CFO and SVP of Finance [4]

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No. I think what Ron said is exactly right, is that we have this very profitable foundation from that traditional licensing business. And with the recent announcements, particularly the ones that Ron mentioned, we've been able to expand upon that. The challenge that we have though is that our licensing agreements are scattered over time. So we're usually in a constant state of working with our customers for the next renewal cycle and that's what gives some of the fluidity in terms of the course of the year. So even though we don't have any other significant DRAM renewals up this year, the timing of these renewals and the new partnerships in our licensing business can be predictable to -- can be difficult to predict and that's really what gives us some variability over the course of the year. However, if you look at our engagements, because we've been able to broaden our engagements beyond just the traditional DRAM players as well as execute in terms of these acquisitions, that's what gives us comfort that we have what we need in place to hit our numbers for the rest of the year and beyond.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [5]

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Okay, great. And then a question on the Western Digital Flash arrangement. I'm just trying to understand whether the Flash memory opportunity is incremental for you guys or not, on the one hand? The people who sell Flash also sell DRAM. You licensed across the DRAM side. And then on the other hand, it's obviously a different product category. So maybe you can help me understand the incremental market opportunity in Flash, if that's something you can articulate?

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Ronald D. Black, Rambus Inc. - CEO, President and Director [6]

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Yes. If you go back to the DRAM agreements that we have, they are broad-based agreements, not all on the security side, but on the memory side. So there is really little incremental benefit from the existing DRAM providers until the renewals, but that is 2019, 2022, and 2024 or something, so it's quite a ways away.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [7]

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Okay, great. And then my last question is on the payment platform you showcased in Barcelona, I'm just wondering how the initial business model plays out in your financials as you start to gain traction with that payment platform initially and then over time?

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Ronald D. Black, Rambus Inc. - CEO, President and Director [8]

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Sure. So at a high level, just -- and to manage expectations, understand that the way these things roll out is you first do pilots. So we're working on pilots for the second half, then lead into tenders. So it's a little more lumpy, which then lead into licensing agreements. What is a little bit different about this platform as you move -- and we still partner with the banks, it's one part of the banks acquiring side of it that service the retail space. So as we go to market with this, the bigger retailers would be straight licensing just like we do today. The smaller players would be in a SaaS model. So it'd be more subscription based. So you'd look at it as incremental and we think this will be attractive over time, because it will show a more steady growth and be able to be more predictable long time as opposed to big licensing deals for millions and millions of dollars that come and go over time.

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Operator [9]

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And our next question comes from Matt Robison with Wunderlich.

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Matthew S. Robison, Wunderlich Securities Inc., Research Division - Analyst [10]

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Yes, I just wanted to get your perspective on announcement made today with Micron and Microsoft concerning their -- Authenta -- Micron's Authenta root-of-trust technology notice. Wondering if you're involved with that? Or how you see that industry development in terms of what you're trying to accomplish with root-of-trust?

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Ronald D. Black, Rambus Inc. - CEO, President and Director [11]

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Yes. Matt, it's Ron. Thanks for asking the question and actually sending the e-mail. We hadn't seen it until you sent it. So no, that's not us. We're not involved with it, but we are extremely excited about this, because this is what we've been saying is a requirement for the industry for long term. And as you know, with our CryptoManager solution, it provisions things just like this. So we look at this as a great opportunity, we look at it as the industry is going exactly down the path that we wanted. It's new opportunities for DPA licensing technology, so it's super.

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Matthew S. Robison, Wunderlich Securities Inc., Research Division - Analyst [12]

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So there -- well, (inaudible) appears to be competitive, so do you see yourself participating with the other -- with their peers as they look to be competitive with this? Or do you see yourself also potentially upgrading this with DPA?

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Ronald D. Black, Rambus Inc. - CEO, President and Director [13]

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From the release and what I saw, I wouldn't say it was competitive. I don't really know the details of it. But I didn't get the feeling it was competitive. It was more complementary. If you think about our offerings and what we've been describing really for the last 3 years, really at least solid 2 when we talked about CryptoManager is that the value in things shifts to provisioning that security is needed, that hardware-based security, hardware root-of-trust. In fact, I think that may have even been our word that the industry has been picking up on -- seems to be translating. Is the only way to guarantee right that you can really manage and securely manage keys. So as a cryptography company, which is little more specific than just general security, we think that this is perfect. So I don't see it as at all as anything other than exactly complementary. And hopefully, it's going to drive other industries and segments to look at this. So we're hoping that this is going to gain traction, and we are seeing a lot of general interest in our CryptoManager solution for IoT.

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Operator [14]

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And our next question comes from Gary Mobley with Benchmark.

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Gary Wade Mobley, The Benchmark Company, LLC, Research Division - Research Analyst [15]

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Realizing that 2 pillars of growth for revenue growth that is relate to the DDR4 buffer chip and subsequent product cycles and as well the SCS side of the business for security. I wanted to ask where you guys stand and get an update where you guys stand with respect to the DDR4 buffer chip and getting traction with yearly customer as we look into the second half of the year?

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Ronald D. Black, Rambus Inc. - CEO, President and Director [16]

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So today, I think, we've spoken about this before, we're shipping in Haswell and Broadwell and we designed in for Skylake and introducing parts for Ice Lake. I think we're in very good position and feel comfortable also, particularly on DDR5. So that's kind of the status. There's really been no update from where it's been before. We have -- we're still learning the course of the seasonality and more of the details about the business, because it's our new entrant. But we still felt confident that we have more traction in the second half than we do in the first half and things are just kind of moving along.

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Gary Wade Mobley, The Benchmark Company, LLC, Research Division - Research Analyst [17]

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Okay. Correct me if I'm wrong, but I believe you have license renewals coming up with a couple of your SoC licensees, specifically NVIDIA, MediaTek license renewals this year that is, can you confirm that? And do you see any speed bumps associated with those renewals?

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Ronald D. Black, Rambus Inc. - CEO, President and Director [18]

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Yes. I think it was in press releases. So I don't know the specific timing of those, but we have them periodically throughout the year. This was what Rahul was referencing in one of the previous questions. We don't have any of the big renewals with the DRAM manufacturers, but we have new business that we're working on and renewals throughout this year and next. It's kind of the typical cycle.

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Gary Wade Mobley, The Benchmark Company, LLC, Research Division - Research Analyst [19]

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Okay. And Rahul, you mentioned -- well, I guess, I can see from the balance sheet that you had about a $5 million sequential increase in deferred revenue and I know the total dollar amount is relatively small compared to your quarterly revenue, but I think your deferred revenues are at an all-time high. Could you speak to what's your driving that in terms of customer engagements and whatnot?

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Rahul Mathur, Rambus Inc. - CFO and SVP of Finance [20]

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Gary, it really is just the timing of payments and the contract that work in terms of our customer basis. Because as you know, in different parts of our businesses, we structure those contracts differently in terms of how they come in. So in some cases, we'll have customers that pay us upfront and then we'll recognize revenue ratably over a period of time or the period of the contract. So it's interesting because I've looked at multiple companies and tried to build the intuition on how deferred revenue works and it's just always been a challenge for me based on the timing of cycles. But as you said earlier, I think the variance quarter-over-quarter wasn't necessarily material, it was 300,000 more I believe, but it's really again just related to the timing of agreements and contracts.

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Operator [21]

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Our next question comes from Paul Coster with JPMorgan.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [22]

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First off, can you just confirm that the guidance that you've issued for the year doesn't really include any contribution from the emerging solutions? And then can you give us quick update on your thoughts around realizing revenue from those initiatives, especially those related to data center and memory?

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Rahul Mathur, Rambus Inc. - CFO and SVP of Finance [23]

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Sure, Paul. Why don't I take the first part of that question and I'll ask Ron to comment on the second. So we do invest in long-term growth opportunities and most of those investments are actually in that emerging solutions group. Now what I look at is for the broad number of programs that we invest in, is do we have partners who are investing alongside with us? Now in many cases (inaudible), we still have an engineering team and then -- Paul, you still -- okay, in many, what this means is that we'll have an engineering team and then the partner will have an engineering team as well and we're working together. In other cases, what it means is that we'll have an engineering team and then sometimes we may get some NRE from some of our partners for the work that we're doing. So not every initiative is the same in terms of the financials, but there is a small amount of NRE that we do get as part of these initiatives. And also from me, that's what gives me faith and confidence that we are working with our industry in terms of these long-term growth initiatives, and we actually meet our investments based on what our partners are doing as well. So there is some NRE that's associated with some of these activities in ESP, but truthfully there is also NRE in our other businesses as well. And it's just a validation that our customers in the industry are working alongside with us in terms of where we're headed. I'll ask Ron to answer your -- the second half of your question.

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Ronald D. Black, Rambus Inc. - CEO, President and Director [24]

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Can you repeat the second half of the question, again?

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [25]

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So Ron, I'm just wondering if in addition to -- well, it's good to hear that there is some NRE revenue coming through. I don't mention it's particularly material, but, of course, we're all very interested in potential payback from these really big R&D initiatives and what's the latest and what's your view of the timeline to realizing those paybacks?

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Ronald D. Black, Rambus Inc. - CEO, President and Director [26]

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So each of them is different. So it depends on how broadly if there is some specific one. With respect to Microsoft, this is obviously a highly speculative program. They are investing heavily in doing it. And I think that the earliest we would see something is around 2020. Now we plan on building this. So what we said in the prepared remarks, I think, is the next phase is prototyping. We've done some work already taking it down in temperature, so we're kind of going through the plan. Laura and team are executing exactly on to plan, so it's very exciting. But it's a high-risk program. So 2020 would be it. Now what's so great about this is Microsoft is just -- I couldn't say a super partner. I went to visit some of them in Redmond and showed all the things that Rambus are doing there. They're very influential. They're really thinking through strategically where the data center is going to go, but we like it because we're co-investing, as you say, as Rahul said, and really partnering with them on this. And we're hoping that it's going to turn out to be a product. But obviously, it's highly speculative. It could be game changing or it could run into problems and be nothing. Was there any other of the programs that you...?

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [27]

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Yes. So perhaps you can give us an upgrade -- update on the Intel initiative as well?

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Ronald D. Black, Rambus Inc. - CEO, President and Director [28]

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So the Intel initiative, I think, is more just collaboration on DDR5. As we've said, we think we're in a very good position on that. Again, Intel is a great partner. They're working very closely with us. We're working very closely with them. We're expanding our focus. We're on track for all of the devices that we're trying to tape out and take to market. So it's going well. Was there another one?

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [29]

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And resistive RAM, but I mean there's no -- at least all seem pretty...

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Ronald D. Black, Rambus Inc. - CEO, President and Director [30]

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DDR5 is the same time frame, I think it's 2019 is where it starts shipments. It could be a little early. It could be a little later and then it ramps from there. The importance of being in this has been just by way of history. If you recall, Inphi led in DDR3 and got the lion's share of it. They had an issue and missed on part of DDR4, so that put them behind. Obviously, we entered the market much after the DDR4 had already initiated, because we were thinking about it more as a long-term play as we saw the attach rates go up. By combining the teams, I think we're in a position to gain share on DDR4. But to win big in this and achieve our long-term objectives is we need to be first with DDR5. So the game and the revenue for 2019, 2020, 2021 is how good we execute this year and next on DDR5, even though the revenue is not there. It's just the nature of the beast. Now the good news is, as we power into that, we don't need to add expenses, as Rahul and I have said for the last couple of years -- well, (inaudible) last couple of years for a shorter period of time as you came on. So this should -- is where you see the real leverage and I felt it and Rahul has said many times, this is a good margin business. This is not the struggling 30% gross margin chiclet-type business. It's solid. So we're still optimistic, cautiously focused on execution, but it's the path to lead to significantly higher stock prices over the next couple of years, and that's the good news. We'll know hopefully earlier that we're in the pole position.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [31]

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Okay. And then finally resistive RAM.

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Ronald D. Black, Rambus Inc. - CEO, President and Director [32]

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Resistive RAM, we continue to partnership in China. We have increased our sales team in China. We're gaining a lot of interest by a variety of groups. There's activity, but I can't announce anything. I think we've spoken about a variety of different test chips -- they're out. They're functioning. We're looking through the right segment to go in. The focus initially is not on standalone chips, but more on embedded solutions, things like smart cards, where performance matters and cost matters. And so we think it could be getting primed for that. We can see long-term embedded applications into automotive and IoT. But at this point, the technology, I don't believe, really makes it from a temperature spectrum. But as we keep working with our fab partner there, we'll keep tweaking the process with them, tweaking the design and hopefully be able to look at this technology being broadly licensed. If not us doing some selective designs ourself.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [33]

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Okay. I've got one last question for Rahul. Sorry about all these questions. You talked of strength in licensing, can you give us some sense of what the organic sort of year-on-year comps look like, to the extent you're able to do so?

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Rahul Mathur, Rambus Inc. - CFO and SVP of Finance [34]

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Sure. Sure, Paul, and never a bother. Happy to have as much of a dialogue as you'd like. When I look at the organic versus inorganic and we've tried to give you all a little more information here. I think it's on Slide 16 of our earnings deck. What you see is that, we have a base business, where that base business is roughly kind of $290 million to $300 million. And that base business I consider is made up of our licensing business, our cores and our lighting business. And what we've seen is, if you look at our numbers for 2016 and if you look at the estimates for 2017 is we expect the growth off that base business to come from our recent acquisitions and the other leading-edge programs in the long term, many of the ones that you and Ron were just talking about. So as Ron and I said earlier, those acquisitions are tracking to our plan and we're seeing our company's growth. And honestly, I look at that financial performance that we printed last quarter, this quarter and the guidance that we've given for Q2 is a validation of that M&A strategy. So one of the benefits we have then is we're leveraging this high-margin historic base business that fuel growth in adjacent areas, where we have that strong technical and market expertise, particularly in these focus areas of memory and security.

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Operator [35]

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Our next question comes from Atif Malik with Citigroup.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment and Specialty Semiconductor Analyst [36]

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Ron, we saw quite a few announcements with Samsung and Microsoft and HBM, can you just talk about a little bit top level what's going on in data centers and networking, which is kind of driving accelerated kind of partnerships with these guys?

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Ronald D. Black, Rambus Inc. - CEO, President and Director [37]

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Yes, sure. There's a few different things. Most of the focus is on our expanded portfolio of both technologies and technology nodes and data rates on the SerDes. So we introduced our 56 gig, which has gone spectacularly well. We've had a lot of customer interest in this. As you know, there is not a lot of providers of this technology, that is why it was important to do kind of classic consolidation with the Semtech-Snowbush team. We're working together, I'd say, rather well. By expanding the number of designs, the number of designers, combining the revenue, we're just kind of hitting our milestones. So in general, as you look at going in 100 meg increments, 56 gig is the natural node. But we're also selling, as we referenced in this, the 28 gig in a variety of different -- or 25 gig in special depending on how they're actually using it. So we're really trying to do off-the-shelf designs using existing product. We've gotten them in a variety of places, I think on the last call I mentioned in China. So we're even getting traction there and then really expanding and trying to get all of the new 56 gig designs with the FinFET technology which is really challenging to do.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment and Specialty Semiconductor Analyst [38]

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Thanks. And for Rahul, thanks a lot for providing the seasonality comments on 4 quarters, that helps out on the modeling. I'm just trying to better understand what drives the seasonality down in Q2. Is this in the memory business? Or is it in the security business? And which segment drives the seasonal downtick in Q2?

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Rahul Mathur, Rambus Inc. - CFO and SVP of Finance [39]

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What really drives it dramatically, is just the timing of the license agreements and the renewals? So I would say just from a segment perspective it's pretty much aligned with the relative revenue contribution of the segments. But what happens is that, just in terms of the historical timing on when have these contracts have been signed, many of them end up being signed in the Q2 time frame. And honestly, I think Ron and I and the rest of the management team are very clear on this that we have absolutely no desire whatsoever to sacrifice any long-term value for our company in order to meet a short-term quarterly revenue target. And that's why you see a slightly wider range in terms of Q2. But really that timing of those agreements is really what drives that variability. And I think, largely, you'll see it on the memory side, but you'll see some of it on the security side as well.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment and Specialty Semiconductor Analyst [40]

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Okay. One last question on capital allocation. In terms of the use of cash from here, M&A is still the top priority or share repurchases is up with M&A, can you just help us out?

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Rahul Mathur, Rambus Inc. - CFO and SVP of Finance [41]

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So what I'll tell you from a use of cash perspective is that we absolutely explore all different kinds of opportunities. We're exploring all sorts of different types of M&A right now. But I'd tell you there's nothing eminent. We do see a lot of conversations and opportunities with all the industry consolidations that's on the table and that means not just companies, but also parts of companies may come -- become available. And so we're always looking for opportunities that leverage our existing core markets or technology. Now with that said, as you mentioned, we have executed on buybacks in the past and would consider one in the future. So in the recent past, we viewed that capital to fuel the M&A strategy. But I do expect we'll continue to generate strong cash flows and it positions us well, because we'll use our existing operating cash flow or (inaudible) either for incremental M&A or return it to shareholders in the form of a buyback. But honestly, what we look at, Atif, is just the most effective and efficient ways to deliver shareholder value back to our investors.

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Operator [42]

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And I'm showing no further questions. I would now like to turn call back to Dr. Ron Black for any further remarks.

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Ronald D. Black, Rambus Inc. - CEO, President and Director [43]

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Thank you, operator. As you can see, we are well aligned with the needs of industry and have the right programs in place to capitalize on the trends driving technology choices. Thank you for continued interest and time. Have a nice day.

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Operator [44]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Everyone, have a great day.