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Edited Transcript of RMBS.OQ earnings conference call or presentation 2-Nov-20 10:00pm GMT

·45 min read

Q3 2020 Rambus Inc Earnings Call Los Altos Nov 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Rambus Inc earnings conference call or presentation Monday, November 2, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Luc Seraphin Rambus Inc. - CEO, President & Director * Rahul Mathur Rambus Inc. - Senior VP of Finance & CFO ================================================================================ Conference Call Participants ================================================================================ * Gary Wade Mobley Wells Fargo Securities, LLC, Research Division - Senior Analyst * Jeffrey A. Rand Deutsche Bank AG, Research Division - Research Associate * John William Pitzer Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head * Mark John Lipacis Jefferies LLC, Research Division - MD & Senior Equity Research Analyst * Suji Desilva ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the Rambus Third Quarter and Fiscal Year 2020 Earnings Conference Call. (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. -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [2] -------------------------------------------------------------------------------- Thank you, operator, and welcome to the Rambus Third 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 2281104 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 a 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 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 our 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? -------------------------------------------------------------------------------- Luc Seraphin, Rambus Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thanks, Rahul, and good afternoon, everyone. The company had another very solid performance this quarter as our excellent product growth continues. We delivered on revenue of $56.9 million and exceeded expectations for profitability with continued great discipline on the bottom line. It was another very strong quarter of cash generation with $44.1 million in cash from operations. This brings the total for the year to over $143 million, which already significantly exceeds our total for the entirety of last year. As our proven track record of cash generation and progress on strategic product initiatives continue, we are poised for a healthy top line growth in 2021. Data Center remains the key growth market across all of our businesses. Cloud demand skyrocketed in the first half, driven by the significant increase in online activity from corporations and consumers, and has returned to more normal growth rates in the third quarter. We continued to see sustained investment from our customers in products and solutions that will help improve the performance and security of the global data infrastructure. Memory and Interface Chips delivered a solid quarter with quarterly revenue up 39% year-over-year. We are on-track to have another record year with over 50% growth in our product business versus 2019. While we continue to gain DDR4 market share, the third quarter saw the beginning of the short-term Data Center inventory digestion we cautioned about in previous calls. We expect the bulk of these adjustments to occur in the fourth quarter and a return to normal consumption levels early next year. We still anticipate to end 2020 significantly above the full-year guidance we provided in 2019. Looking forward to 2021, we have a larger qualification footprint in the upcoming DDR4 server platform transition, which should drive further market share gains. For DDR5, we are in a leading position for qualification with our memory customers and CPU partners. DRAM suppliers are now sampling DDR5 modules with our chips to system companies. Looking forward, we are investing in the development of additional chips for DDR5 platforms as well as new architectures and IP for novel memory subsystems. This will further strengthen our memory leadership position in the years to come. Turning to Silicon IP. We had a strong quarter with increasing design win momentum across Data Center, 5G and edge. This was supported by excellent execution from last year's acquisitions, with the former Verimatrix and Northwest Logic teams both hitting their targeted run rates for revenue. I'm delighted with this performance as the successful integration of these teams gives us confidence in our ability to create greater value from future acquisitions. Our solutions continue to lead the industry, with the latest example being our Silicon demonstration of the world's fastest HBM2E memory interface, running at up to 4 gigabit per second. At this speed, our comprehensive solution delivers the highest bandwidth for the most demanding Data Center applications, including AI, machine learning training and high-end graphics. Lastly, we are very pleased Micron extended their license agreement for an additional 4 years under the existing financial terms. This extends their license agreement beyond the next renewal dates for Samsung and SK Hynix, and is a great testament to the ongoing strength and relevance of our patent portfolio as well as our growing partnership with Micron. With this extension, we have solidified a sustained foundation of cash generation from our licensing program that allows us to return value to our stockholders and build our growing product businesses. With that, this afternoon, we announced a new stock repurchase program, which Rahul will discuss in more detail later on in the call. The program demonstrates the Board's confidence in our strategic direction and underscores our ongoing commitment to investors. Strong cash generation also gives us the flexibility to invest and expand our technology road map to address tomorrow's data-centric applications. Through our ongoing focus on execution, we have multiple revenue streams across the company. And with our structural step-downs behind us after Q4, we will be well positioned for significant absolute growth in 2021. With that, I'll turn the call to Rahul to discuss the quarterly financial results. Rahul? -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [4] -------------------------------------------------------------------------------- Thanks, Luc. I'd like to begin with our financial results for the third quarter. Let me start with some highlights on Slide 5. As Luc mentioned, we delivered a solid quarter. We delivered financial results in line with our revenue expectations and at the high end of our earnings expectations, while continuing to strengthen our balance sheet and make progress on a number of business initiatives as well as our long-term growth strategy. We've adopted ASC 606 in 2018 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 $56.9 million and licensing billings of $63.1 million, in line with our expectations. The strength of our model reflects a proven track record of generating strong cash flows, with a very strong balance sheet, and ended of the quarter with cash, cash equivalents and marketable securities of $520.2 million, up nicely from the previous quarter, primarily due to cash from operations of $44.1 million. This brings year-to-date cash from operations for the 9 months to $143.4 million, well above last year's full-year total of $128.5 million, with another quarter remaining in the current year. Our continued execution on our strategy and our operational discipline have yielded solid financial results and a strong balance sheet that affords us flexibility to support our strategic initiatives. Over the past years, growth in our product businesses has enabled us to offset the known step-downs in patent licensing. We are well-positioned for next year with our final significant licensing step-down scheduled for Q4. Our products will drive overall company growth in 2021, improving both our top and bottom line. Now let me talk you through some revenue details on Slide 6. Revenue for the third quarter was $56.9 million, in line with our expected range. Royalty revenue for the third quarter was $16.6 million, while licensing billings was $63.1 million. The difference between licensing billings and royalty revenue primarily relates to timing as we don't always recognize revenue in the same quarter as we bill our customers. Going into additional detail, our product revenue was $29.8 million, consisting primarily of our buffer chip business. Our contract and other revenue was $10.5 million, consisting primarily of our Silicon IP business. For the year, there's roughly $40 million of our Silicon IP business that's being reflected in our licensing billings. This is almost twice what we expected at our Analyst Day a year ago. Strength in our Security IP business, in particular, enabled us to meet our revenue expectations in Q3. These results represent excellent growth year-over-year. Let me now walk you through our non-GAAP income statement on Slide 7. Along with our revenue performance in Q3, we again exceeded our profitability targets as we have done consistently over the past many years. Total operating expenses, including COGS for the quarter, came in at $56.7 million. Operating expenses of $45.8 million were lower than in the prior quarter due to lower expenses related to our headquarter facility and other variable expenses. Multiple revenue streams enable us to offset quarterly variances in any particular business. We ended the quarter with headcount of 679, slightly higher than 670 in the previous quarter, as we continue to invest in our product programs. Under ASC 606, we recorded $3.3 million of interest income related to the financing component of our fixed fee licensing arrangement through which we recognized revenue, but not yet received payment. We incurred $0.8 million of interest expense, primarily associated with our convertible notes. This was offset by an incremental interest income related to the return on our cash and investment portfolio. After adjusting for non-cash interest expense on our convertible notes, this resulted in non-GAAP interest and other income for the quarter of $2.7 million. Excluding the interest income related to the significant financing component related to ASC 606, this would have been $0.6 million of interest and other expense. Assuming a flat rate of 24% for non-GAAP pretax income, non-GAAP net income for the quarter was $2.2 million. With continued focus on cost and disciplined execution, we delivered profit that was nicely above our expectations. Now let me turn to the balance sheet details on Slide 8. Over the past several years we've built a very strong balance sheet. Cash, cash equivalents and marketable securities totaled $520.2 million, up significantly from the previous quarter, primarily through cash from operations of $44.1 million. As I mentioned previously, year-to-date cash from operations for the 9 months was $143.4 million, well above last year's total of $128.5 million with another quarter remaining in the current year. As we continue to deliver on the top line and execute on operational efficiency, we expect to continue to deliver strong cash from operations into the future. At the end of Q3, we had contract assets worth $401.7 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. As we announced previously, we were pleased to extend our existing licensing agreement with Micron in September at our existing financial terms, demonstrating the strength and relevance of our patent portfolio. When this extension comes into effect in Q4, we expect to account for this agreement to be recognized as a variable contract. We do not expect a onetime impact to revenue nor the corresponding addition to our unbilled contract assets. Instead, we expect to recognize ASC 606 revenue on a quarterly basis starting in the first quarter of 2021. Between this extension and buffer chip growth, our ASC 606 revenue is poised for strong growth next year. From a licensing billings perspective, as negotiated in the original agreement, the Micron contract will step down to $4.5 million in Q4 and then step back up to $10 million in the quarter from Q1 '21 through Q4 of 2024. It's also worth noting, we renewed our agreement for 4 years longer than the extension period initially specified. We have a strong partnership with Micron, and this bodes well for our upcoming renewals and extensions with our other partners. Over time, we endeavor to transition renewals and extensions to variable agreements that could allow us to take revenue over time as opposed to upfront under ASC 606. Third quarter CapEx was $10.6 million and depreciation was $4.8 million. We delivered $33.5 million of free cash flow in the quarter. Looking forward, I expect roughly $14 million of CapEx for the fourth quarter. This represents roughly $35 million for the full year of 2020, 80% of which is related to the relocation of our headquarters facility. I also expect depreciation of roughly $5 million for the fourth quarter and roughly $19 million for the full year of 2020. Now let me turn to our guidance for the fourth quarter on Slide 9. As a reminder, our forward-looking guidance reflects our current best estimates that our actual results could differ materially from what I'm about to review. In addition to the 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've see in the supplemental information we provided on Slide 13 of our earnings deck, licensing billings closely correlates with what we had historically reported as royalty revenue under ASC 605. Under ASC 606, we expect revenue in the fourth quarter between $45 million and $51 million. We expect royalty revenue between $12 million and $18 million. We also expect licensing billings between $61 million and $67 million. We've been making steady progress on our business and financial initiatives. Similarly, we're very pleased with the execution on the acquisitions we made last year. The teams have integrated well into our company, and on a trajectory nearing our expectations at the time of each acquisition. Our guidance reflects the contract terms of the patent licensing extension with Micron, I mentioned previously, as well as the inventory digestion impacting our buffer chip business. As we've been discussing, we've been monitoring the inventory build we saw at the beginning of the year, and we're confident this pause doesn't reflect any change in our competitive position or market share. As Luc mentioned, we expect to be through this in early 2021. Our Q4 guidance on buffer chip reflects annual growth of over 50% year-over-year, and is almost 30% better than what we anticipated at last year's Analyst Day. In total, our Q4 guidance reflects financial results for 2020 that are substantially better than what we expected at last year's Analyst Day on both the top and bottom line despite the unprecedented challenges presented by COVID-19. We expect Q4 non-GAAP total operating costs and expenses, which include COGS, to be between $59 million and $55 million as we continue to invest in programs. Under ASC 606, non-GAAP operating results for the fourth quarter are expected to be between $4 million and a $14 million loss. For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect this to be approximately $1 million of expense, which includes $0.6 million of interest expense related to the notes due in 2023. 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 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 $4 million in Q4. We expect our Q4 share count to be roughly 117 million basic and diluted shares outstanding. This leads you to between a non-GAAP loss per share of $0.03 and $0.10 for the quarter. We have gone through a successful transformation over the past several years, and our strong product growth has offset structural step-downs in patent licensing, the divestiture of payments and ticketing and the shutdown of our Lighting business. This has resulted in the roughly flat top line, as we transition back to our core semiconductor focus. Through this transition, however, our operational discipline resulted in fantastic growth in cash from operations. As we look forward, the scheduled step-downs of patent licensing will be behind us. And in the coming years, we expect patent licensing to stabilize at the same level we expect to see in 2020. As I mentioned earlier, our product growth will translate into profitable growth in 2021. With that said, while we don't provide guidance beyond Q4, we're comfortable with the analyst consensus estimates at the top line and bottom line for each quarter of 2021. While the near-term macroeconomic conditions are difficult for any of us to predict, consensus estimates are currently in line with our long-term strategy, reflecting product growth that continues to be significantly better than the broader semiconductor industry. Our confidence in our long-term prospects is reflected in the near 20 million share repurchase authorization from our Board that we announced earlier today. Let me finish with a summary on Slide 10. We're proud of the excellent performance by our team in this unpredictable macroeconomic environment and the progress we continue to make against 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. We have a predictable base of revenue and a demonstrated ability to generate cash. We have refocused our product portfolio around Rambus' core strength in the semiconductor industry, and are well positioned with a predictable licensing base and multiple product revenue streams across our company. We have continued to execute, and our operational discipline has yielded solid cash from operations. We continue to leverage our strong balance sheet to support our strategic initiatives. Before I open up the call to Q&A, I would, once again, like to thank our employees for their continued teamwork and execution resilience during these at uncertain times. Everyone, please stay safe and take care of yourself and your families. With that, I'll turn the call back to our operator to begin Q&A. Could we please have our first question? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Suji Desilva with Ross Capital. -------------------------------------------------------------------------------- Suji Desilva, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- Luc and Rahul, congratulations on a very strong cash generation and a good sign of the turnaround here. The -- Rahul, I modeled out ASC 605. I just wanted to check, the 3Q revenue affected my numbers. It seems to be at $103 million and $0.30 of EPS. Does that sound like what the ASC 605 might look like? -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [3] -------------------------------------------------------------------------------- So Suji, I think what you're doing is you're substituting what we report for licensing billings for what is royalty revenue. So you're kind of mixing some apples and oranges there, but I understand that's how a lot of our investors and analysts look at our company, and generally, that's how we look at it ourselves. But I think if you were to execute through that math, yes, I'd get the same numbers that you have. -------------------------------------------------------------------------------- Suji Desilva, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4] -------------------------------------------------------------------------------- Okay. And just to check on the guidance for 4Q, I think, with the step-down or the drop in the product revenue, it seems like it's more like $97 million and $0.25. Does that sound reasonable as well? -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [5] -------------------------------------------------------------------------------- Yes. Again, you're doing math that we can't publish because it's company-specific non-GAAP results. But if I were to do that math, I'd get the same numbers that you did. -------------------------------------------------------------------------------- Suji Desilva, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6] -------------------------------------------------------------------------------- Okay. Good. And a couple of questions, quick, on financial, perhaps and starting. You said early, I think the 4Q '20 relicense step-down is the last one you see in the near future quarter wise. Is that correct? '21 is a more normalized year without any expected step-downs, is that what you were saying? -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [7] -------------------------------------------------------------------------------- Yes, that's right. So this is something that we've been talking about for not just quarters, but I think, for a year. Just the agreements that we signed over the past several years, 2016, '17, '18, we're structured in a way that allowed our partners to take advantage of a very positive time in our industry, with some more payments upfront and then fewer billings. But what we said fairly consistently is that we think for the full-year 2020, that should be roughly the rate we'll be at for the next several years. We were very excited to extend the Micron agreement for 4 years instead of what was contractually 3. So that extension then comes back up at the end of 2024. And as you know, we have Samsung coming up in the middle of '23 and then Hynix also in '24. So what we said is we expect licensing billings to be roughly flat now for the next several years with the basis we had in 2020. The one caveat is that we also have our Silicon IP businesses. And in some cases, there are billings associated with that business that also show up in our licensing billings. And I think, as I mentioned in our prepared remarks, there's probably about $40 million of licensing billings in 2020 that's really related to the Silicon IP business. But that base that's associated with just our patent licensing business, I expect to be roughly flat for the next several years because we don't have large extensions and rolls with the big 3 DRAM partners until '23 and '24. -------------------------------------------------------------------------------- Suji Desilva, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [8] -------------------------------------------------------------------------------- Okay. And then maybe one more question for Rahul and perhaps Luc. With the burgeoning cash amount, I appreciate the buyback (inaudible). But with the success of the recent acquisitions, can you talk about the target areas for further acquisitions, similarly to beef up memory and security? And what size of acquisition are you perhaps willing to go to now or is it similar as before? -------------------------------------------------------------------------------- Luc Seraphin, Rambus Inc. - CEO, President & Director [9] -------------------------------------------------------------------------------- Suji, this is Luc. Yes, we continue to generate cash every quarter, and we're pleased with this buyback. But we confidently look at acquisitions. We would like to continue to grow. So the larger the acquisition, the better. Then we're looking at anything that would complement our offering in the data infrastructure to grow our business through acquisitions. We look at this very regularly. We say no to a lot of acquisitions that we think are not going to be good for us strategically or financially, but that's essential to our strategy going forward. -------------------------------------------------------------------------------- Suji Desilva, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10] -------------------------------------------------------------------------------- Okay. And maybe a few more perhaps for Luc. On the Data Center side, the memory buffer opportunity into calendar '21, is the visibility driven by a resumption of Intel platforms that brings the Data Center spending back or Data Center cycles or is it your share gains? Perhaps you can talk about what your ending calendar '20 shares versus '21 share opportunity. -------------------------------------------------------------------------------- Luc Seraphin, Rambus Inc. - CEO, President & Director [11] -------------------------------------------------------------------------------- Yes, so we continue to gain share in 2020. As Rahul said, we plan to generate about 50% growth over the last year in a market that probably grew about 5%. It was heavily front-end loaded because the ecosystem ordered more in the first half, (inaudible) early consequences of COVID-19. Those tiers are winding down, and people are going through the phase of digesting the inventory. But overall, although the profile was heavily loaded in the first half, less in the second half, we grew 50% over last year in a market that grew only 5%. So we continue to gain share. Now when we look at 2021, there are a few things that are tailwinds for us. One is, we believe that early in the next year, this inventory digestion is going to be over. The processors from the next-generation processes from Intel are going to be launched in the markets. And as we said, we are processor independent. So whatever the share between AMD and Intel, as long as the market grow, we grow with them. Now in the longer run, we have the upside coming from DDR5. We have today all of our DRAM customers having placed sample orders for DDR5 or [CD and DBs]. So that's going to be an upside for us in the longer run. That's going to start to ramp at the end of next year. And we invest into the companionships that are going to be required on the DDR5 platforms as well as new architecture that we believe are going to emerge over the next few years, especially from the cloud companies. Yes, that's a business that is showing very nice growth potential for us, a very nice share gain for us. We just need to go to this Q4 where we think the inventory digestion is going to happen. But all -- after that, we will see clear wins. -------------------------------------------------------------------------------- Suji Desilva, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12] -------------------------------------------------------------------------------- Okay. Last quick question, Luc, I'll pass it along. Any thoughts on the Intel NAND divestiture to Hynix and the implication for Rambus? -------------------------------------------------------------------------------- Luc Seraphin, Rambus Inc. - CEO, President & Director [13] -------------------------------------------------------------------------------- It really doesn't have any implications for us. I think this is part of the industry consolidation. I think what's happening in the industry is that we see a lot of consolidations. I think people are going to start to develop domain-specific platforms because they have to deal with an exponential growth of data workloads coming from the new applications like video, work-from-home, AI and so on and so forth. So we see some of that consolidation happening now in the industry. For us, it's all benefits because what it means is that everyone is going to need to have access to more data faster, and that's where we spend our investment money. And I think it's going to be requiring more security as well. And if you look at the track record of security design wins, we see this being translated in the track record. So all of this is good for us. But -and Hynix is going to Intel doesn't have a direct impact on our business. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Your next question comes from the line of Gary Mobley with Wells Fargo Securities. -------------------------------------------------------------------------------- Gary Wade Mobley, Wells Fargo Securities, LLC, Research Division - Senior Analyst [15] -------------------------------------------------------------------------------- Congrats to a strong finish in the year. I wanted to ask about product cycles for the buffer chip business as we look into next year. First, I wanted to get your opinion on who will be the first to adopt DDR5. Will it be the hyperscalers? And then with respect to Intel's 10-nanometer Ice Lake, moving from 6 memory channels to 8. I wonder if you can give me sort of a take on how that might relate to your average selling prices and your content in these memory modules. -------------------------------------------------------------------------------- Luc Seraphin, Rambus Inc. - CEO, President & Director [16] -------------------------------------------------------------------------------- Yes. Thanks, Gary. These are really good questions. So first of all, the move to 6 to 8 channels is going to happen before DDR5 in the next version of the DDR4 processor from Intel, and that will give their customers the ability to populate more memory per processor. So that's a potential growth in the market. And that's going to be up to their customers to decide whether they realize that growth or not because all of their platforms are going to move from 6 to 8 memory channels. When we move from Ice Lake with 8 channels in DDR4 to DDR5 platforms, so we're going to stay on an 8-channel platform. So that capacity of potentially more memory processor will continue. For us, we see a couple of triggers for next year. One is the move to Ice Lake, and the fact that every time you have a new platform, there's an opportunity for us to have a better design in footprint. And we know that our footprint for Ice Lake is better than what it was for Cascade Lake, so that's the first thing that is happening. For DDR5, it will really ramp when the whole ecosystem is ready. They are different stages of development when I say there is the processor guys and the memory guys as well. But the good news for us is we do have some ample purchase orders now from all of them. We are shipping into modules, and these modular are shipping into the very early centers in system companies. So all of these are good signs. And I think when Federal is ready, we're going to be in a very strong position to enjoy a nice share on these swaps. -------------------------------------------------------------------------------- Gary Wade Mobley, Wells Fargo Securities, LLC, Research Division - Senior Analyst [17] -------------------------------------------------------------------------------- To you, Raul, I wanted to ask about your buyback and your timeframe for the buyback. In the past, you've done accelerate share repurchases. And so I'm just wondering if you did go at this time with a more, I guess, methodical approach or slower approach. And if I'm doing the math right, given sort of the offsetting lower share count offset by lower interest income, this could be potentially $0.20 accretive on an annual basis? -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [18] -------------------------------------------------------------------------------- So, Gary, thanks for the question. To put a little bit of context, the last time we did a share repurchase authorization was in 2015, and that was also for 20 million shares. And then from an actual activity perspective, we did about $100 million of accelerated share repurchase in 2015. We did another, I think, $50 million in '17 and another $50 million in 2018. So that's how you get to the $3.6 million that was on the previous authorization, which we canceled with the new one. The reason I provide that history is that this is something we look at for several years in the future. I think it's a very strong signal from our company and from our Board that we believe in the long-term value of our company. Now that said, we have done accelerated share repurchase in the past because I think it's a very positive signal. And it also gives us the surety of taking shares out of market. But then we're opportunistic in terms of when we actually act. Now of course, we can't be in any possession of material nonpublic information whenever we choose to be in the market. So we have to look at some of those guidelines as well. But if you look at what we've done in the past, what that typically refers to is about 40% to 50% of our expected free cash flow over the next 3 or 4 years. So that's, I think, how we look at how we size that amount. Hopefully, that's helpful to you. -------------------------------------------------------------------------------- Gary Wade Mobley, Wells Fargo Securities, LLC, Research Division - Senior Analyst [19] -------------------------------------------------------------------------------- Sure, sure. I appreciate the commentary with respect to your comfort level with current consensus for FY '21, which I believe, currently, from a revenue perspective, sits at $437.2 million which, of course, is an adjusted revenue number. But I was wondering if you can give us any sort of preliminary view into sort of your OpEx trend against that backdrop. -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [20] -------------------------------------------------------------------------------- Sure, sure. So just from an OpEx trend, I think what we look at is we're going to continue to look at investing in our business, right? We have done a fantastic job over the past couple of years of taking cost out of our company. So what you would see is from a total OpEx perspective is that it'd be a little bit larger than we have in this year, 2020, because we will continue to go invest in our programs. I think I'd expect to see our gross margins on the product side continue to be very strong, kind of in the 60% to 65% range. And then you also have high margins in the Silicon IP business as well. So I think that's what adds up to our comfort on the consensus, both on the top line as well as the bottom line for each quarter of 2021. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Your next question comes from the line of Sidney Ho with Deutsche Bank. -------------------------------------------------------------------------------- Jeffrey A. Rand, Deutsche Bank AG, Research Division - Research Associate [22] -------------------------------------------------------------------------------- This is Jeff Rand on for Sidney. Congrats on the nice quarter. Earlier in the year, you announced a patent agreement with the Chinese company building DRAM. Have the recent escalations in trade tensions had any impacts on this? And how do you think about the China market going forward? -------------------------------------------------------------------------------- Luc Seraphin, Rambus Inc. - CEO, President & Director [23] -------------------------------------------------------------------------------- Jeff, this is Luc. Basically, we watch what's happening in China, like everyone else, but what's the tensions, we don't have an impacts -- direct impact, I would say, on the agreements. This is a pure patent licensing agreement. This is a legal agreement that allows these partners in China to build DRAM devices. And this is a royalty agreement. So our revenue will ramp when they ramp their products. So I would say the impact could be indirect, depending on how fast they ramp their products for all the reasons, but it will not have direct impact. This is just a legal agreement for them to be able to build DRAMs for us. -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [24] -------------------------------------------------------------------------------- I'm just going to add a little. What we talked about is that we don't expect to see a significant impact from a dollar perspective in the near term just as the partner is ramping. And as Luc mentioned, there's no technology transfer in the (inaudible). It's just a legal agreement that allows them to ship. I think one of the benefits of the license, from my view, is that our license agreements are usually 5 years or longer. And so that extended beyond the existing renewal and extension timeframes for our -- the big 3 DRAM manufacturers, and it just talks to the strength and relevance of our portfolio. -------------------------------------------------------------------------------- Jeffrey A. Rand, Deutsche Bank AG, Research Division - Research Associate [25] -------------------------------------------------------------------------------- Great. And then just following up. Commentary from earnings so far point to on-premise IT spending still being pretty weak. Can you talk about how on-premise spending risk cloud spending may impact your business? -------------------------------------------------------------------------------- Luc Seraphin, Rambus Inc. - CEO, President & Director [26] -------------------------------------------------------------------------------- You mean, on-premise spending compared to cloud spending? -------------------------------------------------------------------------------- Jeffrey A. Rand, Deutsche Bank AG, Research Division - Research Associate [27] -------------------------------------------------------------------------------- Yes, compared to cloud spending. -------------------------------------------------------------------------------- Luc Seraphin, Rambus Inc. - CEO, President & Director [28] -------------------------------------------------------------------------------- Well, it's difficult for us to track that. Our buffer chip business mostly goes into Data Center types of applications. We see a shift from cloud demand -- from enterprise to cloud demand, but that does not affect us because the memory modules go either in enterprise or in cloud. And just by the same focus, we feel we are almost easing difference to the royalty share of Intel or AMD the kind of indifference to the share between enterprise and cloud. So as long as the market grows and we continue to gain share in terms of (inaudible) footprint, we should see a nice continuation of our share gain in that space. We don't shift any products into the client space in terms of buffers. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Your next question comes from John Pitzer with Crédit Suisse. -------------------------------------------------------------------------------- John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [30] -------------------------------------------------------------------------------- Congratulations on the follow-up results, especially with free cash flow. I guess, my first question is, on the Data Center digestion you see in the calendar fourth quarter, is there any way to quantify kind of the hit that you're expecting to see in the fourth quarter because of that? And is this because customers have too much CPUs they bought too much early in the year or is it because they actually have too much memory? And I guess, importantly, as you think about visibility as to Data Center coming back, why are you confident that it's only a one quarter phenomenon? -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [31] -------------------------------------------------------------------------------- Sure, John, it's Rahul. Thanks very much for your commentary. Let me start, and I'll see if Luc would like to add. If you look at the guidance that we gave for Q4, we had our buffer chip business dropping from roughly $30 million in Q3 to about $21 million in Q4. And what we said is that all of our channel checks and conversations with our partners indicate that this should come back sometime early next year in terms of what's there. I think it really is the best phrase to use is inventory digestion. I think our partners and you see this downstream of us, John, are just being very cautious in terms of how much inventory they have in hand. Now it's really something we've been talking about all year, right? We saw great demand in the first half of the year. And I think, really that was because of the uncertainty of what was going to happen from a supply chain perspective under COVID. And I think now, as Luc mentioned earlier, as people have better visibility and have more face than the resilience of the supply chain then what they're trying to do is just to go manage their inventories. So I'll pause there and see if there's anything Luc want to add. -------------------------------------------------------------------------------- Luc Seraphin, Rambus Inc. - CEO, President & Director [32] -------------------------------------------------------------------------------- Yes, I think what has happened, John, is earlier in the year, the system company started to build inventory because they were concerned about some disruptions downstream in their supply chain. But these inventory buildup, as far as we understand, it was more upstream from us at the system level. Now these concerns have gone away, so people are starting to just digest the inventory at the system level. You asked the question about is it processor or is it memory, I know, that's a great question. Because memory is on a different cycle. Sometimes, populates their systems late in the process. It can build system and in the last minute, populate their memory, which is good for us because if we track that, we can track how our memory relay its (inaudible) are going to go, but also because this is populated late in the process that gives us flexibility, depending on who gains share during that transition or what platform ramps when. At the end of the day, those memory modules are going to be used in one or the other platform when things go back on track. Again, the view on Q1 is based on just talking to the ecosystem. That's a very close ecosystem, with very strong players. That's why -- that's the current view for Q4 and you see the digestion early next year going to see the demand picking up again. -------------------------------------------------------------------------------- John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [33] -------------------------------------------------------------------------------- That's good color. And then just as my follow-up, Rahul, you kind of implicitly answered this when you commented that you feel comfortable with street consensus estimates for the quarters next year in '21. But I'm just kind of curious on the OpEx front. How do we think kind of COVID as an OpEx drive driver? How much more expense was this year because of COVID? And conversely, were there any cuts that you were able to take out of this year's OpEx that come into next year's OpEx? I'm just kind of curious how we should be thinking about that dynamic. -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [34] -------------------------------------------------------------------------------- Yes, John, that's a great question. And I think as I mentioned earlier, we've done a fantastic job over the last several years taking cost out of our company. You see it in our guidance from operating expenses and you see it in overall come down, particularly in terms of SG&A. I think from a COVID impact, we actually had fewer expenses this year, particularly related to travel. And that's something I think that helped us. One of the things that I think we've done very well as a company is use the opportunity with COVID to kind of reimagine how we want to go run our company. So things like hybrid work and our facilities with them, for example, right? So I think there are definitely things that we can do to continue to take cost out of our company next year. And what we're going to do is then take that cost that we might have otherwise had on the infrastructure and invest it back in the programs. I think I've been delighted with the growth in our product program. So it's something where we're using the learnings that we've seen over the course of this year with COVID to become more efficient next year as our employees come back to work. I hope that helps answer your question. I did some feedback a little early, just in terms of range of OpEx, I think I see a little bit of increase, specifically on the R&D side year-over-year, but you should have flatter SG&A coming down. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Mark Lipacis with Jefferies. -------------------------------------------------------------------------------- Mark John Lipacis, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [36] -------------------------------------------------------------------------------- And I just want to make sure I was clear on this. So for the renewed Micron contract, this is under the same terms as before and there's no change in revenue recognitions from an ASC 606 standpoint. Is that -- did I understand that properly? -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [37] -------------------------------------------------------------------------------- So let me spend a little time on this, Mark, because the reason that it could sound confusing is because it can be, and it is. When we adopted ASC 606 in 2018, if you look at the existing agreement we had with Micron, because of the nature of the agreement, essentially, we had earned everything associated with that contract, even through the end of this year. So when we adopted ASC 606 since 2018, the entire balance was adjusted as part of retained earnings, the entire value of the contract. Now when we had the renewal that we signed in Q3, that renewal actually does not come into effect until next quarter in Q4. And then what ends up happening is that from a billings perspective, contractually, that contract comes down by $5.5 million for us in Q4. And so that's why you see kind of a delta in terms of our expected results from Q3 to Q4. And that comes back up to $10 million a quarter in Q1 of '21, and it should be $10 million a quarter from Q1 '21 all the way through the next 4 years, so Q4 of 2024. Now from an ASC --let me -- from a billings perspective, it will just be $10 million a quarter for the next 16 quarters. From an ASC 606 perspective, because we've essentially signed an extension, I do expect that we'll be able to treat that agreement as a variable contract and recognize ASC 606 revenue on a quarterly basis, starting in Q1 of '21. So as I mentioned in my prepared remarks, I don't expect to see a massive onetime entry for revenue in Q4 when that license essentially takes effect, nor do I expect to see a massive increase in our contract asset or our unbuilt contract asset. Rather, what I'd expect to see is that us able to recognize that ratably ASC 606 revenue from '21 through '24. I hope that helps answer your question. -------------------------------------------------------------------------------- Mark John Lipacis, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [38] -------------------------------------------------------------------------------- Got you. I think I understand. So previously, you -- when you adopted 606, you took a onetime revenue. You recognize onetime revenues. And then just on a billings basis, you would get the -- you'd have billings, but we wouldn't have ASC 606 revenues recognized. On this ... -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [39] -------------------------------------------------------------------------------- Yes. Actually, Mark -- sorry, Mark, if I could because actually, because the contract was signed before our adoption of the ASC 606, we were never able to recognize revenue. It was a onetime adjustment to retain the earnings to reflect the time of that billing. There was one of the (inaudible) of 606. -------------------------------------------------------------------------------- Mark John Lipacis, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [40] -------------------------------------------------------------------------------- So you are going to recognize revenues quarterly now from Micron according to ASC 606? -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [41] -------------------------------------------------------------------------------- Starting in Q1 of '21, that's correct. -------------------------------------------------------------------------------- Mark John Lipacis, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [42] -------------------------------------------------------------------------------- Got you. Okay. That's great. And do you think -- is this what you would expect to happen with future contracts as they come up for renewal? -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [43] -------------------------------------------------------------------------------- So Mark, that's exactly what we've been trying to do. As we sign new agreements or as we sign renewals or extensions is to have contracts that are more friendly from a 606 perspective. But we've also been very straightforward for that we're not going to give up economic value in order to get slightly better account improvement. But yes, in our rules and extensions, that's what we've been trying to do. -------------------------------------------------------------------------------- Mark John Lipacis, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [44] -------------------------------------------------------------------------------- Okay. All right. Understand. So your revenues recognized and expenses recognized on Micron going forward are going to more closely resemble your cash flows. Is that fair? -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [45] -------------------------------------------------------------------------------- So, yes. We don't really have specific expenses associated with Micron. But the revenue associated with that will be better. And it's one of the things I mentioned in my prepared remarks is that given the variable treatment of the Micron extension as well as our expected growth in buffer chip, I expect to see a fairly significant increase in ASC 606 revenue in 2021 versus 2020. -------------------------------------------------------------------------------- Mark John Lipacis, Jefferies LLC, Research Division - MD & Senior Equity Research Analyst [46] -------------------------------------------------------------------------------- All right. Got you. Okay. All right. Thanks for reviewing that for me again. Now on the share repurchase, is the way to think about this that you guys throw off a lot of cash. You look for opportunities and you look for inorganic opportunities. If none manifest, you've built up a pile of cash, and then you say, okay, well, the right thing to do is return this to shareholders. Is that the right way to think about your MO? -------------------------------------------------------------------------------- Rahul Mathur, Rambus Inc. - Senior VP of Finance & CFO [47] -------------------------------------------------------------------------------- So Mark, we've been very consistent in terms of capital allocation. We look at organic investment, inorganic and then return to shareholders. And we ended the quarter with, I think, $520 million of cash. So we continue to do a great job investing organically in the places that are growing, and you see it, particularly in our product growth. We've also been active inorganically. I'm very pleased with the progress on the 2 acquisitions we made last year. When we look at our cash balance, what it shows is that we have enough cash on hand to continue to invest organically, and also to continue to participate in the industry consolidations from an inorganic perspective as well. And then what we've done is then been kind of opportunistic in terms of capital return as well. So I think, as I mentioned earlier, it continues to as part of our commitment as the company to return cash to our shareholders. And what we target is returning somewhere between 40% and 50% of free cash flow back to our shareholders. And we've been doing a pretty good job of that over the past several years. One thing also is, just to be clear, the share repurchase does not preclude us from doing the right M&A. I think Luc talked a little bit earlier about some of our focus areas in terms of Data Center and memory and security. And we're constantly looking for more opportunities to add to our business like we did very successfully last year. What I'd also remind you is, for our size, we have relatively little debt. We have one convertible issue that comes due, I think, in early '23. There's a call spread there, so it's not dilutive to us until we're trading at $23.30. So it gives us a level of firepower that I think is unusual for unusually high for a company our size. And certainly, we'd like to see ourselves continue to grow both organically and inorganically. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- 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 Seraphin. -------------------------------------------------------------------------------- Luc Seraphin, Rambus Inc. - CEO, President & Director [49] -------------------------------------------------------------------------------- Thank you to everyone who has joined us today for your continued interest rest and for your time. We hope each of you stays safe and healthy, and look forward to speaking with you again soon. Have a great day. Thank you. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Thank you. This now concludes today's conference.