Rambus Inc. (NASDAQ:RMBS) Q4 2023 Earnings Call Transcript
Rambus Inc. (NASDAQ:RMBS) Q4 2023 Earnings Call Transcript February 5, 2024
Rambus Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Rambus Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. At this time all participants in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Desmond Lynch, Chief Financial Officer. You may begin your conference.
Desmond Lynch: Thank you, operator, and welcome to the Rambus fourth quarter and full-year 2023 results conference call. I am Desmond Lynch, Chief Financial Officer at Rambus; and on the call with me today is Luc Seraphin, our CEO. The press release for the results that we will be discussing today has been filed with the SEC on Form 8-K. A replay of this call will be available for the next week at 866-813-9403. In addition, we are simultaneously webcasting this call. And along with the audio, we are webcasting slides that we will reference during portions of today's call. A replay of this call can be accessed on our Web site beginning today at 5:00 p.m. Pacific Time. Our discussions today will contain forward-looking statements, including our expectations regarding projected financial results, financial prospects, market growth, demand for our solutions, the company's ability to effectively manage supply chain shortages and other market challenges, and the effects of ASC 606 on reported revenue amongst other items.
These statements are subject to risks and uncertainties that may be discussed during this call and are more fully described in the documents we file with the SEC, including our 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may differ materially from our actual results, and we are under no obligation to update these statements. In an effort to provide greater clarity in the financials, we are using both GAAP and non-GAAP financial presentations in both our press release and 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 Web site at rambus.com on the Investor Relations page under Financial Releases.
We adopted ASC 606 in 2018 using the modified retrospective method, which did not restate prior periods but rather run 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 the company's progress. We will continue to provide operational metrics, such as licensing billings, to give our investors better insight into our operational performance. 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, 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: Thank you, Des, and good afternoon everyone. We finished the year strong with Q4 revenue and earnings at the high end of guidance, and a robust $55 million in cash from operations. Through outstanding execution on our strategy, we delivered full-year results that outpaced the overall semiconductor market in a very dynamic environment. Let me first take moment to review our 2023 accomplishments. 2023 was the year of artificial intelligence, with generative AI bursting on to the scene and emerging as a strong catalyst for long-term secular growth. The increasing need for memory performance and capacity across the computing landscape driven by the accelerating demand for data-intensive workloads is a very positive trend for Rambus, and one we expect to continue for many years to come.
Over the course of the year, we realized a number of important milestones and achievements. The company further bolstered its long-term licensing foundation with the extension of the agreement with SK hynix. We've strengthened our balance sheet and returned value to our stockholders through share repurchase and debt repayments. We enhanced our focus on differentiated chips and digital IP for the datacenter with the strategic sale of the PHY business. And finally, as a testament to our success, Rambus was honored with GSA's Most Respected Emerging Semiconductor Company Award in our revenue category. Turning now to our businesses, silicon IP continued to operate at scale, offering comprehensive security and interface IP solutions for multiple market segments.
With our strengthened focus on differentiated digital solutions, we brought to market leading-edge HBM, GDDR, PCIe, and CXL controller IP, as well as state-of-the-art embedded security solutions including Post-Quantum Security, all of which are essential building blocks for future AI-centric datacenter architectures. In memory interface chips, we continue to execute well and gained share in a challenging environment. As the ecosystem redirected CapEx to AI servers, the market for traditional servers declined low double digits last year. And while DDR4 inventory digestion remained a headwind, we saw an acceleration of DDR5 adoption which allowed us to maintain our revenue trajectory and to continue to gain share. In Q4, we delivered solid results with quarterly product revenue of $54 million.
We were very pleased with our execution on DDR5 which was our predominant unit shipment for Q4, and for the year. We remain strategically focused on delivering DDR5 leadership products and announced the industry's first Gen4 DDR5 RCD, in December, to enable server DIMM operations at 7,200 MT/s. Again, I am very pleased with the progress the team continued to make in 2023, while successfully navigating the market dynamics. As we turn to 2024, while we expect the softness in the traditional server market to persist into the first-half of this year and DDR4 inventories to continue to recover slower than anticipated, we remain very positive on the longer-term outlook. We continue to work closely with our customers to reestablish DDR4 order and shipment patterns.
And DDR5 continues to show solid momentum. We have multiple generations of our DDR5 solutions simultaneously progressing through different states of the qualification and production life cycles to support the accelerated pace of computing platform rollouts. As I mentioned previously, we were the first to introduce the Gen4 RCD chip to the market, which is a great demonstration of our ongoing commitment to product leadership. We remain very well positioned and focused on execution as we actively work with customers and partners on the ongoing growth of DDR5. Additionally, we are very pleased with our progress on development of our power management solutions with our first PMIC sampling to customers and receiving positive feedback. We look forward to expanding our DDR5 chip portfolio later this year, and to providing a complete memory interface companion chipset for the coming server module generations.
As we look to 2024 and beyond, the importance of AI and all the compute-intensive workloads will further accelerate the demands on computing and memory infrastructure. Continued advancement in DRAM capacity and bandwidth as well as novel memory architectures, such as serial-attached memory and multi-rank solutions, will be critical enablers to improve compute efficiency and performance across cloud, enterprise, and client systems. Through disciplined investment and close collaboration with the ecosystem, we have built a strong product roadmap than unlocks new levels of system performance and expands our industry leadership and market opportunity. In closing, Q4 was a strong quarter for the company that capped off a year of great execution and agility.
While we navigate dynamic market conditions in the near-term, our strategic focus on high performance products for the data center and AI positions us well to drive the long-term profitable growth of the company and the consistent return of value to our stockholders. This is a very exciting time for the industry and for Rambus. And as always, I'd like to thank our customers, partners and employees for their ongoing support. And with that, I'll turn the call over to Des to discuss the quarterly financial results. Des?
Desmond Lynch: Thank you, Luc. I'd like to begin with a summary of our financial results for the fourth quarter and for the full-year 2023 on slide five. Once again, we delivered a strong quarter with both revenue and earnings above our expectations. We had strong financial results in 2023, driven by our continued execution in a challenging macroeconomic environment as we continue to execute on our long-term strategy. Our robust balance sheet coupled with our continued ability to generate strong cash flows puts us in a strong position to continue to drive shareholder value. Let me walk you through our non-GAAP income statement on slide six. Revenue for the fourth quarter was $122.2 million above our expectations driven by higher royalty revenue in the quarter.
Royalty revenue was $52.4 million with licensing billings was $66.2 million. The difference between licensing billings and royalty revenue mainly relates to timing as we do not always recognize revenue in the same quarter as we bill our customers. We are pleased to see the narrowing of the gap between royalty revenue and licensing billings as the Samsung patent licensing renewal, which was signed in 2022, was recognized as a variable contract under ASC 606 in the quarter and will be for the duration of the 10 year agreements. Product revenue was $53.7 million consisting primarily of memory interface chips. Contract and other revenue was $16.1 million consisting predominantly of silicon IP. As a reminder, only a portion of our silicon IP revenue is reflected in contract and other revenue, and the remaining portion is reported in royalty revenue as well as in licensing billings.
Total operating costs, including cost of goods sold for the quarter were $71.9 million. Operating expenses of $51 million were in line with our expectations as we continue to be disciplined in our expense management. And we ended the quarter with a total headcount of 623. GAAP interest and other income for the fourth quarter was $27.8 million. This included both a $23.9 million gain from the sale of a non-marketable equity security and $200,000 of ASC 606 interest income related to the financing component of fixed fee licensing agreements for which we have recognized revenue but not yet received payment. Excluding both the gain from the non-marketable equity security and the financing interest income related to ASC 606, this would have been $3.6 million of net interest income.
Using an assumed flat tax rate of 24% for non-GAAP pretax income, non-GAAP net income for the quarter was $41.2 million. Now let me turn to the balance sheet details on slide seven. We ended the quarter with cash, cash equivalents and marketable securities totaling $425.8 million. This is up from Q3 primarily through continued strong cash from operations of $54.8 million. At the end of Q4, we had contract assets worth $55.3 million which reflects the net present value of unbilled accounts receivables related to licensing agreements for which the company has no future performance obligations. We expect this number to continue to trend down as we bill and collect for these contracts. Fourth quarter CapEx was $5.7 million, though depreciation expense was $6.1 million.
We delivered $49.2 million of free cashflow in the quarter. Now let me turn to our guidance for the first quarter on slide eight. As a reminder, the forward-looking guidance reflects our current best estimates at this time. We continue to actively monitor the macro environment and our actual results could differ materially from what I'm about to review. In addition to the financial outlook under ASC 606, we also provide 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 we have reported historically, licensing billings closely correlates with what we had historically reported as royalty revenue under ASC 605. Under ASC 606, we expect revenue in the first quarter to be between $113 million and $119 million.
We expect royalty revenue to be between $43 million and $49 million and licensing billings between $59 million and $65 million. We are pleased with our continued execution and progression on our memory interface chip business. As Luc mentioned earlier, the short-term market transition to DDR5 continues to be dynamic. We remain excited about our long-term outlook as we have made the right investments. We expect Q1 non-GAAP total operating costs, which include COGS, to be between $75 million and $71 million. We expect Q1 CapEx to be approximately $8 million. Under ASC 606, non-GAAP operating results for the first quarter is expected to be between a profit of $38 million and $48 million. For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606 we expect $3 million of interest income.
We expect the pro forma tax rate to be approximately 22%, which is down from 24% in 2023 due to increased profitability of our product business versus fixed patents. The 22% is higher than the statutory tax rate of 21% primarily due to higher tax rates in our foreign jurisdictions. As a reminder, we pay approximately $20 million of cash taxes each year, driven primarily by licensing agreements with our partners in Korea. We expect non-GAAP taxes to be between an expense of $9 million and $11 million in Q1. We expect Q1 share count to be 110 million diluted shares outstanding. Overall, we anticipate our non-GAAP earnings per share range between $0.29 and $0.36 for the quarter Let me finish with a summary on slide nine. I am pleased with our strong 2023 results and the team's ongoing execution in this challenging and unpredictable macroeconomic environment.
We have a diversified portfolio, and we are pleased with our progress in all of our businesses as we continue to execute against our strategic initiatives. Our patent licensing business continues to provide consistent and predictable results. In 2023, we are pleased to have extended SK Hynix licensing agreement for a 10-year extension, which follows on from the Samsung extension in 2022 for a similar period. These extensions demonstrate the continued strength and relevance of our patent portfolio and innovation engine. In our silicon IP business, we have sustained momentum as the business continues to operate at scale with revenue of approximately $110 million after adjusting for the PHY divestiture. Our portfolio is well positioned to capitalize on the growing opportunities in the data center market fueled by AI.
Our memory interface chip business continues to gain market share as we delivered revenues in 2023 that were relatively flat with 2022 in a market that declined across the year. We continue to focus on execution and leadership, and we are well-positioned for long-term growth in this business. Overall, we are pleased with our success as we continue to drive profitable growth, strong cash generation, and a robust balance sheet which will continue to drive shareholder value. Before I open up the call to Q&A, I would like to thank our employees for their continued teamwork and execution. With that, I will turn the call back to our operator to begin Q&A. Could we have our first question?
Operator: Thank you. [Operator Instructions] The first question is from the line of Gary Mobley with Wells Fargo Securities. You may proceed.
See also Top 20 Most Innovative Economies in Asia and 15 Highest Quality Bed Sheets of 2024.
To continue reading the Q&A session, please click here.
