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Rambus Inc (RMBS) Q4 2018 Earnings Conference Call Transcript

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Rambus Inc  (NASDAQ: RMBS)
Q4 2018 Earnings Conference Call
Jan. 28, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Rambus Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct the question-and-answer session. (Operator Instructions) As a reminder, this conference 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 -- Senior Vice President, Finance and Chief Financial Officer

Thank you, Christine, and welcome to the Rambus fourth quarter 2018 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 8397247 when you hear the prompt. In addition, we are simultaneously webcasting this call, and along with the audio, we are webcasting slides that you will reference during portions of today's call. So even if you're joining us via conference call, you may want to access the webcast with the slide presentation. A replay of this call can be accessed on our website beginning today at 5:00 PM Pacific Time.

Our discussion today will contain forward-looking statements regarding our financial guidance for future periods, including Q1 2019 and beyond, prospects, product strategies, timing of expected product launches, demand for existing and newly acquired technologies, the growth opportunity for the various markets we serve and the changes that we will experience in our financial reporting due to our adoption of the new revenue recognition standard that started in Q1 2018, among other things. These statements are subject to risks and uncertainties that are discussed during this call, and maybe more fully described in the documents we filed with the SEC, including our 8-K's, 10-Q's and 10-K's. 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 to our financials, we are using both GAAP and non-GAAP financial presentations in both our press release and also on this call. We 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: Luc will start with an overview of the business; I will discuss our financial results, including our guidance for future period, and then we'll end with Q&A.

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

Luc Seraphin -- President & Chief Executive Officer

Thank you, Rahul, and good afternoon everyone. This is my second earnings call, as CEO at Rambus, and as we embark on the new year, I would like to share some insights on the strategy for the company going forward, before moving into specifics for Q4 and 2018 as a whole.

For 2019, our top priorities as a company will be centered around three primary objectives. The first, will be to refocus our product portfolio around our core strengths in semiconductor, namely high-speed memory and chip-to-chip interfaces, memory buffer chips and embedded security cores and provisioning software. We will target leading-edge high growth markets like data center and networking, artificial intelligence, machine learning, IoT, and automotive. These are markets that demand both increasing levels of performance and security, positioning Rambus as an ideal choice to high-speed interfaces and embedded security solutions. We are aligning the research priorities in Rambus Labs on innovation and patents development in these key areas as well. Our patents remain foundational to our industry. By reinforcing our commitment to invention and advancing semiconductor technology, we enhance our value and relevance in our target markets and create a platform for investment in product development.

The second objective will be to optimize the company for operational efficiency and profitability, leveraging synergies across our businesses and customer base. There is significant overlap in our ecosystem of customers, partners, and influencers. By focusing on the hardware and software solutions for secure connected semiconductors, we are able to bring better value to our customers and improve profitability for the company.

And finally, the third objective is to leverage our demonstrated ability to generate cash and reinvest in our sales through organic and inorganic growth to amplify our market and technology position. These priorities, we set the foundation for the company moving forward, emphasizing operational excellence, and will enable Rambus to further its position as a global semiconductor leader in high-speed interfaces, memory buffer chips and embedded security cores. With that, we've already taken the first steps toward these objectives in my first few quarters as CEO. Rambus had another solid performance in Q4 and is full (ph) year overall for 2018, with continued execution from our product teams and record annual product revenue for IP cores and memory buffers.

In Q4, we delivered results in line with expectations, with GAAP revenues of $68.5 million on the ASC 606 and generated $35.1 million in cash from operations. For the full year, we delivered revenues of $231.2 million on the ASC 606 and generated $87.1 million in cash. For reference, our fourth quarter revenue under the prior ASC 605 accounting standard would have been $102 million with a full year at $401.1 million, which excluding the lighting business we shut down in Q1 is up 6% year-over-year. We executed well with systematic increases in customer wins in our product groups and continued technology leadership on strategic programs. Our licensing programs remain strong with new deals and renewals closed in Q4, including an agreement with Broadcom, as well as NVIDIA and Phison, which we mentioned on our previous call.

Turning now to our product teams, Q4 was another positive quarter for server DIMM chips. As we continue to make steady gains in market share for DDR4 and closed our 2018 with record revenue of $36 million in line with our target of $35 million to $40 million for the year. Looking forward to 2019, we remain confident in our ability to continue to gain market share for the current generation server platform and anticipate even greater share on the upcoming CPU refresh, as we have more than twice the number of OEM and data center qualifications versus the previous generation.

We believe this strong market position, at the time of new product introduction for Intel's next CPU will outweigh the potential near-term softness for the memory market and propel strong gains in market share for our server DIMM chips in the second half. With that, we expect to continue the growth that has been demonstrated year-over-year and anticipate a revenue range of $50 million to $70 million for the buffer chip program in 2019.

In addition to the steady growth in DDR4, we maintain our leadership position for next generation DDR5 server DIMM chips, and then now shipping customer samples at the top-end speeds for both the RCD and DB chips. We are leveraging our head start in product development, with samples being validated by our partners and continue to have strong collaboration with the memory vendors, as well as the broader ecosystem.

Turning now to our high-speed IP cores business, it has been growing at an impressive compound annual growth rate of greater than 50% over the past four years. We continue to gain traction in high growth, high performance applications, including artificial intelligence, machine learning, graphics, wired communications, and wireless infrastructure. We close out the year with record revenue fueled by wins with Tier 1 customers in data center and communication segments worldwide.

Competing against industry players like Cadence and Synopsys, we continued our leadership position in high-end and high-bandwidth SerDes and memory IP cores in advanced process nodes with the tape out of the industry's first GDDR6 memory PHY in a leading-edge process node. As demand for high-memory bandwidth extends beyond graphics, we see expanding customer engagement in a wide range of high performance applications. In Q4, we closed a substantial number of design wins with top tier customers worldwide, which sets us up nicely for healthy growth to continue in 2019.

Moving over to our Cryptography business, 2018 saw the importance of semiconductor device-level security grow in the industry, resulting in increased traction and opportunities for our embedded security cores and provisioning capabilities in market segments like IoT, automotive, networking and government. We launched the programmable CryptoManager Root of Trust, which combines our deep security expertise with a modern open architecture, RISC-V, to create an easy-to-consume, secure processing core and have ongoing engagements with semiconductor manufacturers, OEMs and cloud providers.

In Q4, we closed the year with a great win at Micron and announced that our CryptoManager platform will be used to securely provision Micron's Authenta secure memory product line. This is a key milestone, as it showcases our ability to combine our device level provisioning solutions with third-party cores to extend our market share and enable a new level of protection for connected devices.

As we entered 2019, we are focused on delivering best-in-class embedded security cores and provisioning capabilities, which can be deployed independently, or as a complete platform. We believe our CryptoManager programmable secure core and provisioning platform will play an increasingly important role in securing special purpose computing use cases at the edge, driving increased customer interest across our target segments, including authorities, artificial intelligence, machine learning and governments.

In summary, Q4 was another strong quarter that closed out a solid performance with 2018 (ph). But 2019, we are renewing our focus on our core areas of expertise and that poised for success in our target markets and year-on-year growth in product revenue. We are creating the foundation for future profitable growth, as we continue to fuel innovation, roll-out products, improve operational efficiency and generate cash.

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

Rahul Mathur -- Senior Vice President, Finance and Chief Financial Officer

Thanks, Luc. I'd like to begin with our financial results for the quarter and the year. Let me start with some highlights on slide six. As Luc mentioned, we continue to make progress and delivered solid financial results in line with our revenue expectations and at the high end of our earnings expectations. As you know, we've chosen to adopt the new accounting standard ASC 606 using the modified retrospective method which does not restate prior periods, but rather runs the cumulative effect of the adoption through retained earnings as a beginning balance sheet adjustment. As a result, any comparison between fourth quarter of full year 2018 results under ASC 606 and prior results under ASC 605 is not the best way to track our company's progress. We are required to present a footnote that presents our 2018 results as if we continue to recognize revenue under the old standard. To make this transition easier to the readers of our financial statements, we presented our results under both ASC 606 and ASC 605 through 2018. This way, we can have a meaningful discussion regarding the performance of our business instead of focusing on accounting changes.

Going forward, we'll only be able to report results and give guidance under ASC 606, that will continue to provide additional operational metrics, such as licensing billings to give our investors better insight into our operational performance. Under our new accounting standard ASC 606, we delivered fourth quarter revenue of $68.5 million; under ASC 605, we would have delivered revenue of $102 million; under ASC 606, we delivered non-GAAP diluted net income per share of $0.09; under ASC 605, we would have delivered non-GAAP diluted net income per share of $0.28 at the high-end of our expectations.

We ended the year with cash, cash equivalents, and marketable securities of $277.8 million, up $30 million from the previous quarter, due primarily to cash from operations of $35.1 million. We delivered solid results, while continuing 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.

Now, let me talk you through some revenue details on Slide Seven. Revenue for the fourth quarter was $68.5 million under the new revenue accounting standard, higher than our expectation at $56 million to $62 million due to the structure of licensing agreement signed within the quarter. Revenue would have been $102 million under ASC 605, in line with expectations. For the full year, excluding the Lighting business we shutdown in Q1, our business was up 6%. As we've mentioned previously, the new revenue recognition standard has a material difference in the timing of revenue recognition for a fixed fee licensing arrangements. Our Licensing business continues to perform well, it is a foundation of our success, is core to our initiatives in both memory and security, and will continue to generate cash in years to come.

Going into additional detail under ASC 605, our memory and interface revenue would have been $82.8 million and our security business revenue would have been $19.2 million. Our overall security business was down year-over-year, as we restructured contracts in our pipeline to improve overall long-term value, and we saw one-time true up in both fees and forecasts with an anti-counterfeiting customer of our Cryptography products groups. As we expected, revenue for our Payments and Ticketing business was between $25 million and $30 million for the full year. We expect that business to grow to $35 million to $40 million in 2019. As we announced last quarter, we are evaluating strategic options for that business, but this business is still part of our operating results. We expect that business to be roughly break-even in 2019, so regardless of which strategic option we choose, if any, I don't expect a significant impact to the company's overall profitability in 2019.

Let me walk you through our non-GAAP income statement on Slide Eight. Along with our solid revenue performance in Q4, we once again beat our profitability targets on non-GAAP basis. Cost of revenue, plus operating expenses or what we refer to as total operating expenses, for the quarter came in at $61.6 million. We ended the quarter with headcount of 796, down from 814 in the previous quarter, as a result of our refocus on our core growth initiatives. Over the course of 2019, we expect to invest in headcount to support our growth initiatives in our memory and security businesses.

Revenue and operating expenses under ASC 605 led to operating income of $40.4 million. We are pleased with the operating margin expansion, we delivered in 2018. We recorded $6.1 million of interest income under ASC 606 related to the significant financing component for a fixed fee patent and technology licensing arrangements for which we have not yet received payment, but recognize revenue under the new accounting standard.

We incurred $0.6 million of interest expense primarily related to the convertible notes we issued in Q4 2017. This was offset by incremental interest income related to the return on our cash portfolio. After adjusting for non-cash interest expense on our convertible notes, this resulted in non-GAAP interest and other expense for the fourth quarter of $0.5 million, up from Q3. Using an assumed flat rate of 24% for non-GAAP pre-tax income, non-GAAP net income for the quarter would have been $30.3 million under ASC 605, or $0.28 per share at the high-end of our guidance. On an apples-to-apples basis under ASC 605, our earnings per share in 2018 was 35% higher than 2017.

Now let me turn to the balance sheet details on Slide Nine. We are very pleased with the strength of our balance sheet. Cash, cash equivalents and marketable securities totaled $277.8 million, up $30 million from the previous quarter due primarily the cash from operations of $35.1 million. We expect to maintain our ability to generate solid cash flow from operations in 2019. This will be an important metric to monitor as we adopt ASC 606. As a result of adopting ASC 606, at the end of Q4, we had contract assets with $674 million which reflects the net present value 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 arrangements, as several customers have royalty-based agreements that allow us to recognize revenue each quarter under ASC 606. As a reminder, Rambus has invested in technology R&D throughout our history and our patent portfolio continues to be among the strongest in our industry. As part of our strategic planning cycle, we renewed our focus and investment on patent generation with an emphasis on key technology challenges facing the industry in the years to come. Our patents are foundational to our industry and provide a strong platform for our investment in product development and innovation.

As we look forward to our significant patent renewals in the future, we should note that while our typical licensing agreements last five to 10 years, our patents are valid for 20 years, and we remain confident in our ability to continue to renew with our partners at favorable economic terms in the future, as we've demonstrated historically.

Fourth quarter CapEx was $2.9 million and depreciation was $2.6 million. For the year, CapEx was $10.8 million and depreciation was $10.7 million. Looking forward I expect roughly $3 million of CapEx for the first quarter, and roughly $11 million for the full year of 2019. I also expect depreciation of roughly $2.5 million for the first quarter, and roughly $10 million for the full year of 2019. Overall, we have a strong balance sheet with limited debt and expect to continue to generate strong cash from operations in the future.

Now, let me turn to our guidance for the first quarter on Slide 10. As a reminder, our forward-looking guidance reflects our best estimates at this point in time, and our actual results could differ materially from what I'm about to review. To provide our investors and analysts additional transparency through our accounting transition, we've been providing financial outlook as if we were still under ASC 605. Going forward, we will only be able to provide financial outlook under ASC 606. Future revenue under ASC 606 could be volatile from period-to-period due to the timing and structure of our licensing arrangements. We will continue to focus on leveraging our vast patent portfolio to maximize the value for our business as well as provide the best economic structure for our customers.

To offer additional transparency, 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. The differences between licensing billings and royalty revenue under ASC 605 are primarily related to timing as we don't always recognize revenue the same quarter we bill our customers.

As you see in the supplemental information that we provided on Slide 17 of our earnings deck, on an annual basis licensing billings closely correlates with what we reported as royalty revenue under ASC 605, given this timing lag. We'll continue to provide licensing billings as another operational metric to help our investors understand the underlying performance of our company. With that said, under the new ASC 606 revenue standard, we expect revenue in the first quarter between $41 million and $47 million. Under ASC 606, we expect royalty revenue between $18 million and $24 million. We also expect licensing billings between $73 million and $79 million.

We expect Q1 non-GAAP total operating expenses, which includes COGS, to be between $62 million and $66 million, up from Q4 spend due to the regular FICA (ph) and other employee-related expenses that come back in the first quarter. Over the course of 2018, we've kept operating expenses roughly flat as revenue grew providing leverage to our financial model. I expect total operating expenses which include COGS related to our buffer chip business to grow through 2019, as we ship more product. We continue to expect that our buffer chip business will grow to $50 million to $70 million in 2019. However, as we've mentioned previously, we have limited visibility in the first quarter due to macroeconomic issues, inventory in the supply chain, and trade concerns with China. This could cause softness in buffer chip shipments in this first quarter. But we cannot control the macroeconomic environment, we're very pleased with our continued share gain representing several consecutive years of 15% or higher growth.

Under the new 606 revenue standard, non-GAAP operating results for the first quarter is expected to be between a loss of $20 million and $13 million.

For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we would have expected a $1 million expense, which includes $0.6 million of interest expense related to the notes, due in 2023. Based on the new tax legislation passed at the end of 2017, we expect our pro forma tax rate in 2019 to remain consistent with our 2018 pro forma tax rate of roughly 24%. The 24% is higher than the new statutory rate of 21%, primarily due to higher tax rates in our foreign jurisdictions. As a reminder, we pay roughly $20 million of cash taxes each year, driven primarily by our licensing agreements with our partners in Korea.

Under 606, and based on a 24% tax rate, we expect GAAP taxes to be a benefit of $6 million and a tax provision of $4 million in Q1. We expect our Q1 share counts, roughly 110 million basic and diluted shares outstanding. This leads you to between a non-GAAP loss of $0.18 and $0.12 for the quarter. While we do not issue annual guidance, looking ahead to 2019, as we've discussed previously, we had a structural step downs in a number of our long-term licensing agreements, which impacts our 2019 revenue, even though one of these agreements steps back up in 2020.

In balance, we expect the growth we see in our product programs to offset the structural step downs and we're comfortable with the current consensus analyst expectations on the top-line and the bottom-line for each quarter of 2019. To our focus on our core business, we also expect roughly flat cash flow in 2019, as we maintain our strong cash flow and continue to invest in product programs that are growing nicely.

Let me finish with the summary on Slide 11. We are proud of the solid performance by our team and the progress we continue to make against our strategic initiatives. But we understand that the adoption of ASC 606 has a level of complexity to our financial reporting, it's important to reiterate, that the underlying financial strength of our business remain strong. In closing, we are refocusing our product portfolio around core strengths in the semiconductor industry, improving our operational efficiency and profitability, leveraging synergies across businesses and our customer base, and using our strong balance sheet to support our strategic initiatives. We continue to generate solid cash from operations and remain very well positioned for continued success as we head into 2019.

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

Questions and Answers:

Operator

Thank you, Rahul. (Operator Instructions) Your first question comes from the line of Gary Mobley from Benchmark. Your line is open.

Gary Mobley -- The Benchmark Company -- Analyst

Hey, guys. Lot of information. I want to start with the buyback, or -- is the different legal act,(ph)the buyback. Cash position has grown, and I know you did an ASR earlier this year, but I'm just wondering where you stand with respect to the buyback and should we read into the fact that shares repurchased in the quarter maybe indicative of something in the M&A pipeline?

Rahul Mathur -- Senior Vice President, Finance and Chief Financial Officer

Hi, Gary, thanks very much for your question. As you know, over the last several years or so, we've returned about 40% to 50% of our free cash flow back to our shareholders and we've been using the share buyback in order to go do that. And what we did in Q4 is we actually spent some time with our Board looking at our overall capital structure and what we wanted to do with cash and debt and equity, the other components as well. And what I'd expect is that we'll continue to generate strong cash from operation, and if there's nothing near term from an acquisition perspective, than yes, you should absolutely expect us to continue to return capital to our shareholders through a buyback program.

Gary Mobley -- The Benchmark Company -- Analyst

Okay. And given that your headcount -- personal headcount has been trickling down and just given the guidance you gave for the first quarter, perhaps some modest growth off that base. Is it possible, we could see operating margin expansion in -- on a non-GAAP ASC 605 basis versus 2018?

Rahul Mathur -- Senior Vice President, Finance and Chief Financial Officer

I think, absolutely Gary. If you look at the last several years, we had a much higher operating margin again on an like-for-like ASC 605 basis. And with the acquisitions and -- that we made in 2016, we made the decision to go into these product businesses, which will help us grow both on our top line and bottom line. And that's what you've seen over the last several years.

So what you've seen is that you have seen that growth from -- I think about a 32% operating margin up to about a 34%. I think, current consensus estimates have that being roughly flat, that as our Payments and Ticketing business is roughly breakeven, if we end up finding a strategic option for that business, then you could see operating margin again grow by another few percent.

What I also like about our product businesses, Gary, is that our infrastructure and investment for those businesses is already built into our model. So as we continue to grow either on the buffer chip side or the IP core side or on the Cryptography products, that incremental gross margin has a pretty strong fall through into operating profit and operating margin and so as we grow on the top line, you'll see operating margin expansion through there as well.

Gary Mobley -- The Benchmark Company -- Analyst

Okay. A question for Luc. You did mention, for the buffer chip business, expanded footprint of roughly two times the size. And I'm assuming that perhaps is tied with Intel's latest generation server processors. And I'm wondering if a delay in Intel's ramp at 10-nanometer might have any impact on the timing of the ramp in the buffer chip pipeline?

Luc Seraphin -- President & Chief Executive Officer

No, thanks for the question, Gary. First of all, we've increased share year-over-year, '18 over '17 on the Skylake platform. So we've increased our footprint with all OEMs and customers on the Skylake platform, when we are coming late to market. For the new platform, Cascade Lake, or the new processor Cascade Lake, we have a footprint that is twice as big as what we had in Skylake. And we track this ramp for our Cascade Lake, and we're confident that with the second half of the year, we will continue on that growth path that we are on. And we feel confident with this $50 million to $70 million revenue for this coming year.

Operator

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

Suji Desilva -- ROTH Capital -- Analyst

Hi, Luc. Hi, Rahul. So maybe a little bit related to Gary's question, but perhaps a little different. The recent data center uncertainty that Intel has called out in video with the pre-announcement today, can you just talk about how we should think about that in the context of what's going on with your memory buffer business? I know Rahul, you talked about limited visibility, but any color you could have as to how, you in those data points overlap, would be helpful to understand for the go forward?

Luc Seraphin -- President & Chief Executive Officer

What we see is that there's uncertainty in the macroeconomic environment, there are questions about the supply chain in general and the levels of inventory. So we see some potential softness, I would say, a lack of visibility into Q1. But our traction on the design win front is still very, very strong. And we think the effect it's going to have on us is going to be -- maybe softness in Q1. But as I said, we feel confident based on what we see with our customers that our revenue is going to continue to grow in 2019 overall, as I said to the $50 million to $70 million range.

Suji Desilva -- ROTH Capital -- Analyst

Okay, no, that's helpful. And then, maybe on the strategic options for the security payments business, can you just give us some color as to what the process is like and what the environment is like? Just to have some understanding of the appetite in the marketplace for this kind of asset? Any color there would be helpful.

Rahul Mathur -- Senior Vice President, Finance and Chief Financial Officer

Sure, Suji, it's Rahul. What I'll tell you is, we've been delighted just with what we've seen as a response to the announcement we made in October. There's been a lot of inbound interest from different partners, investors, different partners, investors, different options in terms of that business.

So we're going through a process, I think toward the end of Q4, we looked at having advisors that would help us go through that. So what I expect is that likely somewhere in the first half of this year, we'll have an idea of what strategic option we'll choose, if any, in terms of this business. But as we've talked about previously, not just in this call, but on previous calls, and other times, this is a very exciting business.

I think what we're doing there with tokenization in particular, has a lot of traction in the marketplace and in the security software marketplace as well. Just one of the things we learned over the last year or so is that, that business was growing in ways that was further and further away from our semiconductor core. Hence the announcement we made in October. But to answer your question, yes, we've had a lot of very exciting conversations about different options for that business.

Operator

Your next question comes from the line of Sidney Ho from Deutsche Bank. Your line is open.

Sidney Ho -- Deutsche Bank -- Analyst

Great. Thanks for taking my question. The lack of ASC 605 disclosure is certainly going to make things little more complicated, but maybe just for the first quarter of this practice and see if we can get some help here. If you were to report revenue under ASC 605, and let's say, if your revenue and billings is just like -- we can say, the same just like the last quarter, should we just add up the guide guidance for billings and royalty and then put in our own assumption for chipset revenue, or am I double counting something here?

Rahul Mathur -- Senior Vice President, Finance and Chief Financial Officer

Hi, Sidney. Thanks a lot for your questions, and yes, we can understand how the difference between 605 and 606 can be a little confusing. If you go back to slide 10, in terms of our deck, what we've shown is our outlook under ASC 606. And then we've also provided a little more clarity in the table to the right of it. And if you look again, and this is what we've presented historically, I think it's on slide 17 right now, historically under ASC 605, what we reported at licensing billings, again that's an operational metric that reflects the amounts that we've actually invoiced to our partners, adjusted for certain differences.

But our licensing billings historically has been very close to what we reported as royalty revenue under ASC 605, right? So I think that the difference in 2017 was nothing, the difference on -- over $300 million in fiscal year 2018 was just about $2 million. So it's been a very accurate way to look at what we previously reported under royalty revenue.

So coming back to slide 10, the guidance that we gave for the quarter under ASC 606 has total revenue of $41 million to $47 million. Of that, royalty revenue is $18 million to $24 million. However, licensing billings which some folks used as a proxy for royalty revenue is about $55 million higher than what we've given from a royalty revenue perspective. But I think that's one way to look at what our actual cash flow might look like going forward under 606.

Sidney Ho -- Deutsche Bank -- Analyst

Okay, that's helpful. I have to go through the numbers myself. But maybe a follow-up question is, in the past you've talked about your recurring revenue, it's about $15 million in core and about $220 million for patent licensing. How should we think about the current environment impact at revenue stream and may be broadly what that caused them to move up or down more meaningfully, other than the scheduled step down that we've talked about on the memory side?

Rahul Mathur -- Senior Vice President, Finance and Chief Financial Officer

Sure, Sidney and just for a little bit of background, I refer to the backbone of our company as being between patent licensing and core. And that backbone historically has been roughly $300 million as you just called out. It's usually been about $250 million on the licensing side, about $50 million in cores, as we talked about previously, we have a number of structural step downs in certain license agreements. I think we had several partners who were looking to manage their cash flows in a certain time in the industry. And so what that results then as a step down for those patent licensing agreements through 2019.

Now as Luc talked about, we have some really interesting growth happening in -- on the product side, IP cores, buffer chip as well. And so I think the net delta on that backbone of $300 million is probably about $15 million of a headwind for us in 2019. So essentially the product growth will offset any declines in patent licensing until -- up to about $15 million, So instead of being roughly $300 million you'd expect that to be closer to kind of $285 million in 2019. Does that help you in terms of additional color?

Sidney Ho -- Deutsche Bank -- Analyst

Yeah, that's helpful. Thank you. If I can squeeze in one more --

Rahul Mathur -- Senior Vice President, Finance and Chief Financial Officer

Sure.

Sidney Ho -- Deutsche Bank -- Analyst

Yeah. So you guys bought the assets from Diablo and my understanding is that Diablo has a long history in the enterprise SSD market. What are your plans as it relates to the assets you acquired from them? And will you be licensing those IP or do you have plans to enter the SSD market by actually making those SSDs?

Luc Seraphin -- President & Chief Executive Officer

Yeah, that's a great question, Sidney. Let me give you some context. Diablo was an early pioneer in NVDIMM technologies and we acquired the patented innovations to broaden our portfolio in the hybrid DRAM and flash memory markets and complement our product offering. For people, we are not very visible on that but we already had activities in hybrid memory systems. When we refocused our R&D efforts one of the key areas of focus was hybrid memory system.

We also have as part of our buffer chip sales, a small portion of our sales going to NVDIMM systems. So this is something that is not new to us. But the acquisition of Diablo strengthens our portfolio for patents and brings technologies that we think is going to be useful for future systems -- in future memory systems. And these hybrid memory systems, they combine DRAM and non-volatile memory, like flash or other memory, such as 3D X. And they're designed to offer the cost effectiveness of non-volatile solutions with the performance of DRAM. And we think that in the future, the benefits are desirable to handle large data sets like the ones that we can find in our machine learning type of applications. So, overall this was a good acquisition for us, it strengthens our portfolio of patents and it continues to build on adjacent focus areas around DIMM technologies.

Sidney Ho -- Deutsche Bank -- Analyst

Great, thank you very much.

Rahul Mathur -- Senior Vice President, Finance and Chief Financial Officer

Thank you, Sidney.

Operator

Next question comes from the line of Mark Lipacis from Jefferies. Your line is open.

Mark Lipacis -- Jefferies -- Analyst

Hi, thanks for taking my question. The first one on the CryptoManager Root of Trust. Luc, I was wondering, can you help us understand what is the blue sky scenario for this business? And does -- is there a chance that the business model evolves? And maybe you could just review that business model to the extent that you're selling a product versus like maybe some kind of transactions or something like that? That's the first question, I have a follow-up.

Luc Seraphin -- President & Chief Executive Officer

Yes, that's a great question. I think one pivot that happened in 2018 was the recognition in the market that more and more applications require security to be handled at the silicon level. I think that understanding has happened in 2018, that was good for us. We were well positioned in that space because of our history with our initial customer, where we provision more than a billion chips per year. So we have a strong position there. That recognition in the market has translated in new design wins we've announced in Q4, the design win with Micron, where they do provision their own core with our provisioning system and that's going to be a great inroads into applications such like IoT.

Now the big vision is that more and more applications in more and more segments will require these secure embedded into the silicon. And although we kind of talk about it today we have more and more engagements with a large number of customers in different segments that actually requires to either provide the complete solution or part of the solution to do so.

Again 2018 was pivotal. Customers did realize that they needed embedded security. This has translated to us into new customer wins like the one we announced in Q4 and a lot of activities with new customers going forward.

We've changed our product line to take the benefits of these opportunities in the sense that we moved our architecture to RISC-V, that gives our customers the programmability that they didn't have in previous versions. And we've decoupled the provisioning system from the cores so that we can address applications such as the one we have with Micron.

Now from a business model standpoint, the current business model is, we sell cores like we sell cores like standard IP cores, license fees and NRE and then when it comes to the provisioning system, it depends on the customers, it depends on the customers, it can be volume based, for example, but it really depends on customers, but we hope that when these applications become pervasive, then the revenue will grow at the same rate.

Mark Lipacis -- Jefferies -- Analyst

Okay, thank you. That's very helpful. And is there -- when you talk about the three kind of areas of focus, it sounds like one of them was a refocus of R&D on IP. Is that a change from the past or is that kind of an extension of what you've already been doing? It sounded like was there kind of a refocus toward patent development or is that -- is this just something that you've been doing and you're just kind of refocusing the segments?

Luc Seraphin -- President & Chief Executive Officer

It's a combination. We think that, as we said earlier, we don't want to invest in programs that do not have customer traction. So we've eliminated programs that didn't give us customer traction. We are refocusing on memory technology and high speed interface and embedded security, because we believe that there is a future there.

Our patent licensing program is important to us. We continue to invest in invention for our patent licensing program so that we are in a strong position for the renewals. Remember the patents have a long life. Some of the patents we have today will still be valid at the time of renewal and we're continuing to invest in new inventions for those areas. We believe it's foundational for the long-term growth of our business and we also believe it's foundational for our product development.

That's why we eliminated those areas where we didn't have customer traction, that were far afield from our core and we want to refocus on what we're good at to support both our patent licensing programs for the renewals as well as supporting our product initiatives that show -- the growth that we're showing between '18 and '19.

Mark Lipacis -- Jefferies -- Analyst

That's helpful. Thank you. And then the last question, Rahul the -- did you say that OpEx would grow through the year? Is that if -- only if revenues grow, like in this scenario, revenues were flat with OpEx, or grow anyway? Or is that a comment just on the DIMM business side?

Rahul Mathur -- Senior Vice President, Finance and Chief Financial Officer

So I think that's more on -- I think that's more on the DIMM business, because our total operating expenses include COGS related to that business. So that's the premise(ph)and our total operating expenses will grow. As Luc mentioned, I think we've done a nice job of refocusing our company and I think our total operating expenses excluding COGS or OpEx, excluding COGS should be roughly flat, kicks out in Q1, because of the normal employee-related costs.

One other things I'm actually quite proud of it was, Luc just talked about, and he and I were actually working on this before he became CEO as well, that really helping to refocus and be better at understanding where we invested. And so what you're seeing just from us from a operating income perspective over the last several years, is very nice growth on the operating income, despite roughly flat revenue as we've optimized our portfolio.

Mark Lipacis -- Jefferies -- Analyst

That's helpful. Thank you.

Operator

Your next question comes from the line of Atif Malik from Citigroup. Your line is open.

Atif Malik -- Citigroup -- Analyst

Thank you for taking my questions. I just have a few questions. Rahul you talked about long-term licensing agreement coming down this year, and then stepping back up in 2020? Why does it step up in 2020 and what visibility do you have?

Rahul Mathur -- Senior Vice President, Finance and Chief Financial Officer

Sure, Atif and thanks for your question. So one of our key licensing arrangements actually had a provision in it, where our partner had a certain number of quarters, during which they could step down their payment of their choosing. And I think our partner negotiated that years ago to help them manage cash flow through any cycle.

So they elected to take that step down, where the impact, among several quarters really hits us in 2019. And that's the bulk of the difference of that backbone dropping from 200 to 285 is almost entirely explained from there, although there's a bunch of moving pieces. Now the provision says that it steps down for a number of quarters, but then once that's finished, it steps back up. So that step up is just purely contractual to come back up in 2020 and beyond.

Atif Malik -- Citigroup -- Analyst

Got it. And then Luc, going back to Sidney's question, Diablo Technologies, it sounds very interesting. Can you just talk about how much you paid for it? And does this improve your leverage in licensing, signing up Intel as a licensee, as they are using non-volatile memory on a DIMM for their server purely(ph)platform?

Rahul Mathur -- Senior Vice President, Finance and Chief Financial Officer

So Atif, it's Rahul, I'll take a portion of that. The consideration there was relatively immaterial in terms of the total dollar amount for our company and I think we may have mentioned we actually just took assets. So there is no liabilities or anything else that came across with a patent portfolio. I'll ask Luc to speak a little on the other parts in terms of is there an opportunity for us in the future.

Luc Seraphin -- President & Chief Executive Officer

For Diablo, yes, there are opportunities for us in the future. Again, this was a great deal for us in terms of acquisition, it supports our licensing program going forward, it strengthens our licensing portfolio, but it also strengthen our ability to give value to our customers on the product side. Again, we will continue to look at these type of opportunities when they are adjacent to what we do, support our product growth and support our licensing program.

Atif Malik -- Citigroup -- Analyst

Okay and one final one, you talked about $50 million to $70 million sales of buffer chip this year, what is the size of the market and where you think you can take your market here?

Luc Seraphin -- President & Chief Executive Officer

Yeah, the size of the market is about $350 million, roughly so we continue to gain share. We continue to gain share because over the last two years, we've improved the competitiveness of our products. We've improved the footprint of our design wins, and we've improved the quality of our products. There -- the market is not growing at the pace that we are growing, but we're gaining share in that market, substantial share. We grew share from '18 to -- from '17 to '18, and we have confidence we'll continue on that trajectory in '19 going from the $36 million we did in 2018 to anything between $50 million and $70 million in 2019.

Atif Malik -- Citigroup -- Analyst

Thank you.

Operator

(Operator Instructions) At this time, there are no further questions. This concludes the question-and-answer session. I would now like to turn the conference back over to the Company.

Luc Seraphin -- President & Chief Executive Officer

So as you can see, we continue to demonstrate our technology leadership and ability to execute across the Company. We have renewed our focus on our core expertise and look forward to an exciting 2019. Thank you for your continued interest and time and have a very good day.

Operator

Thank you. This now concludes today's conference.

Duration: 50 minutes

Call participants:

Rahul Mathur -- Senior Vice President, Finance and Chief Financial Officer

Luc Seraphin -- President & Chief Executive Officer

Gary Mobley -- The Benchmark Company -- Analyst

Suji Desilva -- ROTH Capital -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Mark Lipacis -- Jefferies -- Analyst

Atif Malik -- Citigroup -- Analyst

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