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Welcome to the Rambus First 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 a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the call over to Rahul Mathur, Chief Financial Officer. Please begin.
Thank you. And welcome to the Rambus first quarter 2018 results conference call. I'm Rahul Mathur, CFO, and on the call with me today is Dr. Ron Black, our President and CEO. The press release for the results that we will be discussing today have been furnished to the SEC on Form 8-K. A replay of this call will be available for the next week at 855-859-2056. You can hear the replay by dialing the toll free number and then entering ID number 939-2458 when you hear the prompt.
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. So, even if you are 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 Q2 2018 and full year 2018, prospects, product strategies, timing of expected product launches, demand for existing and newly acquired technologies, potential benefits of our past acquisitions, the growth opportunities of the various markets we serve, and changes that we will experience in our financial reporting due to our adoption of new revenue recognition standards starting in Q1 2018, 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 are under no obligation to update these statements.
In an effort to provide greater clarity within our financials, we are using both GAAP and non-GAAP financial presentation 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 in the Investor Relations page, under Financial Releases.
The order of our call today will be as follows. Ron will start with an overview of the business, I will discuss our financial results including the guidance we issued in today's press release, and then we will end with Q&A.
I'll now turn the call over to Ron to provide an overview of the quarter. Ron?
Thanks, Rahul, and good afternoon everyone. We delivered a solid first quarter and are making strong progress across all of our businesses as we maintain our growth trajectory living up to our tagline Rambus; making Data Faster and Safer. From a financial perspective in Q1, we delivered revenues of $46.4 million which reflects the impact of the new accounting standard ASC 606. As a reference point under the prior ASC 605 accounting standard our first quarter revenue would have been $100.5 million which includes $2.5 million from our lighting division that was wound down during the quarter. If we compare under the same accounting standard and excluding lighting, this equates to 4% increase from Q1, 2017.
We also delivered pro forma earnings per share in line with our expectations. So overall, we performed well the strong execution in our product groups, continued technology leadership on strategic programs and ongoing licensing of our broad IP portfolio. Q1 was a positive quarter for our memory and interfaces division in both chips and IP cores. Our DD4 memory buffer chip business continues to grow with further OEM in cloud customer qualifications leading to further design wins at our customers. Indeed, we remain on track to meet our targets for the business and drive significant revenue growth for 2018.
As we look to the next generation, we believe we maintain our leadership position for DDR4 memory buffer chips being the first and only supplier with working silicon that supports the top end speeds for both the RCD and DB chips. We remain actively engage with our customers and the ecosystem leveraging our head start in product development and learning's to help enable the industry develop both the hardware and software infrastructure required to support the bring up of high quality DDR5 solutions.
Moving to other side of our memory and interface division. This quarter saw record revenues drive IP cores as we continue to grow our portfolio with new technologies and expand into new market segments. As we discussed on our previous call, we launched our new GGDR6 memory PHY in January as part of a comprehensive solution alongside ecosystem partners Micron, Northwest Logic and Avery Design leveraging our expertise in high speed interface design.
As the first IP supplier to offer a broadly available GGDR6 PHY, we aim to enable new markets outside of graphics that require high performance memory including AI, automotive and networking. Indeed during the quarter we closed our first major design win for a non-graphics application. For the IP cores business, we continue to collaborate with our ecosystem partners to extend our foundry access and gain traction in next generation technologies, solidifying our market leadership in leading edge process nodes and performance capabilities while all the time feeing our IP portfolio with best in class innovation.
Turning now to our security division, with consist of our Cryptography, Ticketing and Payments product groups. We continue to build strong momentum across all areas with solid commercial traction, product development and expanded patent licensing. Developers in our cryptography product group were part of the research team of world class security experts that earlier this year identified two wide reaching CPU vulnerabilities call Meltdown and Spectre. These vulnerabilities highlight the need for tip security by design with controlled secure processing that does not depend on often inherently insecure general purpose CPUs. The discovery of these vulnerabilities reinforces the importance of SOC design implementing a strategy of security first and highlights the value of our CryptoManager security platform which absolutely uses this approach.
Our first generation CryptoManager security engine was an embedded security core that acted as a secured vault for sensitive keys in configuration information that can be used for secure provisioning and device authentication throughout the lifecycle of the device. It was not however designed to provide processing capabilities or program abilities with the [technical difficulty]. Recently, we announced our new next generation CryptoManager Root of Trust that does provide such secure processing capabilities. This next generation programmable secured core uses RISC-V CPU that is been customized by our security experts to go beyond the secure vault and then enabled the siloed execution, a secured code within the core. Thus helping to protect against vulnerabilities such as Meltdown and Spectre.
Also part of our cryptography product group is our DPA patent licensing program which we continue to expand. In 1Q, we signed an agreement with Gemalto to provide access to our DPA countermeasures portfolio which protects against side-channel attacks. Turning to our Ticketing products group, which is a market leader in smart ticketing with ongoing deployments of our back-office software and services to train and bus operators across the UK. Our mobile ticketing offering includes a ticket log service and white label app that utilizes Host Card Emulation or HCE to enable passengers to securely buy and download tickets directly to their smartphone and then tap through the existing the gate or readers to travel. We're looking forward to additional pilots in the coming months.
Turning to our Payments product group, there is ongoing traction for our tokenization solutions with world-wide implementation of our Token Service Provider solutions will replace traditional credit card primary accounts numbers with temporary unique identifiers the payment tokens, that keep the actual account number secret. The global trends continue to ship toward new payment methods like peer-to-peer in real-time payments. We see growing demand to bring the security benefits of tokenization beyond traditional mobile payments.
Our Unified Payment platform that enables multiple payment options for real retail scan and go experience using our bank read tokenization security continues to attract global interest across multiple retail segment. As noted previously, we're engaged with the major retail customer in Asia Pacific to integrate and deploy the Unified Payment Platform into their digital payment system. This pilot offers not only multiple payment options but also real-time loyalty point redemption with the convenience of scan and go and it's all based on our hardened bank grade tokenization software. More on this in other pilots in the coming months.
Last but certainly not least is our Emerging Solutions Division which focuses on advance research, innovation and IP development. We have two significant amount [indiscernible] from the divisions. The first was a partnership with IBM to develop hybrid memory system architectures for future data centers. Much like our ongoing relationship with Microsoft on cryogenic memory we're collaborating with IBM to explore advance memory system architectures targeted at solving the industries key performance challenges. As part of the collaboration we will develop an architecture of the combined the best attributes of DRAM and storage class memory to create a high capacity architecture at lowest cost per bit with performance levels comparable that of DRAM.
The second, with just came out last week was the formation of joint venture in China with GigaDevice and THG Ventures called Reliance Memory which focuses on commercializing embedded Resistive RAM access memory or RRAM. Rambus has invested in RRAM technology for several years in its joint venture as an natural way to continue the path to productization [ph] and provide innovative memory solutions for the next wave of the state-of-the-art mobile devices.
In closing, Q1 was a strong quarter that continue to reinforce our confidence and our strategy and execution to plan. With that, I'll turn the call to Rahul to discuss the quarterly financial results. Rahul?
Thanks Ron. I'd like to begin with our financial results for the quarter. Let me start with some highlights on Slide 5, as Ron mentioned we delivered solid financial results in line with our revenue and EPS expectation. We've chosen to adopt the new accounting standard ASC 606 using the modified retrospective method which does not [indiscernible] prior period, but rather runs the cumulative effect of the adoption through retained earnings as beginning balance sheet adjustment.
As a result any comparison between first quarter 2018 results under ASC 606 and prior results under ASC 605 is not the best way to track the company's progress. We're 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 will present our results under both ASC 606 and ASC 605. This way we can have a meaningful discussion regarding the performance of our business instead of focusing on accounting changes.
Under our new accounting standard ASC 606, we delivered revenue of $46.4 million. Under ASC 605 we would have delivered revenue of $100.5 million which included roughly $2.5 million of revenue from our lighting division which we closed in the quarter. Excluding the benefits from our LD, our revenue was up year-over-year and in line with the midpoint of our guidance. Under ASC 606, we delivered non-GAAP dilutive loss per share of $0.10. Under ASC 605, we would have delivered non-GAAP earnings per share of $0.21 just above the midpoint of our expected range. We delivered solid results while continuing our investments in our business to drive long-term profitable growth. To drive this growth, we continue to leverage our high margin historic business to fuel growth in adjacent areas where we have strong technical and market expertise with the focus on memory and security.
Now let me walk you through some of the revenue details on Slide 6. Revenue for the first quarter was $46.4 million under the new accounting standard and would have been $100.5 million under ASC 605 both within our expectation. Year-over-year excluding lighting under ASC 605 our business was up 4%. As we've mentioned previously the new revenue recognition standard has a material difference in the timing of revenue recognition for our fixed fee licensing arrangements. Our licensing business continues to perform well as the foundation of our success and is core to our initiatives in both our memory and security businesses.
Going into additional detail under ASC 605 our memory and interface revenue would have been $78 million, security $19.9 million and our lighting and display technology revenue which we closed midway through the quarter $2.5 million. Let me now walk you through our non-GAAP income statement on Slide 7. Along with our solid revenue performance in Q1, we once again met our profitability targets on a non-GAAP basis. Cost of revenue plus operating expenses or what we refer to as total operating expenses for the quarter came in at $68.7 million. Again this included expenses from our lighting division which has historically been a breakeven business for us and for which we don't anticipate will contribute to significant pro forma revenue or expenses going forward.
We ended the quarter with headcount of 771 down from 819 in the previous quarter primarily due to the employees impacted by the lighting closure. Over the course of 2018, we expect to invest in headcount to support our growth initiatives in our memory and security businesses. Revenue and operating expenses under ASC 605 lead to operating income of $31.7 million. We recorded $7.5 million of interest income under ASC 606 related to the financing component of licensing agreements for which we have not yet received payment but recognized revenue under the new accounting standard. We incurred $0.6 million of interest expense primarily related to the convertible notes we issued in Q4, this was offset by incremental interest income related to a higher return on our cash portfolio.
After adjusting through non-cash interest expense on our convertible notes which resulted in non-GAAP interest and other income for the first quarter of $0.1 million up in Q4. Assuming a flat rate of 24% or non-GAAP pre-tax income non-GAAP net income for the quarter was $24 million or $0.21 a share just above the midpoint of our guidance.
Now let me turn to the balance sheet details on Slide 8. We are very pleased with the strength of our balance sheet. Cash, cash equivalent and marketable securities totaled $291.2 million down $38.2 million from the previous quarter due primarily to the $50 million accelerated share repurchase program we launched in the quarter. Cash also increased due to $16.5 million of cash generated from operation. We're pleased to have progress in this area and we expect to maintain our ability to generate cash from operations in 2018. This will continue to be an important metric to monitor as we adopt ASC 606.
As a result of adopting the new revenue standard, we recognized contract assets worth $818 million which reflects a net present value of unbilled AR related to licensing arrangements for which the company has no future performance obligation. The offset of this contract asset is primarily reflected in $639 million net credit to accumulated deficit predominantly from the acceleration of revenue recognized under the new revenue standard. First quarter CapEx is $1.7 million and depreciation was $2.9 million. Looking forward, I expect roughly $3 million of CapEx for the second quarter and roughly $10 million for the full year of 2018. I also expect depreciation of roughly $3.5 million per quarter in 2018. Overall we have a strong balance sheet of limited debt and expect to continue to generate strong cash from operations in the future.
Now let me turn to our guidance for the second quarter on Slide 9. 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 analyst, additional transparency during this transition, we're also providing financial outlook as if we were still under ASC 605 as well as ASC 606 during this transition period. Please note that the presentation under ASC 605 is not a substitute for the new ASC 606 revenue recognition standard under GAAP. Featured revenue under ASC 606 will 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 to provide the best economic structure for our customers. To offer additional transparency, we've also been providing information on licensing billing which is an operational metric that reflects amounts invoiced to our patent and technology licensing customers during the period adjusted for certain differences. The difference 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 we have provided on Slide 16 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 second quarter between $42 million and $48 million. Under ASC 605 revenue standard, we expect revenue in the second quarter would be between $94 million and $100 million. Excluding the impact of lighting division this is up 4% year-over-year and flat quarter-over-quarter when we're historically down 5% seasonally. We expect Q2, non-GAAP total operating expenses which includes COGS to be between $68 million and $64 million down from Q1 primarily due to the exclusion of the lighting division.
Over the course of 2018, I expect we will keep operating expenses roughly flat as revenue growth dividing leverage to our financial model. I expect total operating expense which include COGS related to our buffer chip business [indiscernible] through the year as we ship more product. We continue to target $35 million to $40 million in buffer chip revenue in 2018. Under 606 revenue standard, non-GAAP operating loss for the second quarter is expected to be $26 million and $16 million. We expect roughly $1.7 million in non-GAAP interest in other income and expense. This includes $0.6 million of interest expense related to 2023 notes and $0.2 million related to the remaining 2018 notes which we expect to pay off in Q3.
Based on the new tax legislation path at the end of December, we expect our pro forma tax rate to drop to roughly 24%. The 24% is higher than the new statutory rate of 21% primarily due to the higher tax rates in our foreign jurisdiction. As a reminder, we pay roughly $20 million of cash taxes per year driven primarily by our licensing agreements with our partners in Korea. Based on 24% tax rate, we expect GAAP benefit of between $7 million and $4 million from taxes in Q2. We expect our Q2 share count to be roughly 107 million basic shares outstanding. This leads you to between $0.20 and $0.13 of non-GAAP loss per share for the quarter.
Under ASC 605 revenue standard even with same assumptions for expenses and other income and expenses, $6 million to $8 million for taxes and $111 million fully diluted share count. We would expect between $19 million and $26 million of non-GAAP net income and between $0.17 and $0.23 of non-GAAP earnings per share for the quarter. Looking ahead to 2018, while we do not issue annual guidance as we look at consensus estimates from our sell side analyst we remain comfortable with current quarterly consensus estimate for growth and earnings for 2018 as reported under ASC 605 prior to the new revenue recognition rules.
Let me finish with a summary on Slide 10. We're proud of the solid performance by our team and the progress we continue to make against our strategic initiative. While we understand that adoption of ASC 606 as a level of complexity to our financial reporting, it's important to reiterate that the underlying financial strength of our business remain strong. We continue to generate solid cash from operations and remain very well positioned for continued success as we head into fiscal 2018.
With that, I'll turn the call back to our operator to begin Q&A. could we please have our first question?
[Operator Instructions] your first question is from Suji Desilva with ROTH Capital
Just want to check, next quarter there will be zero lighting revenues, is that right? In the guidance.
Yes, Suji. The next quarter assumes zero revenue for lighting for the quarter, we may have some small immaterial amounts of revenue associated with lighting. Primarily associated to patent or technology licensing over the course of the year, but I don't expect that to be material and it's excluded from our guidance.
Okay, helpful. And then on the - as I look at the security business, the royalties there are down in the first quarter versus the fourth quarter and third quarter for security. Is that seasonality or is there some other trend going on there?
It's a combination of seasonality and also just timing of our arrangements and agreements. I tell you Suji one of the benefits of our business is because we do have so many different growth opportunities is we're not dependent on any one of them in order to make our commitments to you on a quarterly basis. So in this case, it was just simply timing of agreements.
Okay, helpful there. And then the OpEx, if I look at your guidance versus the revenue guidance. It seems like it's up with percent of revenues, additional investment going on there or any other factors?
So we're continuing to invest in both our memory and security businesses, but it's also changing is that as our buffer chip revenue grows, there's more COGS associated with it and so you'll see a little more of the total operating expenses related to those COGS.
And that's kind of lead to another question, which is on the cost, on the gross margin. What would be the drift down there as the memory buffer business grows? What would you expect that to exist the year at or just some quantification there would be helpful?
Sure. I wouldn't be surprised to see our overall pro forma gross margins under 605 drop a couple of points towards the end of the year just as our buffer chip business grows. Now that said, we still have a lot of other very exciting interesting opportunities on the licensing and core side, which is almost 100% gross margin. But by design at that chip business grows, I wouldn't be surprised to see a couple of ticks down from gross margin on a year-over-year basis.
Okay and then my last question, I'll get back in the queue. For Ron perhaps, on the RISC-V CPU you guys have developed here, is there extensible use for that beyond the CryptoManager Root of Trust where it's showing up here?
Yes I'm very pleased to say that we've had unprecedented interest in it, part of it we found the Spectre and Meltdown issues when we were developing this last year, a brilliant technologist in the security division. And announce of it the new initiative has generated interest in both licensing as a core but also us using it as a chip in various applications or very broadly exploring that with a lot of very high profile names unfortunately I can't reveal them.
Okay, thanks for the color guys.
Your next question is from Sidney Ho with Deutsche Bank.
My first question is, you've said in the past that you expect the security revenues to grow 10% to 15%, is that still you target? Maybe a little color on how of that growth comes from IP and cores and how much from tech implementation and maybe how much from subscription model that you're hoping to transform it through?
Sidney it's Ron. It's exactly what we expect I mean obviously we're targeting more aggressively than that, but that's the - what we expect. I think we've said in the past. The licensing in core is more of flattish and the growth is really about the CryptoManager, the IoT security service, the software side of things, then the payments and ticketing which are tokenization solutions. So again software based security parts. Now what can change that trajectory is the announcement that we just made with the RISC-V core given the demand that we have, that may see a significantly higher uptick in more of these embedded security solutions overtime.
That's helpful. My follow-up question is, if you look at your royalty revenue for your memory division, it has accelerated in the past few quarters to now I think, if my math is right it's close to 14% year-over-year. Is there any one-time benefits in those numbers or is that more sustainable going forward? Just looking at the royalties and within MiB.
[Technical Difficulty]
Your next question is from Gary Mobley with Benchmark.
Are you guys there Rahul, Ron? Operator, I think we lost them.
Speakers I do have your lines still connected. You may place the line on mute. We're unable to hear you.
Can you hear us Gary?
Ron, I can hear you now.
Okay. We are here.
Rahul, are you there?
Yes, Gary. Go ahead thanks for your patience.
Sure. You should apologize to the last caller. But with respect to the mobile interface division and this relates to the last question asked. I was hoping that you could break down the slip between the buffer chips IP core licensing and just straight patent royalties and give us a sense of the growth of the IP cores and the buffer chips as the year progresses.
Sure, so if you look at Slide 15 and the deck that we're provided Gary, we break down revenue under both 606 as well as 605. And what you'll see on the mid-side in terms of what we report as product revenue that's predominantly what we do in - from a buffer chip perspective. Now the royalty in technology revenues are in the royalty revenue line and we also have [indiscernible] cores in the contract and other revenue line as well, so those aren't broken out as cleanly. But what you'll see is that we had about $6 million in buffer chip revenue in Q1 and what I'd expect is that, I'd expect that to grow in each subsequent quarter of 2018 to get to the $35 million to $40 million for the total year. I think from the patent side particularly in mid for the royalty contract and other. I'd expect that to continue to be maybe roughly flat go up or down just based on timing of renewals for different partners and customers.
Okay and on the China Resistive RAM that you announced last week, can you give us a sense of how that may impact the P&L statement and the balance sheet as well looking out over the next couple quarters?
Sure what I'll tell you is that's still relatively new and I think it's going to take us a while to get to traction from a product perspective, so we did make a small investment into that JV and we invested not just cash, but patents as well. But I expect it's going to take at least a year or two, [technical difficulty] to really come out with some sort of product revenue. So there's a small bit of cash that was deployed for that JV that we announced last week. But I don't expect it to have material benefit from revenue for at least one or two years.
Okay, last question from me. You mentioned on your last earnings call that your intent was to get out of the lighting business. but your hope was to find a buyer for the business and as soon as that you add restructuring charge and basically winding down the business that you were unable to find buyer or is that still perhaps in the cards?
We ended up, Gary it's Ron. Really breaking it into pieces and selling different parts of the business, but there wasn't a sustainable long-term business there from our perspective and as a consequence there was no buyer the whole asset.
Got it. Okay, that's it from me. Thanks.
[Operator Instructions] and there are no further question. Ron, do you have any closing remarks.
Yes thank you. As you can see we continue to demonstrate our leadership and execution across our products and deliver profitable growth across the company. Thank you for your continued interest in time. Have a very nice evening.