Rambus - Q2 2023

Transcript

Operator (participant)

Welcome to the Rambus second quarter and FY 2023 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. If you would like to ask a question, you may press star 1 on your touchtone keypad at any time. If anyone should require assistance during the conference, please press the star 0 on your touchtone keypad at any time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Desmond Lynch, Chief Financial Officer. You may begin with your conference.

Desmond Lynch (CFO)

Thank you, operator, welcome to the Rambus second quarter 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 website beginning today at 5:00PM 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 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. 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 website 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 ran 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, 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 (CEO)

Thank you, Des, and good afternoon, everyone. We delivered another strong quarter with revenue in line and earnings at the high end of guidance. We also generated $50 million in cash from operations as we continue to successfully navigate through challenging macroeconomic conditions. As generative AI and other advanced workloads accelerate demand for performance in the data center, requirements for greater memory bandwidth and capacity are growing at a rapid pace. Generative AI is expected to simultaneously boost demand for general purpose servers that utilize DDR DIMMs for data preprocessing, as well as specialized accelerators with dedicated memory, such as HBM. The systems that run these advanced workloads will typically be high-end servers populated with substantially more memory than traditional servers. This is a strong catalyst for demand for multiple types of memory and a very positive long-term growth driver for the company.

Rambus continues to lead in our areas of focus, providing chips and IPs that deliver the performance, reliability, and security to feed the AI data pipeline. We just took an important step in the strategic evolution of the company to continue to intercept the long-term needs of the market. We signed a definitive agreement to sell our PHY IP business to Cadence while retaining our digital IP business, including industry-leading control solutions for HBM, CXL, and PCIe, as well as state-of-the-art security IP, critical to data center and AI. With that, we have maintained the scale and diversity of the business while strengthening our focus on the development of differentiated chips and digital IP that expand our opportunities in the data center market.

In concert with the increased focus on our competitive digital IP offerings, we are investing in initiatives to expand our product portfolio for the data center as well as the emerging client space. Data center memory subsystems will require higher bandwidth memory modules and more complex companion chips. The client space, with its increasing performance requirements, will gradually adopt technologies and solutions only used in data center servers thus far. These new investments will expand our product offering to support the continued evolution of high-performance computing systems for years to come. Turning now to our quarterly results, all of our businesses continue to execute well. For Memory Interface Chips, we delivered strong results at the high end of expectations, with product revenue of $55 million. As we have highlighted in past quarters, the transition to DDR5 continues to be dynamic.

In Q2, we were very pleased to see DDR5 volume production run faster than projected, but this was offset by a deeper than anticipated DDR4 inventory correction. In line with the broader ecosystem, we expect DDR4 headwinds to continue through the remainder of the year, but remain very positive on the long-term outlook for DDR5, which represented our predominant unit shipments this quarter and tripled in volume over Q1. Going forward, we expect continued lumpiness in our product business in the short run, while the DDR5 ramp continues, as the industry works through the challenges of platform migration and continues to face DDR4 inventory headwinds. With this, we remain focused on execution and are actively working with customers and partners.

As the first generation of DDR5 ramps, we continue our leadership position in follow-on generations of DDR5 with our Gen2 RCD in qualification across the ecosystem and our Gen3 RCD sampling to all of our customers and partners. In addition to DDR5, close collaboration and development with the ecosystem continues on novel memory solutions to support the roadmap of future server generations. In closing, this was a strong quarter for the company, with solid results and continued execution from the team.

We continue to see excellent long-term growth opportunities, driven by increasing demand in the data center, fueled by AI. While we navigate dynamic market conditions in the near term, our focused investments position us well to expand our leadership and deliver the critical solutions for high-performance computing systems. As always, I'd like to thank our customers, partners, and employees for the ongoing support. With that, I turn the call over to Des to discuss the quarterly financial results. Des?

Desmond Lynch (CFO)

Thank you, Luc. I'd like to begin with a summary of our financial results for the second quarter on slide 5. Once again, we delivered a strong quarter, and we are very pleased with the company's ongoing execution and focus on addressing key trends in the market. Our Q2 financial results were in line with our revenue expectations and at the high end of our earnings expectations, as we further strengthened our balance sheet with continued strong cash generation in the quarter. As Luc discussed, we announced that we entered into a definitive agreement with Cadence to divest our PHY IP business, and we expect the transaction to close in Q3. We are pleased with this transaction, as it will allow us to redeploy our investments into higher growth areas of digital IP and products. Let me walk you through our non-GAAP income statement on slide 6.

Revenue for the second quarter was $119.8 million, in line with our expectations. Royalty revenue was $40.7 million, while licensing billings was $60.2 million. The difference between licensing billings and royalty revenue primarily relates to timing, as we do not always recognize revenue in the same quarter as we bill our customers. Product revenue was $55 million, consisting primarily of Memory Interface Chips. Contract and other revenue was $24.1 million, consisting primarily 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, was $75.7 million.

Operating expenses of $55.9 million were more than our expectations as we continue to be vigilant in our expense management. We ended the quarter with a total headcount of 724. Non-GAAP interest and other income for the second quarter was $1.9 million. This included $600,000 of ASC 606 interest income related to the financing component of fixed-fee licensing arrangements, for which we have recognized revenue but not yet received payment. Excluding the financing interest income related to ASC 606, this would have been $1.2 million of net interest income. Using an assumed flat tax rate of 24% for non-GAAP pre-tax income, non-GAAP net income for the quarter was $34.9 million. Now, let me turn to the balance sheet details on slide 7.

We ended the quarter with cash, cash equivalents, and marketable securities totaling $332.6 million, up from the previous quarter, primarily through cash from operations of $50.4 million. At the end of Q2, we had contract assets worth $97.9 million, which reflects the net present value of unbilled accounts receivable related to licensing arrangements for which the company has no future performance obligation. We expect this number to continue to trend down as we bill and collect for these contracts. It is important to note that this metric does not represent the entire value of our existing licensing and agreements, as at each renewal opportunity, we work to restructure our patent agreements in a manner that allows us to recognize revenue each quarter during the life of each agreement.

Second quarter CapEx was $11.5 million, while depreciation expense was $7.8 million. We delivered $39 million of free cash flow in the quarter. Now let me turn to our guidance for the third quarter on slide 8. As a reminder, the forward-looking guidance reflects our current best estimates at this time. We continue to actively monitor the macro environment, 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. Our guidance for the quarter includes our PHY IP business.

On a quarterly basis, the business is running breakeven, as approximately $6 million in revenue is offset with $6 million in cost. Under ASC 606, we expect revenue in the third quarter between $96 million and $102 million. We expect royalty revenue between $26 million and $32 million, and licensing billings between $59 million and $65 million. We have made a lot of progress with our product business, and we are well positioned in the market to deliver long-term profitable growth while maintaining our competitive position and share gains. As Luc mentioned earlier, the DDR5 product transition is underway. However, our product revenue guidance continues to be impacted by DDR4 inventory digestion. We expect this transition to continue to impact us through the remainder of the year. We expect Q3 non-GAAP total operating costs, which includes COGS, to be between $75 million and $71 million.

We expect Q3 CapEx to be approximately $10 million. Under ASC 606, non-GAAP operating results for the third quarter is expected to be between a profit of $21 million and $31 million. For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect $1 million of interest income. We expect the pro forma tax rate to remain at approximately 24%. The 24% 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 $5 million and $8 million in Q3.

We expect Q3 share count to be 112 million basic and diluted shares outstanding. Overall, we anticipate a non-GAAP earnings per share range between $0.15 and $0.21 for the quarter. Let me finish with a summary on slide 9. I am pleased with our strong results and the team's continued execution in this challenging and unpredictable macroeconomic environment, as we continue to make progress against our strategic initiatives. We have a diversified portfolio with a stable and predictable backbone from our patent licensing business.

Our product portfolio is well positioned to capture growing opportunities in the data center, fueled by AI. We continue to deliver value to our shareholders with our strong innovation, a robust balance sheet, and strong cash generation. Before I open up the call to Q&A, I would like to thank our employees for their continued teamwork and execution. I'll turn the call back to our operator to begin Q&A. Could we have our first question?

Operator (participant)

The first question comes from the line of Kevin Cassidy with Rosenblatt Securities. Please proceed.

Kevin Cassidy (Managing Director and Senior Research Analyst)

Yes, thanks for taking my question. Congratulations on the good results. Maybe, you know, the questions will be around the shipping of the DDR4. Is the, is the inventory at one customer more than another? You know, do you have higher exposure to one customer or another? You know, maybe do you have a split of what DDR5 versus DDR4 was?

Luc Seraphin (CEO)

... Thank you, Kevin. We, we, we, we, we don't have exact visibility in every customer, but I would say that the DDR4 inventory, inventory situation is common to all customers at this point in time. The inventory levels in the channels are still quite high, and across the board, the burn is slow. On the other hand, you know, as, as we saw in Q2, we see these customers placing orders for DDR5, you know, at, at, at surprisingly high levels. Inventory across the board on DDR4 with all of our customers with a slow burn, you know, we see our customers being very slow in placing new orders for DDR4.

We're working with them in, on, on the backlog. Typically, you know, they, they don't cancel backlog, but they try to push out backlog, which is a reflection of the, of, of the slow burn. We expect, you know, eventually, you know, the DDR4 inventory to be consumed, but it's gonna take more time than we anticipated, and it's across the customer base.

Kevin Cassidy (Managing Director and Senior Research Analyst)

I see. Okay. You know, you made an interesting comment about applications from the servers moving down into client. Can you give us a little more explanation for that, or should we be expecting to see registered DIMMs being used in client, in PCs, or will there be PC CPUs that support that?

Luc Seraphin (CEO)

In the long run, as the speed of transfers between the processors and memory increase, some of the challenges that we've faced in the data center are going to expand into the client space. In the long run, we expect, you know, signal integrity problems, thermal problems to appear on the client space, and that will lead the development of chips that are similar to what we had in the data center.That will hit the market probably in a couple of years from now, but we are investing in those technologies today because we believe that some of the challenges that the data center faced, you know, over the last few years, are, are going to be faced by the client space, and that's a, that's a, a, an area of focus for us.

Kevin Cassidy (Managing Director and Senior Research Analyst)

Okay, great. Thanks.

Operator (participant)

Thank you. The next question comes from the line of Mehdi Hosseini with SIG. Please proceed.

Mehdi Hosseini (Senior Equity Research Analyst)

Yes, thanks for taking my question. Look, maybe you can help us all on better understand how your buffer chip is driven by a server. I think someone on the street may have confused DDR5's bit shipment with the buffer chip. Can you please just remind us that your buffer chip is, is, is driven, the demand is driven by units of server or DIMM and not so much by bits of DDR5? Unless, unless I'm just thinking about this the wrong way.

Luc Seraphin (CEO)

The main drivers for buffer chip sales are, number one, the number of channels that you have on each of the processors from Intel and Advanced Micro Devices. And number two, how many slots you can put on each one of the channels. So you know, what's happening in the market with the emergence of DDR5 is that, you know, we do see more channels per processor compared to the DDR4 generations. That means that people will have an opportunity to put more DIMMs per channel, and therefore, there's gonna be a higher number, potentially of RCD per channel. So the move to DDR5 gives that, you know, gives that opportunity to augment the number of DIMMs per channelThis has to be combined with, you know, higher density on DDR5 and these kind of things, but, but at a high level, this is, this is what's happening.

Mehdi Hosseini (Senior Equity Research Analyst)

Sure. Okay, so it... Given that description, opportunities associated with DDR5, which is tied into the new server CPU, is coming. It's not like you're missing anything or you're losing market share. It's just that it's we're in the earliest stage of this transition. Would that be?

Luc Seraphin (CEO)

That's correct.

Mehdi Hosseini (Senior Equity Research Analyst)

Fair.

Luc Seraphin (CEO)

You know, we. That. Yeah, that's correct, Mehdi. I, you know, what's happening is that, you know, that launch of DDR5 technology in the market, you know, involves, you know, new processors, new memories, new buffer chips, new companion chips. There are a lot of teething issues, which makes the ramp, you know, challenging as we've seen over the past few quarters. That being said, you know, this market is going to grow. You know, more channels, more processors, more need for data is going to translate into a higher sum. That transition now between DDR4 and DDR5 is just very dynamic, you know, between the inventory digestion from DDR4 and the teething problems in ramping DDR5 in the industry.

Mehdi Hosseini (Senior Equity Research Analyst)

Okay. If I may just ask one follow-up. Is there an update on the Companion chip, product introduction and attraction? Anything you can share with us?

Luc Seraphin (CEO)

Yeah. We're making good progress with the companion chips. We released, you know, two products last year. We're shipping products, but they are in low volumes today, Mehdi. Given that we were late compared to others, you know, the revenue contribution from this chip will increase with the Gen2 DDR5 devices will start to ramp in 2024. You know, good progress, you know, modest revenue that we're starting to ship to customers. I think the revenues in earnest will correspond to the launch of Gen2 DDR5 in the market.

Desmond Lynch (CFO)

Great. Thank you.

Operator (participant)

Thank you. The next question goes to the line of Gary Mobley with Wells Fargo Securities. Please proceed.

Gary Mobley (Executive Director and Senior Analyst of Semiconductors)

Hey, guys. Thanks for taking my question. To paraphrase, you, you mentioned that the headwinds from the DDR4 customer inventory drawdowns will create uncertainty for the balance of the year. So my question is, you know, can DDR5 shipments continue to grow sequentially through Q3 through Q4? Given the undercurrents between DDR4 inventory drawdowns and the ramp of DDR5, is it possible that the fourth quarter product revenue can grow sequentially?

Luc Seraphin (CEO)

It is a good question. You know, I think we are as I said, we are surprised by how slow the burn is on DDR4. At the same time, we were pleasantly surprised with, you know, the ramp of DDR5 in the second quarter. On the prepared remarks, we said that, you know, this was 3 times what we shipped in Q1, but to give you a perspective, this is as much as we shipped last year in the total year.

We, we're quite, you know, pleased with that, that, that is starting in earnest. This being said, as you could see in Q2, this is very dynamic, and with, with large swings. You know, we expect DDR5 to be flattish in Q3. You know, Q4 is difficult to predict given the swings that we have between DDR4 and DDR5. Overall, you know, we expect that that transition to DDR5 is going to be positive for us, given our footprint in the market.

Gary Mobley (Executive Director and Senior Analyst of Semiconductors)

Okay, thanks. Thanks for that, Luc.

Desmond Lynch (CFO)

Gary, just to add on to.

Gary Mobley (Executive Director and Senior Analyst of Semiconductors)

Sure.

Desmond Lynch (CFO)

Sorry, go ahead. Go ahead, Gary. Sorry.

Gary Mobley (Executive Director and Senior Analyst of Semiconductors)

No, go ahead, Des.

Desmond Lynch (CFO)

You, you know, what I think on, you know, we were delighted that DDR5 is the predominant unit shipment in Q2. As Luc mentioned, we are seeing these production volumes taking place just now. The DDR4 situation really remains fluid. We did see customers pull back on these unit shipments in Q2, given the inventory challenge. Our guidance for Q3 expects minimal DDR4 shipments. We're hoping as we get into the December quarter, that these inventories start to sort of normalize from there. On the positive, the DDR5 transition and production volumes are taking place just now.

Gary Mobley (Executive Director and Senior Analyst of Semiconductors)

That's helpful color. Thank you. As my follow-up, I wanted to ask about how the Silicon IP business is trending. Last update, it was a $130 million annualized run rate. Des, I know you mentioned this, but I missed it. Can you clarify if the third quarter revenue guide includes the divestiture of the PHY IP business?

Desmond Lynch (CFO)

Hi, Gary. Thanks. That's a good question. You know, last year we were delighted to grow this business to about $130 million in revenue, which was up about 30% year-over-year, and really double our long-term growth expectations, which was really fueled by the growth in our digital controller and security IP business. Going into this year, we did warn people that the macro challenges, we would see the growth rate on this business being lower, which includes the headwinds of startup funding and slowdown in China. If you look at our performance in the first half of the year, we have been operating roughly $31 million-$33 million per quarter on revenue, which is really flat on a run rate basis to 2022 performance, given some of the headwinds that we described earlier.

We are invested in the right areas here, which includes the digital IP controllers and the high growth areas of HBM, CXL, PCIe controllers, as well as security IP solutions, which are critical for AI. In the long term, we do expect this business to come back to the 10%-15% growth rate from there. As I mentioned in my prepared remarks, we have included the PHY IP business in our guidance for the quarter. What I did mention upfront is that this is roughly a break-even business for Rambus, is $6 million in revenue is offset roughly by $6 million in cost, Gary, from there.

Gary Mobley (Executive Director and Senior Analyst of Semiconductors)

Thanks, Des.

Desmond Lynch (CFO)

Thanks, Gary.

Operator (participant)

Thank you. The next question comes from the line of Sidney Ho, Deutsche Bank. Please proceed.

Gianmarco Conti (VP of Technology Equity Research)

Great, thanks. This is Gianmarco for Sidney. Guys, my first question is on DDR5 and the price premium. I guess, can you guide us through what kind of price premium are you seeing there compared to DDR4? Are ASPs sort of playing out or ASP trends playing out as, as you would have expected a couple of quarters ago, and do you see these as, as sustainable going forward? I have a follow-up.

Desmond Lynch (CFO)

... Hi, Gianmarco, and that's a really good question. The pricing environment that we're in just now is in line with our expectations and also normal pricing cycles. Given the competitive environment we're in with 3 customers and 3 suppliers, we do not break out the individual ASPs of the individual products of DDR4 and DDR5. However, as we've talked about previously, the transition to DDR5 is positive for us, and we do see the ASP reset driven by the generational change from DDR4 to DDR5. From a pricing environment, what we see just now is relatively stable pricing on DDR4. From a DDR5 perspective, with the volume production ramp taking place just now, we will see some erosion in the second half of the year.

This was anticipated and in line with normal pricing cycles for us, and we do expect to manage our product gross margins to be within a long-term range of 60%-65%. Overall, I would describe that the ASP environment is really playing out as we expected, and we remain committed to the 60%-65% long-term gross margin targets for the product business.

Gianmarco Conti (VP of Technology Equity Research)

Great. That, that's very clear, Des. I have a quick follow-up on the PHY divestiture. If I understand correctly, Luc, you're exiting this OpEx-heavy business, right, to focus on segments where you see faster growth. The first question is: Is your long-term target of 10%-15% for Silicon IP still valid, or is there an upward bias to that? Then if you can walk us through sort of how would you expect to deploy the cash from this transaction, given that your balance sheet will be even stronger after that? Thanks.

Luc Seraphin (CEO)

Thanks, Sydney. To your first question, yes, we expect this business to continue to grow at 10%-15%, you know, on average per year. It was important for us to divest this PHY business to respond to some secular trend that we see in the AI space. You know, with AI, we do see the emergence of chips specific to AI that will need to connect to other chips. It's really, really important that we invest into these communication IP, especially on the controller side, where we have differentiation. I think there's going to be a proliferation of chips that will create an environment where security is going to be more important. Finally, the bandwidth of communication between those chips is going to be more important.

For those reasons that are driven by AI, you know, we believe that investing in that portfolio is really, really good. We have a strong position in the market. The market is growing, and we expect to grow in the long run, 10%-15% a year. If we look at the PHY business, the PHY business is a business that is based on analog IP or mixed-signal IP, and it's a business that is different in terms of its ability to scale because it's process node dependent and foundry dependent.

It was important for us to give the opportunity for this business to be in the hands of a company that has the scale to develop that business, and together, we'll be able to respond to the market faster with a more competitive roadmap. That's, that's what was driving the, you know, the IP, the IP solution. Des, if you want to address the other question.

Desmond Lynch (CFO)

Yes, thanks, Luc and, and Gianmarco. The sale of the PHY IP business does not change our approach or posture towards capital allocation. As a company, we are fortunate to have a robust balance sheet with strong cash generation, which has enabled us to consistently return 40%-50% of free cash flow back to shareholders. Our approach to capital allocation will remain consistent, which focuses on the 3 pillars of, firstly, organic investments. We will continue to fund the high growth opportunities ahead of us. I think Luc just gave you some additional color, and also in his prepared remarks, talked about the growing opportunities in the data center. By freeing up investment from the PHY IP business, this will enable us to invest at a faster rate into the growing opportunities ahead of us from there. Secondly, inorganic investments.

We have been acquisitive, with five acquisitions over the last three years. We do have a strong funnel and pipeline of targets. However, we'll continue to remain focused and disciplined in our approach to ensure strategically, financially, and operationally, the M&A opportunities make sense to us. Really, lastly, on the capital return perspective, you know, we've consistently returned that free cash flow back to shareholders, and that's something we'll continue to review and evaluate. Overall, I would say that the sales of PHY IP business does not change our approach to capital allocation, and we'll continue using the playbook that I've outlined to you here today.

Gianmarco Conti (VP of Technology Equity Research)

Thanks, Des. Great call.

Desmond Lynch (CFO)

Thanks, Gianmarco.

Operator (participant)

Thank you. We have a follow-up question from the line of Kevin Cassidy with Rosenblatt Securities. Please proceed.

Kevin Cassidy (Managing Director and Senior Research Analyst)

Yeah, thanks. Maybe it's just along the lines of what you were just explaining, Des, but maybe, if it was $6 million in investments, in OpEx for the PHY business. We're expecting that OpEx will stay about the same because you're gonna invest $6 million more into the current products. Is that the right way to think that?

Desmond Lynch (CFO)

Kevin, I, I think over time, you know, we'll, we'll certainly increase our products in the, you know, the, the product space to continue to capture the product growth that Luc sort of talked about. You know, we've been fairly consistent on our sort of OpEx, you know, in that $55 million-$56 million. We'll continue, you know, investing in the right areas to make sure that we can capture the growing opportunities ahead of us. I think, you know, in the sort of Q2, Q3 time frame, you know, you're looking at OpEx being in that $55 million-$56 million, and we'll gradually increase the OpEx going forward from there, Kevin.

Kevin Cassidy (Managing Director and Senior Research Analyst)

Okay, great. Thank you.

Desmond Lynch (CFO)

Thanks, Kevin.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question, please press star one on your touch tone telephone. We'll pause here briefly to allow questions to generate in-