Business Context and Reporting Period
Rambus Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2020. The company operates as a single semiconductor segment focused on silicon IP, memory-interface chips, security IP, licensing and related services. Its 2019 divestiture of the Payments and Ticketing businesses and acquisitions of Northwest Logic and Secure Silicon IP and Protocols shifted the business toward semiconductor operations.
Management reported record first-quarter revenue from silicon IP and memory-interface chip products, supported by demand from data center and infrastructure markets. The filing also identifies increased bandwidth, capacity and security requirements associated with remote operations and 5G-related infrastructure.
Financial Highlights
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $64.0 million | $48.4 million | Up 32.3% |
| Gross profit | $48.1 million | $37.2 million | Up $10.9 million |
| Gross margin | 75.2% | 76.9% | Down 1.7 percentage points |
| Operating expenses | $58.9 million | $68.6 million | Down $9.7 million |
| Operating loss | $10.8 million | $31.4 million | Improved $20.6 million |
| Operating margin | (16.9%) | (64.9%) | Improved 48.0 percentage points |
| Net loss | $8.0 million | $26.6 million | Improved $18.6 million |
| Net loss per diluted share | $0.07 | $0.24 | Improved |
| Cash flow from operations | $37.3 million | $28.8 million | Up $8.5 million |
Revenue mix changed materially: royalties declined 20.8% to $19.7 million and represented 30.8% of revenue, while product revenue increased 242.8% to $30.7 million and represented 48.0% of revenue. Contract and other revenue declined 6.9% to $13.6 million. Product revenue growth was attributed primarily to increased sales and market share gains in memory-interface chips.
Research and development expense declined 9.7% to $36.7 million, and sales, general and administrative expense declined 13.7% to $22.9 million. The company recorded $0.8 million of restructuring charges and a $1.8 million gain from a reduction in the fair value of an acquisition-related earn-out liability.
Cash, Liquidity and Debt
- Cash and cash equivalents were $175.4 million at March 31, 2020, compared with $102.2 million at December 31, 2019.
- Marketable securities were $260.0 million, resulting in total cash, cash equivalents and marketable securities of $435.4 million, up from $407.7 million.
- Cash, cash equivalents and restricted cash increased by $73.3 million during the quarter to $175.8 million.
- Investing activities provided $42.2 million, primarily reflecting $215.2 million of marketable-security maturities partially offset by $169.9 million of purchases.
- The company had $172.5 million principal amount of 1.375% convertible senior notes due 2023, carried at $150.6 million net of discount and issuance costs.
- Contractual obligations include the convertible notes, $7.1 million of related interest payments, $29.1 million of software commitments and $10.0 million of acquisition-related retention bonuses. Lease commitments are disclosed separately; operating lease liabilities totaled $43.3 million on a present-value basis.
- Management stated that existing cash, marketable securities and operating cash flows should be adequate to meet cash needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by product revenue, which more than offset lower royalties and contract revenue.
- Gross margin declined because product revenue carries higher associated costs than the company’s royalty revenue mix.
- Operating losses narrowed substantially due to higher revenue and lower research and development and sales, general and administrative expenses.
- Operating cash flow improved, principally due to cash generation from licensing, product sales and a reduction in unbilled receivables.
- International customers accounted for approximately 46% of revenue versus 29% in Q1 2019, increasing exposure to foreign markets, trade restrictions and currency-related risks.
- The top five customers represented approximately 55% of revenue, indicating continued concentration, although this was modestly lower than 56% in the prior-year quarter.
- No shares were repurchased during the quarter; approximately 3.6 million shares remained authorized for repurchase.
Guidance, Outlook, Commentary and Risks
Management expected product revenue to increase during 2020, primarily from memory products. It also expected product costs and research and development spending to rise as sales increase and the company continues investing in semiconductor, security and related technologies. Sales, general and administrative expenses were expected to remain relatively flat. The filing does not provide a clear numerical quarterly or full-year revenue or earnings guidance range.
The COVID-19 pandemic created uncertainty regarding customer demand, sales cycles, employee operations, suppliers, third-party manufacturers, product shipments and the planned headquarters relocation. The filing states that the ultimate financial impact could be material but could not be predicted as of the filing date.
- Revenue remains volatile because of license renewals, fixed and variable royalty structures, customer shipment volumes, product mix and revenue-recognition timing.
- Royalty revenue is exposed to customer adoption, pricing, sales volumes, contract expirations, fully paid-up license conversions and the ability to renew or sign licenses.
- Product growth depends on customer orders, qualification cycles, third-party manufacturing and supply-chain performance.
- Customer concentration and international revenue concentration could amplify the effect of losing a customer, adverse customer performance or geopolitical and trade restrictions.
- The company maintains a full valuation allowance against U.S. federal and California deferred tax assets and reported approximately $121.0 million of unrecognized tax benefits, including amounts associated with potential South Korean withholding-tax refunds. The timing and outcome of possible settlements were not estimable.
- Goodwill was $183.5 million and other intangible assets were $50.2 million. Management warned that weaker business performance or economic conditions could result in future impairment charges.
- The company was not party to any material pending legal proceeding as of the filing date, but remains exposed to intellectual-property, indemnification, product liability, regulatory, tax and other claims.
- The 2019 restructuring program, involving an approximately 80-person workforce reduction, was expected to be substantially completed in the second quarter of 2020.
Most Important Facts to Verify
- Whether the sharp increase in memory-interface product revenue is sustainable and translates into improved operating profitability despite lower royalty revenue.
- The timing and terms of major license renewals, including the potential effect of fixed, variable, fully paid-up or terminated licenses on future royalties.
- The impact of COVID-19 on customer demand, product qualifications, manufacturing capacity, supply chains and international operations after March 31, 2020.
- The company’s ability to fund the $172.5 million convertible-note maturity in 2023 while continuing acquisitions, investment and potential capital returns.
- Developments in the approximately $121.0 million of unrecognized tax benefits and the potential South Korean withholding-tax refund claims.
- Whether goodwill, acquired intangible assets or other investments require impairment charges if semiconductor demand or market conditions weaken.
- Future customer concentration, international revenue exposure and the effect of trade restrictions or currency movements.