Rambus Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. The unaudited results cover Rambus’s Memory and Interfaces, Security, and emerging/other activities. The filing was dated August 3, 2018.
Business Context and Reporting Period
Rambus develops and licenses semiconductor, memory-interface, security, mobile-payment, smart-ticketing, software, and related technologies. Its primary revenue model combines patent and technology licensing with product sales and engineering, software, support, and maintenance services.
Effective January 1, 2018, Rambus adopted ASC 606 using the modified retrospective method. Prior-period results were not restated and are therefore not directly comparable. Adoption produced a $626 million net credit to opening accumulated deficit and resulted in $750.9 million of unbilled receivables at June 30, 2018, primarily from fixed-fee licensing arrangements.
Key Financial Metrics
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Total revenue | $56.5 million | $102.9 million |
| Royalties | $30.0 million | $51.4 million |
| Product revenue | $8.1 million | $15.4 million |
| Contract and other revenue | $18.3 million | $36.1 million |
| Operating income (loss) | $(20.0) million | $(63.6) million |
| Net income (loss) | $(15.4) million | $(51.0) million |
| Diluted EPS | $(0.14) | $(0.47) |
| Operating margin | (35.4)% | (61.8)% |
| Net margin | (27.2)% | (49.6)% |
| Cash flow from operations | Approximately $3.6 million | $20.4 million |
For the six months, total revenue less cost of product and contract revenue was approximately $71.1 million, implying an approximately 69.1% contribution margin before research and development, sales and general and administrative, and restructuring expenses. The filing does not present a consolidated gross margin measure.
Liquidity, Cash Flow, and Capitalization
- Cash and cash equivalents were $248.3 million, and marketable securities were $50.1 million, totaling $298.3 million at June 30, 2018, compared with $329.4 million at December 31, 2017.
- Six-month operating cash flow was $20.4 million, down from $42.5 million in the comparable 2017 period. Investing cash flow was $52.4 million, while financing cash flow was $(49.9) million.
- Convertible notes had aggregate principal of $253.7 million: $81.2 million of 1.125% notes due in August 2018 and $172.5 million of 1.375% notes due in February 2023. Carrying value was $219.3 million.
- Rambus repurchased approximately 3.8 million shares for $50.0 million under an accelerated share repurchase program. Approximately 3.6 million additional shares remained authorized for repurchase at quarter-end.
- Management stated that existing cash, investments, and operating cash flow were expected to meet cash requirements for at least the next 12 months, including repayment of the 2018 notes.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 40.4% from $94.7 million to $56.5 million; six-month revenue declined 46.4% from $192.1 million to $102.9 million.
- Royalty revenue declined 57.1% in the quarter and 63.0% year to date, principally because ASC 606 changed the timing of recognition for fixed-fee and certain variable licensing arrangements. Management stated that the accounting change did not affect billings or cash flows.
- Product revenue declined 3.7% in the quarter and 20.2% year to date, primarily due to lower security and lighting sales, partly offset by higher memory-product sales.
- Contract and other revenue increased 12.2% in the quarter and 6.6% year to date, driven primarily by memory and security technology-development projects.
- Operating results shifted from income of $8.2 million in the second quarter of 2017 and $21.7 million in the first six months of 2017 to losses of $20.0 million and $63.6 million, respectively, in 2018.
- Research and development expense increased 0.5% in the quarter and 5.8% year to date, while reported sales, general and administrative expense declined 9.8% in the quarter and 1.2% year to date. The latter included a reversal of approximately $5.8 million of stock-based compensation related to the former chief executive officer’s termination.
- Rambus announced the closure of its lighting division and Ohio manufacturing operations. Six-month restructuring charges were $2.2 million; the company also recorded a second-quarter recovery of approximately $1.0 million after selling related assets.
Guidance, Outlook, Commentary, and Risks
- Management expected 2018 royalty revenue to be significantly lower than 2017 because of ASC 606 and warned that revenue may become more volatile between quarters. The filing does not provide a clear consolidated numerical revenue or earnings forecast.
- Management expected product revenue to increase in 2018, mainly from memory products, while engineering expenses were expected to increase as Rambus continued investing in semiconductor, security, mobile-payment, smart-card, and other technologies. Sales, general and administrative expense was expected to remain relatively flat.
- Licensing results remain dependent on signing and renewing agreements, customer product volumes and pricing, royalty reporting, and lengthy and unpredictable negotiations. The top five customers represented approximately 66% of second-quarter revenue and 58% of six-month revenue.
- International customers represented approximately 47% of second-quarter revenue and 60% of six-month revenue. Rambus does not hedge its indirect foreign-exchange exposure.
- Deferred tax assets and tax positions remain material: the company reported a $66.9 million valuation allowance and approximately $23.8 million of unrecognized tax benefits. Additional valuation allowances or unfavorable tax audits could increase tax expense.
- Contractual obligations totaled $312.1 million, including $253.7 million of convertible-note principal. The filing also identified approximately $23.8 million of uncertain tax benefits that were excluded from the contractual-obligations table.
- Rambus reported no material pending legal proceedings, but identified continuing risks involving intellectual property enforcement, patent challenges, customer concentration, cybersecurity, product defects, third-party manufacturing and hosting providers, international regulation, management changes, and cyclical semiconductor demand.
Most Important Facts to Verify
- Reconcile ASC 606’s large accounting impact, including the $626 million opening accumulated-deficit credit, $750.9 million of unbilled receivables, and the resulting difference between reported revenue and cash collections.
- Confirm the August 2018 repayment, refinancing, conversion, or other settlement of the $81.2 million 2018 convertible notes.
- Assess the sustainability and collectability of the substantial fixed-fee licensing contract assets and the timing of future billings and cash receipts.
- Monitor royalty-license renewals, new licensing deals, customer concentration, and reported customer shipment volumes.
- Evaluate the financial effect of the lighting-division closure, expected restructuring completion in the second half of 2018, and continued investment in research and development.
- Review tax-audit outcomes, deferred-tax-asset realizability, valuation allowances, and unrecognized tax benefits.