Rambus Inc. 2018 Q1 Form 10-Q Summary
Business context and reporting period
Rambus designs and licenses memory and interface technology, security solutions, software, products and related services for data-center and mobile-edge markets. The report covers the unaudited three months ended March 31, 2018. Reportable segments were Memory and Interfaces (MID) and Rambus Security (RSD); remaining activities were reported as Other.
Effective January 1, 2018, Rambus adopted ASC 606 using the modified retrospective method. Prior-period amounts were not recast, so reported revenue, earnings and balance-sheet amounts are not directly comparable in several respects.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $46.4 million | $97.4 million | Down 52.3% |
| Royalty revenue | $21.4 million | $69.0 million | Down 69.0% |
| Product revenue | $7.3 million | $10.9 million | Down 32.9% |
| Contract and other revenue | $17.7 million | $17.5 million | Up 1.4% |
| Operating income (loss) | $(43.6) million | $13.4 million | Declined |
| Net income (loss) | $(35.7) million | $3.0 million | Declined |
| Diluted EPS | $(0.33) | $0.03 | Declined |
| Operating margin | (93.9%) | 13.8% | Down 107.7 points |
| Net margin | (76.9%) | 3.1% | Down 80.0 points |
Operating costs and expenses were $90.0 million, compared with $83.9 million in the prior-year quarter. Research and development increased to $40.1 million, sales, general and administrative expense increased to $30.2 million, and Rambus recorded $3.2 million of restructuring charges related primarily to its lighting-division closure.
Interest and other income, net, was $4.7 million, compared with a $3.1 million expense in Q1 2017. The 2018 amount included approximately $7.5 million of interest income from significant financing components of licensing arrangements under ASC 606. The income-tax benefit was $3.2 million, compared with a $7.4 million provision in the prior-year period.
Net cash provided by operating activities was $16.8 million, compared with $17.2 million. Investing activities used $66.7 million, primarily for $79.2 million of marketable-security purchases. Financing activities used $54.1 million, principally reflecting the $50.0 million accelerated share repurchase program and $4.9 million of taxes paid on restricted stock units.
At March 31, 2018, cash and cash equivalents were $122.4 million and marketable securities were $168.9 million, for total cash, cash equivalents and marketable securities of $291.2 million. Convertible-note principal totaled $253.7 million, including $81.2 million of 1.125% notes due in August 2018 and $172.5 million of 1.375% notes due in 2023. Management stated that existing liquidity and operating cash flows were expected to meet cash needs for at least the next 12 months, including repayment of the 2018 notes.
Material changes versus the prior comparable period
- Reported revenue fell by $50.9 million, primarily because ASC 606 changed the timing of fixed-fee and variable royalty recognition. Management stated that the accounting change did not affect billings or cash flow from the related arrangements.
- Under ASC 605, Q1 2018 revenue would have been approximately $100.5 million rather than the reported $46.4 million, and net income would have been approximately $6.1 million rather than a $35.7 million loss; these alternative figures are provided for accounting-comparability analysis and are not the reported results.
- ASC 606 generated $771.0 million of unbilled receivables, or contract assets, at March 31, 2018, compared with none reported at December 31, 2017 under the prior presentation. The adoption produced a $626 million net credit to opening accumulated deficit.
- MID revenue declined to $34.0 million from $70.6 million and RSD revenue declined to $10.0 million from $23.2 million. MID reported segment operating income of $11.0 million, while RSD reported a $2.8 million segment operating loss.
- Rambus announced the closure of its lighting division and Ohio manufacturing operations, terminated approximately 50 employees, recorded $3.2 million of restructuring charges and classified approximately $3.5 million of related property and equipment as held for sale.
- Shares outstanding declined to 107.5 million from 109.8 million, principally due to the accelerated share repurchase. Approximately 3.1 million shares were initially delivered and retired; approximately 4.3 million shares remained authorized for repurchase at quarter-end.
- An additional $15.6 million valuation allowance was recorded against deferred tax assets, and total valuation allowance was $66.6 million at March 31, 2018.
Guidance, outlook, commentary and risks
Management expected 2018 licensing revenue to be significantly lower than 2017 because of ASC 606, with greater quarterly and annual volatility. Rambus stated that product revenue was expected to increase in 2018, while engineering costs were expected to rise as investment continued in semiconductor, security and other technologies. Sales, general and administrative costs were expected to remain relatively flat in the near term.
The company announced development of hybrid memory-system architectures with IBM and launched a CryptoManager RISC-V root-of-trust security core. On May 4, 2018, after quarter-end, Rambus announced the formation of the Reliance Memory joint venture in China to commercialize RRAM technology with GigaDevice and other investment partners.
Principal risks include dependence on licensing revenue and renewals, customer and geographic concentration, cyclical semiconductor markets, unpredictable licensing negotiations, reliance on customer shipment reports, technology adoption and competitive pressures, cybersecurity and product defects, intellectual-property litigation and patent challenges, international and foreign-exchange exposure, potential impairment of goodwill and intangible assets, tax-audit uncertainty, and the August 2018 note maturity. The top five customers represented approximately 59% of Q1 revenue, and international customers represented approximately 76%.
Rambus reported no material pending legal proceedings and stated that disclosure controls and procedures were effective as of March 31, 2018. The company was evaluating several accounting standards, including the lease standard expected to materially affect its financial statements beginning in 2019.
Facts investors should verify
- How ASC 606 affects future reported revenue, interest income, contract assets, taxes and quarter-to-quarter volatility.
- Collections, credit quality and expected timing of the $771.0 million of unbilled receivables.
- Funding and completion of the $81.2 million 2018 convertible-note repayment.
- Progress and final share count under the $50.0 million accelerated share repurchase program.
- Execution of the lighting-division closure and whether additional restructuring or impairment charges arise.
- Renewals and new licenses, particularly given the high customer concentration and dependence on royalty revenue.
- Realizability of deferred tax assets, changes in valuation allowances and outcomes of ongoing tax examinations.
- Commercial progress of the IBM memory initiative, CryptoManager products and Reliance Memory joint venture.