Rambus Inc. 2019 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rambus reported results for the quarter and nine months ended September 30, 2019. During the quarter, the company operated as a single semiconductor-focused segment covering high-speed interface IP and chips and embedded security. Rambus completed the acquisition of Northwest Logic and continued its strategic refocus through the divestiture of its Payments and Ticketing businesses.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2019 | Year-over-Year Change | Nine Months Ended September 30, 2019 |
|---|---|---|---|
| Total revenue | $57.4 million | Down 3.9% | $164.1 million, up 0.9% |
| Royalty revenue | $19.4 million | Down 42.1% | $71.4 million, down 16.1% |
| Product revenue | $21.4 million | Up 81.9% | $46.4 million, up 70.8% |
| Contract and other revenue | $16.6 million | Up 15.1% | $46.4 million, down 8.1% |
| Operating loss | $22.9 million | Compared with $19.2 million loss | $91.3 million, compared with $82.8 million loss |
| Net loss | $17.3 million | Improved from $104.9 million loss | $80.9 million, improved from $155.9 million loss |
| Diluted loss per share | $0.16 | Improved from $0.97 | $0.73, improved from $1.44 |
| Cash flow from operating activities | Approximately $25.6 million, as reported by management | Not clearly comparable in the filing text | $93.1 million, compared with $52.1 million |
Operating expenses totaled $80.3 million in the third quarter and $255.4 million for the first nine months. The third-quarter operating margin was approximately negative 39.9%; the nine-month operating margin was approximately negative 55.7%. These figures include restructuring charges and the impairment or recovery of assets held for sale.
At September 30, 2019, Rambus held $91.8 million of cash and cash equivalents and $246.2 million of marketable securities, for total cash, cash equivalents and marketable securities of $338.0 million. The company had $172.5 million of convertible notes due in 2023, carried at $147.0 million net of discount and issuance costs. Management stated that existing liquidity and operating cash flow should meet cash needs for at least the next 12 months.
Total assets were $1.30 billion and stockholders’ equity was $961.3 million at September 30, 2019. Unbilled receivables totaled $559.6 million, including $376.6 million classified as long term. Contracted but unsatisfied performance obligations were approximately $28.6 million, primarily expected to be recognized over the following two years.
Material Changes Versus the Prior Comparable Period
- Revenue mix shifted materially from royalties toward products. Royalties declined to 33.9% of quarterly revenue from 56.2%, while product revenue increased to 37.2% from 19.7%.
- Higher memory-product sales drove the increase in product revenue, but royalty declines from various customers more than offset that growth in the quarter.
- Operating losses increased despite the quarterly improvement in net loss, principally because of lower royalty revenue, restructuring activity and the held-for-sale business adjustments.
- Nine-month operating cash flow increased by $41.1 million, primarily reflecting cash collections and changes in unbilled receivables, while investing cash outflows increased because of marketable-security purchases and the Northwest Logic acquisition.
- Rambus adopted the new lease standard on January 1, 2019. It recognized operating lease right-of-use assets and liabilities and recorded a $4.5 million opening accumulated-deficit adjustment. Prior periods were not recast, limiting direct comparability.
- Rambus acquired Northwest Logic on August 23, 2019 for approximately $21.9 million in cash. The preliminary purchase accounting included $11.3 million of goodwill and $8.8 million of identified intangible assets, plus $9.0 million of employee retention bonuses payable over three years.
- The company initiated a restructuring plan expected to reduce headcount by approximately 4%. It recorded $4.2 million of restructuring and severance charges during the first nine months, with most of the plan expected to be completed by year-end.
- Rambus signed an agreement to acquire Verimatrix’s Silicon IP and Secure Protocols businesses for $65 million in cash, subject to customary closing conditions and regulatory approvals.
- The Payments and Ticketing businesses were classified as held for sale and sold to Visa in October 2019. Gross proceeds were approximately $83.6 million, net of approximately $3.7 million of transaction costs; cumulative impairment recognized through September 30 was approximately $15.1 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected product revenue to continue increasing in 2019, primarily from memory products, while engineering costs were expected to rise as Rambus invested in semiconductor, security and other technologies. Sales, general and administrative costs were expected to remain relatively flat in the near term.
- Royalty revenue remains subject to customer shipment volumes, product mix, license renewals, new license agreements and the timing effects of ASC 606 revenue recognition. The company expects significant period-to-period variability.
- The top five customers represented approximately 49% of third-quarter revenue and 47% of nine-month revenue. One customer represented 14% of quarterly revenue and another 15% of nine-month revenue.
- Rambus depends on cyclical and competitive semiconductor markets, customer adoption of its technologies, long licensing cycles and the accuracy of customer royalty reporting.
- The company maintains a full valuation allowance against U.S. federal and state deferred tax assets. Total valuation allowance was $196.5 million, and unrecognized tax benefits were approximately $24.3 million. California and India tax examinations were ongoing.
- Rambus disclosed no material pending legal proceedings, but remains exposed to intellectual-property litigation, patent challenges, indemnification obligations and claims involving product or security defects.
- Financial risks include customer concentration, international operations and foreign-exchange exposure, although the company does not hedge its indirect foreign-exchange risk.
- The company entered into a new San Jose headquarters lease with approximately $41 million of required future payments and expected occupancy during summer 2020.
- Rambus had approximately $217.5 million of listed contractual obligations excluding lease commitments and potentially payable uncertain tax benefits. The 2023 convertible notes require $172.5 million of principal repayment at maturity, subject to conversion or other terms.
Important Facts for Investors to Verify
- Whether the sharp decline in royalty revenue is temporary or reflects customer, licensing or technology-adoption deterioration.
- The sustainability and margins of the significantly expanded memory-product business.
- The timing, regulatory approval and expected financial contribution of the Verimatrix transaction.
- The final purchase accounting and integration performance of Northwest Logic, including the $9.0 million retention obligation.
- The final proceeds, working-capital adjustments and post-closing obligations related to the Visa divestiture.
- The company’s ability to manage its $172.5 million convertible-note maturity in 2023 while continuing acquisitions and investment.
- The collectability and timing of the $559.6 million of unbilled receivables and the related financing-component accounting.
- The effect of customer concentration, semiconductor cyclicality, patent enforcement outcomes and future license renewals on revenue volatility.
- The realization of deferred tax assets and the outcome of outstanding tax examinations and uncertain tax positions.