Rambus Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The financial statements are unaudited. Rambus develops and licenses semiconductor, memory-interface, security, mobile-payment, smart-ticketing and related technologies, and also sells products and provides engineering and other services. Reportable segments were Memory and Interfaces (MID) and Rambus Security (RSD); remaining activities were reported as Other.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $99.1 million | $89.9 million | $291.2 million | $239.0 million |
| Revenue growth | 10.3% | — | 21.8% | — |
| Operating income | $17.0 million | $11.8 million | $38.7 million | $33.1 million |
| Operating margin | 17.2% | 13.1% | 13.3% | 13.9% |
| Net income | $7.7 million | $4.5 million | $13.3 million | $10.3 million |
| Net margin | 7.8% | 5.0% | 4.6% | 4.3% |
| Diluted EPS | $0.07 | $0.04 | $0.12 | $0.09 |
- Revenue mix: Royalties were $72.8 million in Q3 and $211.7 million for nine months, representing 73.4% and 72.7% of revenue, respectively. Product revenue was $8.7 million and $28.0 million; contract and other revenue was $17.7 million and $51.5 million.
- Segment performance: Q3 revenue was $68.8 million for MID, $26.3 million for RSD and $4.0 million for Other. Segment operating income was $47.7 million for MID and $14.5 million for RSD; Other recorded a $3.8 million loss before corporate and other reconciling items.
- Expenses: Q3 research and development was $36.2 million, sales, general and administrative expense was $26.8 million, and total operating costs and expenses were $82.1 million. Nine-month R&D and SG&A increased 20.4% and 17.9%, respectively, primarily reflecting investments and the 2016 acquisitions.
- Cash flow: Nine-month operating cash flow was $57.8 million versus $61.5 million in the prior year. Investing activities provided $31.0 million, principally from marketable-security maturities and sales. Financing activities used $43.4 million, primarily for a $50.0 million accelerated share repurchase. Management reported approximately $15 million of operating cash flow for Q3.
- Liquidity: Cash, cash equivalents and marketable securities totaled $183.6 million at September 30, 2017, versus $172.2 million at December 31, 2016. Cash and cash equivalents were $182.3 million, while marketable securities were $1.3 million.
- Debt: The company had $138.0 million principal amount of 1.125% convertible senior notes due August 15, 2018, carried at $131.5 million net of discount and issuance costs. The notes were reclassified to current liabilities. Management stated that liquidity should be sufficient for at least the next 12 months and that repayment is not expected to create a liquidity constraint.
- Balance sheet: Total assets were $824.1 million and stockholders’ equity was $589.5 million at September 30, 2017. Goodwill was $209.3 million and net intangible assets were $102.5 million.
Material Changes Versus Prior Comparable Period
- Revenue increased 10.3% in Q3 and 21.8% for nine months, supported by higher patent royalties, memory and security product sales, and technology-development projects.
- Royalty revenue increased 6.6% in Q3 and 9.1% for nine months. Increases from renewed or expanded arrangements, including STMicroelectronics and other customers, were partly offset by lower revenue from certain Broadcom, SK hynix, Xilinx and AMD arrangements.
- Product revenue increased 22.1% in Q3 and 95.5% for nine months, primarily due to the acquired Memory Interconnect Business and higher security-product sales.
- Contract and other revenue increased 22.3% in Q3 and 67.7% for nine months, primarily from memory and security technology-development projects and the 2016 acquisitions.
- Operating income increased 44.0% in Q3 but increased only 16.8% for nine months. The nine-month operating margin declined to 13.3% from 13.9% because operating expenses grew faster than revenue.
- Net income increased 70.6% in Q3 and 29.6% for nine months. The effective tax rate declined to 44.8% from 48.5% in Q3 and to 54.8% from 59.2% for nine months.
- Shares outstanding declined following the $50.0 million accelerated share repurchase program. Approximately 3.2 million shares were initially delivered and retired, and approximately 8.3 million shares remained authorized for repurchase at September 30, 2017.
- Accumulated deficit and deferred tax assets were affected by adoption of ASU 2016-09, including a $38.2 million cumulative-effect adjustment that reduced accumulated deficit and increased deferred tax assets at January 1, 2017.
Outlook, Commentary, Risks and Unusual Items
- Management expected product revenue to continue increasing in 2017 and expected engineering costs to remain higher as Rambus invests in semiconductor, security and other technologies. SG&A was expected to remain relatively flat in the near term.
- Rambus announced a silicon-proven server DIMM buffer chipset designed for next-generation DDR5 speeds and expanded its mobile-payment activity through a tokenization-software relationship with Australia’s eftpos network.
- Revenue Recognition Standard ASC 606 becomes effective January 1, 2018. Rambus expected a material change in the timing of fixed-fee IP-license revenue, potential recognition of interest income before cash collection, and significantly greater quarterly revenue volatility. The company had not finalized its adoption method or quantified the complete impact.
- Revenue is concentrated: the top five customers represented approximately 57% of Q3 revenue and 56% of nine-month revenue. Micron, Samsung and SK hynix each represented at least 10% of revenue for the periods presented.
- Key risks include dependence on licensing renewals and customer shipment volumes, semiconductor cyclicality, customer concentration, competition and alternative technologies, patent validity and enforcement, product and security defects, reliance on third-party manufacturers and service providers, international operations and currency exposure, and the ability to integrate acquisitions.
- Rambus had no material pending legal proceedings and believed ordinary-course claims would not have a material adverse effect, although litigation could still generate costs and management distraction.
- Potential tax exposure included approximately $22.9 million of unrecognized tax benefits and a $29.0 million valuation allowance against deferred tax assets. Tax examinations were ongoing in California, New York and India.
- Goodwill and long-lived assets were subject to impairment risk if acquired businesses underperformed or market conditions deteriorated. No goodwill impairment was recorded in the period.
Important Facts for Investors to Verify
- Final implementation method and quantified financial effects of ASC 606, including the effect on fixed-fee licenses, minimum guarantees, royalty timing and future guidance.
- Ability to refinance or repay the $138.0 million convertible notes due August 2018 while continuing acquisitions, investment and share repurchases.
- Sustainability of revenue from Samsung, Micron, SK hynix and other concentrated licensees, including renewal terms and shipment-based royalty trends.
- Whether higher R&D and SG&A spending produces sustained growth in MID, RSD, memory products, security solutions and mobile-payment offerings.
- Completion and final share count impact of the accelerated share repurchase program, expected by November 2017.
- Realizability of approximately $225.0 million of gross deferred tax assets, potential changes in valuation allowances and outcomes of open tax examinations.
- Exposure to impairment charges related to approximately $209.3 million of goodwill and $102.5 million of intangible assets.