Rambus Inc. 10-Q Summary
Business context and reporting period
Rambus filed its quarterly report for the period ended June 30, 2020. The company operates as a single semiconductor segment providing memory-interface chips, semiconductor and security IP, technology licenses, and related services. Management highlighted strong demand for memory-interface chips, particularly in data centers, and reported a fifth consecutive quarter of record memory-interface-chip revenue. The 2019 divestiture of the Payments and Ticketing businesses continued to affect year-over-year comparisons.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $59.9 million | $58.3 million | $123.9 million | $106.7 million |
| Gross profit | $43.8 million | $45.3 million | $91.9 million | $82.5 million |
| Gross margin | 73.1% | 77.7% | 74.2% | 77.3% |
| Operating expenses | $56.2 million | $82.3 million | $115.2 million | $150.9 million |
| Operating loss | $12.5 million | $37.0 million | $23.3 million | $68.5 million |
| Net loss | $10.8 million | $37.0 million | $18.8 million | $63.6 million |
| Net loss per diluted share | $0.09 | $0.33 | $0.17 | $0.58 |
| Operating cash flow | Approximately $62.0 million | Not clearly provided | $99.3 million | $67.5 million |
Q2 revenue was composed of $17.0 million of royalties, $31.7 million of product revenue, and $11.2 million of contract and other revenue. Product revenue increased 97.9% year over year, while royalties declined 37.3% and contract and other revenue declined 26.1%. Product revenue represented 52.9% of quarterly revenue versus 27.5% in the prior-year quarter.
Cash, cash equivalents and marketable securities totaled $486.1 million at June 30, 2020, including $103.3 million of cash and cash equivalents and $382.8 million of marketable securities. Total assets were $1.32 billion and stockholders’ equity was $965.2 million. The company stated that existing liquidity and operating cash flows should meet cash needs for at least the next 12 months.
Convertible debt consisted of $172.5 million principal amount of 1.375% convertible senior notes due 2023, with a $152.4 million carrying value and a $179.8 million estimated fair value at June 30, 2020. The company also reported $52.1 million of operating lease liabilities, including its new San Jose headquarters lease.
Material changes versus the prior comparable period
- Revenue increased 2.8% in Q2 and 16.2% for the first six months, driven primarily by memory-interface-chip sales and market-share gains.
- Royalty revenue decreased because of the timing and structure of license renewals and architecture-license agreements.
- Gross margin declined to 73.1% from 77.7% as product revenue, which carries associated manufacturing costs, became a larger revenue component.
- Operating expenses declined 31.7% in Q2 and 23.7% for the first six months, reflecting lower headcount, consulting, travel and other costs, as well as the absence of the $17.0 million impairment charge recorded in Q2 2019 for assets held for sale.
- Research and development expense declined 8.5% in Q2, while sales, general and administrative expense declined 10.4%. Management expects near-term research and development spending to increase as it continues investing in semiconductor, security and other technologies.
- The company recorded no Q2 2020 restructuring charge and $0.8 million for the first six months. The 2019 restructuring plan was substantially completed in Q2 2020.
- Operating cash flow increased to $99.3 million for the first six months from $67.5 million, aided in part by a $83.6 million decrease in unbilled receivables.
- No shares were repurchased during the first six months. Approximately 3.6 million shares remained authorized for repurchase.
Guidance, outlook, commentary, risks and unusual items
Management expects product revenue to increase in 2020, primarily from memory-interface chips. It expects product costs to rise with higher sales, research and development expense to increase with continued investment, and sales, general and administrative expense to remain relatively flat. Royalty and contract revenue are expected to remain variable based on renewals, customer shipment volumes, contract milestones and product mix. No specific quarterly or full-year revenue or earnings guidance amount is provided in the filing text.
- COVID-19 could disrupt customers, suppliers, manufacturing, shipments, sales cycles, research and development, the headquarters relocation and overall demand; the eventual financial impact remained uncertain.
- Revenue concentration is significant: the top five customers represented approximately 56% of Q2 revenue and 52% of first-half revenue. International customers represented approximately 47% and 46%, respectively.
- Unbilled receivables totaled $444.5 million at June 30, 2020, including $289.0 million classified as long term. Contracted but unsatisfied performance obligations were approximately $16.0 million, primarily expected to be recognized over two years.
- The company had approximately $125.9 million of unrecognized tax benefits, including a reserve for $99.5 million of potential Korean withholding-tax refunds. Approximately $26.4 million of possible uncertain-tax payments were excluded from the contractual-obligations table.
- Material contractual obligations totaled $214.9 million, excluding lease commitments and possible uncertain-tax payments. This included the $172.5 million convertible notes principal due in 2023.
- Management reported no material pending legal proceedings, but identified continuing risks related to intellectual property enforcement, patent challenges, customer indemnification, cybersecurity, product defects, third-party manufacturing, international operations, competition and impairment of goodwill or long-lived assets.
- A 1% immediate and uniform increase in interest rates was estimated to reduce the fair value of the fixed-income portfolio by approximately $1.2 million.
Important facts for investors to verify
- Whether memory-interface-chip demand and market-share gains offset continued volatility and potential declines in royalty revenue.
- The timing, collectability and concentration of the substantial unbilled receivable balance.
- The company’s ability to refinance or repay the $172.5 million convertible notes due in 2023 without materially reducing liquidity.
- The effect of COVID-19, supply-chain constraints, customer concentration and international trade restrictions on future product revenue.
- Whether planned research and development investment increases operating expenses faster than revenue and delays profitability.
- The outcome and timing of Korean tax-refund matters and ongoing tax examinations.
- Potential impairment of goodwill and long-lived assets if operating performance or market conditions deteriorate.
- The filing’s disclosure controls conclusion, which states that controls were effective as of June 30, 2020, while acquired entities remained excluded from the internal-control assessment during their first year of integration.