Business Context and Reporting Period
Rambus Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company develops and licenses semiconductor, memory-interface, security and related technologies, and sells products and services. Reportable segments were Memory and Interfaces (MID) and Rambus Security (RSD).
During the quarter, Rambus agreed to sell its Payments and Ticketing businesses to Visa for expected gross proceeds of approximately $75.0 million, subject to working-capital adjustments and transaction costs. The transaction supports management’s strategic refocus on its semiconductor business and was expected to close in the second half of 2019.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $58.3 million, up 3.3% | $106.7 million, up 3.7% |
| Royalty revenue | $27.1 million, down 10.0% | $51.9 million, up 0.9% |
| Product revenue | $16.0 million, up 98.2% | $25.0 million, up 62.3% |
| Contract and other revenue | $15.2 million, down 17.0% | $29.8 million, down 17.4% |
| Operating loss | $37.0 million | $68.5 million |
| Net loss | $37.0 million, or $0.33 per diluted share | $63.6 million, or $0.58 per diluted share |
| Operating cash flow | Approximately $38.7 million, according to MD&A | $67.5 million |
Operating expenses were $95.3 million in the second quarter and $175.1 million for the six-month period. Operating margin was negative 63.5% for the quarter and negative 64.2% for the six months. The quarter included a $17.0 million impairment charge for assets held for sale and $2.5 million of restructuring charges. The six-month tax provision was $4.7 million, compared with a $4.2 million tax benefit in the prior-year period.
- At June 30, 2019, cash and cash equivalents were $114.2 million, marketable securities were $223.5 million, and total cash, cash equivalents and marketable securities were $337.7 million.
- Convertible notes had a $172.5 million principal amount and a $145.3 million carrying value, with maturity in 2023. Contractual obligations included $212.3 million of disclosed obligations, excluding lease commitments and approximately $24.3 million of uncertain tax benefits.
- Unbilled receivables were $597.4 million, including $419.5 million classified as long-term. Contracted but unsatisfied performance obligations were approximately $19.6 million, primarily expected to be recognized over the next two years.
- Stockholders’ equity was $973.2 million at June 30, 2019, compared with $1.012 billion at December 31, 2018.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher memory-product sales, while royalty revenue declined in the quarter and contract and other revenue declined in both reported periods.
- Product revenue increased substantially, but related product costs also increased to $6.3 million in the quarter and $10.7 million for the six months.
- Engineering costs declined 8.6% in the quarter and 8.9% for the six months, principally because of lower amortization and certain personnel and development costs.
- Sales, general and administrative expense decreased 3.9% for the six months but increased slightly in the quarter, partly due to higher stock-based compensation.
- Net loss worsened from $15.4 million to $37.0 million in the quarter and from $51.0 million to $63.6 million for the six months, primarily reflecting the asset-held-for-sale impairment, restructuring charges and the change from a prior-year tax benefit to a current-year tax provision.
- Operating cash flow increased from $20.4 million to $67.5 million for the six months, supported in part by collections and a $75.3 million decrease in unbilled receivables.
- Rambus adopted the new lease standard on January 1, 2019. It recognized operating lease right-of-use assets and liabilities and a $4.5 million cumulative adjustment to opening accumulated deficit; prior periods were not recast.
- No share repurchases occurred during the first six months of 2019. Approximately 3.6 million shares remained authorized for repurchase.
Guidance, Outlook, Commentary and Risks
- Management expected product revenue to increase during 2019, primarily from memory products, while engineering costs were expected to remain elevated due to continued investment in semiconductor, security and other technologies. Sales, general and administrative costs were expected to remain relatively flat.
- The company initiated a restructuring plan in June 2019, including a workforce reduction of approximately 4%. The majority of the plan was expected to be completed by year-end 2019, with estimated cash severance and termination payments of approximately $2.6 million.
- Management stated that existing cash, investments and operating cash flows were expected to meet cash needs for at least the next 12 months.
- Revenue remains concentrated: the top five customers represented approximately 54% of second-quarter revenue and 49% of six-month revenue. International customers represented approximately 49% of second-quarter revenue and 40% of six-month revenue.
- Key risks include dependence on licensing renewals and customer adoption, semiconductor cyclicality, customer and royalty concentration, lengthy and uncertain licensing negotiations, competition, technology and product execution, intellectual-property disputes, cybersecurity, international operations and foreign-exchange exposure.
- The company maintained a full valuation allowance on U.S. federal and state deferred tax assets. It reported approximately $190.9 million of valuation allowance and $24.3 million of unrecognized tax benefits; California and India tax examinations were ongoing.
- Rambus was not party to any material pending legal proceeding at the filing date, although ordinary-course claims and future intellectual-property litigation could result in significant costs or adverse outcomes.
- Subsequent to quarter-end, Rambus signed a 128-month lease for a new San Jose headquarters, expected to be occupied in summer 2020, and announced a planned acquisition of Northwest Logic for approximately $30 million in cash.
Important Facts for Investors to Verify
- Completion timing, final proceeds, working-capital adjustments and transaction costs for the Visa sale of the Payments and Ticketing businesses.
- Whether the restructuring plan produces the expected cost reductions without impairing product development, customer service or revenue generation.
- The collectability and timing of the company’s substantial unbilled receivables and the related effect on future cash flow.
- Renewal and expansion of major patent licenses, particularly given customer concentration and quarter-to-quarter royalty variability.
- Availability of cash to fund operations, the 2023 convertible-note maturity and the announced Northwest Logic acquisition.
- Developments in California and India tax examinations, uncertain tax benefits and the recoverability of deferred tax assets.
- The impact of ASC 606 revenue timing, ASC 842 lease accounting and other unusual items on comparability and reported volatility.