Rambus Inc. — Q2 2017 Form 10-Q Summary
Business context and reporting period
Rambus develops and licenses semiconductor, memory-interface, security, mobile-payment, smart-ticketing, lighting and related technologies, and also sells products and provides engineering and support services. The filing covers the quarter and six months ended June 30, 2017. Memory and Interfaces (MID) and Rambus Security (RSD) were reportable segments; other activities included Emerging Solutions and Lighting.
Management highlighted partnership agreements with Cybertrust, Synopsys, Google and Interac, and the launch of the CryptoManager IoT Device Management service, demonstrated with Qualcomm and STMicroelectronics.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $94.7 million | $76.5 million | $192.1 million | $149.2 million |
| Operating income | $8.2 million | $12.0 million | $21.7 million | $21.3 million |
| Operating margin | 8.7% | 15.7% | 11.3% | 14.3% |
| Net income | $2.6 million | $3.9 million | $5.6 million | $5.8 million |
| Diluted EPS | $0.02 | $0.03 | $0.05 | $0.05 |
| Operating cash flow | Approximately $25 million | Not clearly provided | $42.5 million | $50.3 million |
Revenue consisted of $70.0 million of royalties, $8.4 million of product revenue and $16.3 million of contract and other revenue in Q2. Royalty revenue represented 73.9% of quarterly revenue, while product and contract revenue represented 8.9% and 17.2%, respectively.
Six-month revenue growth reflected increases in royalties of 10.5%, product revenue of 167.6% and contract and other revenue of 108.0%. Product growth was primarily attributable to memory products acquired through the Memory Interconnect Business acquisition, while contract growth reflected increased memory and security development projects.
Q2 total operating costs and expenses were $86.5 million, or 91.3% of revenue, compared with 84.3% in the prior-year quarter. Research and development expense increased 30.5% to $37.5 million, and sales, general and administrative expense increased 24.5% to $27.1 million. Amortization, acquisition-related costs, headcount, software tools, bonuses and stock-based compensation contributed to the expense increases.
Cash, cash equivalents and marketable securities totaled $168.0 million at June 30, 2017, compared with $172.2 million at December 31, 2016. Cash and cash equivalents increased to $167.2 million from $135.3 million, while marketable securities declined to $0.8 million from $36.9 million. Current assets were $222.3 million versus current liabilities of $51.1 million.
Long-term convertible notes had a carrying value of $129.7 million and face value of $138.0 million. The 1.125% convertible senior notes mature in August 2018. Total contractual obligations were $196.8 million, including the notes and related interest, leases, software licenses and imputed financing obligations.
Material changes versus the prior comparable period
- Q2 revenue increased 23.8%; six-month revenue increased 28.7%.
- Q2 operating income declined 31.3% despite higher revenue, and operating margin fell seven percentage points to 8.7%, primarily because expenses grew faster than revenue.
- Q2 net income declined 32.8%; six-month net income was broadly stable.
- Royalty mix declined to 73.9% of Q2 revenue from 82.1%, while product and contract revenue increased as a proportion of revenue.
- Q2 MID revenue increased to $67.4 million from $54.5 million, and RSD revenue increased to $23.4 million from $16.4 million. Other-segment revenue declined to $4.0 million from $5.6 million.
- Cash provided by operations declined to $42.5 million for the six-month period from $50.3 million, partly reflecting a $13.2 million increase in accounts receivable.
- Financing activities used $44.9 million, primarily because of a $50.0 million accelerated share repurchase. Approximately 3.2 million shares were initially delivered and retired; approximately 8.3 million shares remained authorized for repurchase at June 30.
- The company adopted ASU 2016-09 on January 1, 2017, recognizing a $38.2 million cumulative-effect adjustment that reduced accumulated deficit and increased deferred tax assets.
Guidance, outlook, risks and unusual items
Management stated that existing cash, investments and operating cash flows should be sufficient to meet cash needs for at least the next 12 months, including repayment of the 2018 Notes. No specific quarterly or full-year revenue or earnings guidance is provided in the filing text.
- Management expects product revenue to increase in 2017, but expects product, engineering and other investments to keep costs elevated. Sales, general and administrative costs were expected to remain relatively flat in the near term.
- Revenue remains concentrated: the top five customers represented approximately 59% of Q2 revenue and 55% of six-month revenue. Micron, Samsung and SK hynix each represented at least 10% of revenue during the reported periods.
- Licensing revenue depends on lengthy and uncertain negotiations, renewals, customer shipment volumes, pricing, product mix and adoption of Rambus technology. Royalties may fluctuate materially between periods.
- The semiconductor industry is cyclical and competitive. Acquired businesses and newer offerings, including memory products, CryptoManager, mobile payments and smart ticketing, may not achieve expected adoption or returns.
- The company had no material pending legal proceeding and stated that ordinary-course claims were not expected to have a material adverse effect. However, intellectual-property enforcement, patent challenges, infringement claims and customer indemnification obligations remain significant risks.
- Net deferred tax assets before valuation allowance were approximately $219.5 million, with a $26.2 million valuation allowance. Unrecognized tax benefits were approximately $22.9 million, and tax examinations were ongoing in California, New York and India.
- The company expects the new revenue recognition standard, effective January 1, 2018, to materially affect the timing of revenue recognition for fixed or guaranteed minimum IP licensing arrangements and to require royalty estimates and subsequent true-ups.
- Goodwill was $208.0 million and intangible assets were $111.9 million. A significant deterioration in business performance or market conditions could result in material impairment charges.
Important facts for investors to verify
- Whether increased product and contract revenue can offset the lower-margin profile and higher operating costs associated with the expanded business.
- The sustainability, renewal terms and concentration of royalty revenue from Samsung, Micron, SK hynix and other major licensees.
- Cash generation and the company’s plan to fund the $138.0 million convertible-note maturity in August 2018 while continuing share repurchases.
- The final share count and settlement economics of the $50.0 million accelerated share repurchase program, expected to conclude by November 2017.
- The effect of ASC 606 adoption on reported revenue timing, deferred revenue, receivables and future comparability.
- Utilization of deferred tax assets, outcomes of tax examinations and potential payments related to the $22.9 million of unrecognized tax benefits.
- Performance and integration of the 2016 acquisitions, including the Memory Interconnect Business, Snowbush IP assets and Smart Card Software.