Rambus Inc. Form 10-Q Summary
Business Context and Reporting Period
Rambus designs and licenses semiconductor, memory-interface, SerDes, security, mobile-payment, smart-ticketing, lighting and related technologies. The filing covers the quarter and nine months ended September 30, 2016, compared with the same periods in 2015. Memory and Interface Division (MID) and Rambus Security Division (RSD) were reportable segments.
During 2016, Rambus acquired Smart Card Software Limited (SCS), Inphi’s Memory Interconnect Business and Semtech’s Snowbush IP assets. These acquisitions expanded security, mobile-payment, memory-buffer and high-speed SerDes offerings but increased amortization, operating expenses and integration requirements.
Financial Performance and Key Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $89.9 million | $73.8 million | $239.0 million | $219.5 million |
| Royalties | $68.3 million | $66.8 million | $194.0 million | $196.2 million |
| Contract and other revenue | $21.6 million | $7.0 million | $45.0 million | $23.3 million |
| Operating income | $11.8 million | $17.6 million | $33.1 million | $51.1 million |
| Operating margin | 13.1% | 23.9% | 13.9% | 23.2% |
| Net income | $4.5 million | $182.0 million | $10.3 million | $198.4 million |
| Diluted EPS | $0.04 | $1.52 | $0.09 | $1.67 |
Revenue increased 21.8% year over year in the quarter and 8.9% for the nine-month period. Contract and other revenue more than doubled, primarily from acquired memory products and increased security-development activity. Royalties increased 2.2% in the quarter but declined 1.1% year to date. Royalty concentration remained high: the top five customers represented approximately 59% of quarterly revenue and 65% of nine-month revenue.
Profitability declined despite higher revenue. Cost of revenue, research and development, and sales, general and administrative expenses increased due largely to acquisitions, product costs, amortization, headcount, consulting and stock-based compensation. Net income in the 2015 periods was substantially enhanced by a $167.0 million quarterly and $155.7 million year-to-date income-tax benefit from releasing valuation allowances; the 2016 periods included tax provisions of $4.3 million and $14.9 million, respectively.
Net cash provided by operating activities was $59.6 million for the first nine months of 2016 versus $53.7 million in the comparable 2015 period. Investing cash outflow was $125.9 million, including approximately $214.6 million of acquisition cash payments before consideration of cash acquired and marketable-security activity. Financing cash inflow was $12.7 million.
Balance Sheet, Debt and Liquidity
| Metric | September 30, 2016 | December 31, 2015 |
|---|---|---|
| Cash and cash equivalents | $89.5 million | $143.8 million |
| Marketable securities | $61.3 million | $143.9 million |
| Total cash, cash equivalents and marketable securities | $150.8 million | $287.7 million |
| Total assets | $800.3 million | $718.0 million |
| Total liabilities | $247.5 million | $191.5 million |
| Convertible notes, carrying value | $124.4 million | $119.4 million |
The company has $138.0 million principal amount of 1.125% convertible senior notes due in 2018, with contractual principal repayment scheduled in 2018. Total contractual obligations were $196.0 million, including the notes, interest, leases, software licenses and imputed financing obligations. Management stated that existing liquidity and operating cash flow should meet cash needs for at least the next 12 months.
Goodwill increased to $207.5 million and net intangible assets to $164.9 million, primarily from acquisitions. Management cautioned that weaker-than-expected performance or adverse market conditions could result in impairment charges. The company repurchased and retired approximately 0.7 million shares during the nine months and had authorization remaining to repurchase approximately 11.5 million shares.
Material Changes Versus the Prior Comparable Period
- Revenue increased, driven primarily by acquired product and security-development revenue; royalty revenue was broadly stable in the quarter and lower year to date.
- Operating margin fell from 23.9% to 13.1% in the quarter and from 23.2% to 13.9% year to date.
- Research and development expense increased 21.7% in the quarter and 6.5% year to date; sales, general and administrative expense increased 38.8% and 29.8%, respectively.
- Cash and marketable securities declined by approximately $136.9 million from year-end, primarily reflecting acquisition spending and investment-portfolio changes.
- Goodwill and intangible assets increased materially following the SCS, Memory Interconnect and Snowbush acquisitions.
- Foreign-currency translation losses and unrealized investment losses reduced other comprehensive income.
- Rambus signed a license agreement with Xilinx, began shipping acquired memory-buffer products and announced new DDR4 PHY and SerDes developments.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear numerical revenue or earnings forecast. Management expects engineering and sales, general and administrative expenses to remain higher in the near term because of continued technology investment and recent acquisitions. Revenue is expected to fluctuate with licensing renewals, customer shipment volumes, product mix, contract timing and new license wins.
- Revenue is highly concentrated among a small number of customers, including Samsung, SK hynix and Micron. Loss, renegotiation or deterioration of a major license could materially affect results.
- Licensing cycles are lengthy and unpredictable, and royalty payments may depend on customer volumes, prices and reporting accuracy.
- The semiconductor and electronics markets are cyclical, competitive and subject to rapid technological change and price erosion.
- Acquisition integration, retention of personnel, realization of synergies and potential goodwill or intangible-asset impairment are significant risks.
- The 2018 convertible notes create a substantial 2018 cash requirement and may require refinancing or use of operating cash.
- Rambus maintains approximately $22.4 million of unrecognized tax benefits and is subject to California and India tax examinations. The timing and outcome of potential settlements are unclear.
- The company faces risks from intellectual-property challenges, patent expiration, litigation, security breaches, product defects, third-party manufacturing and international operations.
- There were no material pending legal proceedings reported. The 2015 restructuring was substantially completed, with only $15 thousand remaining accrued at September 30, 2016.
- The Snowbush acquisition includes contingent consideration of up to $50 million, valued at $6.8 million at September 30, 2016. Preliminary purchase-price allocations remain subject to change.
Important Facts for Investors to Verify
- Whether acquired memory, SerDes and security businesses produce sustainable revenue and acceptable margins after integration.
- The timing and funding plan for repayment, refinancing or conversion of the $138.0 million 2018 convertible notes.
- The durability of royalty revenue from Samsung, SK hynix, Micron and other major customers, including renewal and payment terms.
- Whether higher operating expenses and amortization subside or continue to compress operating margins.
- The recoverability of goodwill, acquired intangible assets, deferred tax assets and related valuation allowances.
- The outcome of tax examinations and the potential cash impact of approximately $22.4 million of unrecognized tax benefits.
- Progress toward completing and commercializing acquired in-process research and development projects.
- Future cash requirements from contingent acquisition consideration, contractual obligations and share repurchases.