RMBS

Business Context and Reporting Period

Rambus Inc. filed its Form 10-Q for the quarterly period ended June 30, 1998. The company designs and licenses semiconductor interface technologies, primarily for PC main memory and consumer electronics. As of the reporting date, the company had 28 licensees, with significant revenue concentration in Japan and Korea. The company operates with a business model heavily reliant on contract revenues (non-refundable license fees) and royalties based on licensee sales.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 35.2% for the quarter and 55.0% for the nine-month period compared to the prior year. Contract revenues grew 40.2% (quarter) and 54.1% (nine months), driven by new licensees and DirectRambus development. Royalties grew 16.2% (quarter) and 57.6% (nine months).
• Profitability: Net income surged 221.6% for the quarter and 451.0% for the nine-month period. Operating margins improved significantly, rising from 7.5% to 19.7% of revenue for the quarter.
• Expense Trends: While absolute costs increased due to headcount growth, engineering costs as a percentage of revenue decreased from 59.1% to 51.0% (quarter). Research and development expenses as a percentage of revenue dropped from 37.1% to 23.8% (quarter).
• Quarterly Royalty Decline: Royalty revenue for the third quarter of 1998 decreased 35.7% from the second quarter of 1998, attributed to seasonal reductions in Nintendo 64 shipments and a decline in DRAM prices.

Guidance, Outlook, and Risks

• Revenue Outlook: Management expects contract revenues to decline gradually over the next several quarters as previously booked contracts expire and the pool of potential new licensees shrinks. Royalties are expected to become a larger portion of revenue long-term but will likely remain volatile quarter-to-quarter.
• Key Dependencies: Future royalty potential is heavily dependent on system sales by Nintendo (home video games) and logic IC sales by Cirrus Logic and Chromatic Research (PC graphics). Both Cirrus Logic and Chromatic Research have recently ended development of current Rambus-based product lines.
• Liquidity: The company anticipates existing cash balances ($83.6 million in cash and marketable securities) are adequate for at least the next 12 months.
• Risks: Significant risks include market acceptance of Rambus technology, dependence on the PC main memory market and Intel, competitive pressures, and the volatility of the home video game market. The company also faces concentration risk, with the top five licensees accounting for 43% of revenue in the quarter.
• Intel Warrant: The company granted Intel a warrant for 1,000,000 shares at $10.00 per share, exercisable only upon achieving specific milestones.

Investor Verification Checklist

• Licensee Concentration: Verify the stability of the top five licensees, which accounted for 43% of quarterly revenue, and the impact of Cirrus Logic and Chromatic Research ending Rambus product development.
• Deferred Revenue Recognition: Confirm the schedule for recognizing the $68.4 million in deferred revenue, which represents a significant portion of future revenue visibility.
• Seasonality and DRAM Prices: Assess the correlation between DRAM price fluctuations, Nintendo 64 shipment volumes, and the company's royalty revenue stream.
• Contract Revenue Trajectory: Monitor the anticipated decline in contract revenues as existing license agreements mature and new licensee acquisition slows.
• Intel Milestone Achievement: Track progress toward the milestones required to make the Intel warrant exercisable, which could impact future dilution.