Rambus Inc. Form 10-Q Summary
Business Context and Reporting Period
Rambus develops and licenses semiconductor, memory-interface, security, mobile-payment and smart-ticketing technologies, and sells related products and services. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018. Reportable segments were Memory and Interfaces (MID) and Rambus Security (RSD); remaining activities were reported as Other.
Management highlighted higher memory buffer chipset revenue and expansion of the SerDes portfolio, including 32G and 112G SerDes PHY products intended for 5G and next-generation communications systems.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $48.4 million | $46.4 million | Up 4.2% |
| Royalty revenue | $24.9 million | $21.4 million | Up 16.3% |
| Product revenue | $9.0 million | $7.3 million | Up 22.6% |
| Contract and other revenue | $14.6 million | $17.7 million | Down 17.9% |
| Operating costs and expenses | $79.8 million | $90.0 million | Down 11.4% |
| Operating loss | $31.4 million | $43.6 million | Improved by $12.2 million |
| Net loss | $26.6 million | $35.7 million | Improved by $9.1 million |
| Diluted loss per share | $0.24 | $0.33 | Improved by $0.09 |
| Cash flow from operations | $28.8 million | $16.8 million | Up $12.0 million |
Revenue mix shifted toward royalties and products: royalties represented 51.4% of revenue versus 46.0% in the prior-year quarter, product revenue represented 18.5% versus 15.8%, and contract and other revenue represented 30.1% versus 38.2%. The operating margin was negative 64.9%, compared with negative 93.9% in Q1 2018; the net margin was negative 54.9%, compared with negative 76.9%.
Interest and other income, net, was $5.1 million, including approximately $5.7 million of interest income associated with significant financing components of licensing arrangements. Interest expense declined to $2.3 million from $4.4 million, primarily because facility-related imputed interest expense was replaced by operating lease expense following adoption of the new lease standard.
Liquidity, Cash Flow and Capitalization
- Cash and cash equivalents were $143.0 million at March 31, 2019, compared with $115.9 million at December 31, 2018.
- Marketable securities were $162.9 million, resulting in total cash, cash equivalents and marketable securities of $305.9 million versus $277.8 million at year-end.
- Operating cash flow was $28.8 million. Investing cash flow used $1.5 million, primarily reflecting purchases and maturities of marketable securities. Financing cash flow used $0.2 million.
- Unbilled receivables totaled $629.4 million, including $459.1 million classified as long term. Contracted but unsatisfied performance obligations were approximately $27.7 million, primarily expected to be recognized over the next two years.
- The company had $172.5 million principal amount of 1.375% convertible senior notes due 2023, carried at $143.6 million net of discount and issuance costs. Contractual obligations included $191.8 million of listed obligations, excluding lease commitments and potentially uncertain tax payments.
- Management expects existing cash, investments and operating cash flow to meet cash needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly as higher royalty and product revenue more than offset lower contract and other revenue.
- Royalty growth included a significant increase in RSD royalties, while MID royalties were approximately flat to slightly lower.
- Product revenue increased primarily because of higher memory-product volumes.
- Cost of contract and other revenue declined $5.4 million, primarily due to lower amortization and engineering costs. Research and development was approximately flat, while sales, general and administrative expense declined $2.6 million.
- Restructuring charges declined to $0.3 million from $3.2 million. The remaining Q1 2019 charge related to estimated costs to close the Brecksville, Ohio facility.
- The company adopted ASC 842, the new leasing standard, on January 1, 2019. It recognized operating lease right-of-use assets of $19.5 million at March 31, 2019 and lease liabilities totaling $21.7 million. Prior periods were not recast, limiting direct comparability.
- Common shares outstanding increased to 110.4 million from 109.0 million at year-end, primarily from equity compensation and option exercises. No shares were repurchased during the quarter; approximately 3.6 million shares remained authorized for repurchase.
Guidance, Outlook, Risks and Unusual Items
Management expects product revenue to increase in 2019, primarily from memory products, while contract and other revenue is expected to fluctuate based on development work, deliverables and new contracts. Engineering costs are expected to increase in the near term as Rambus invests in product innovation and infrastructure; sales, general and administrative expense is expected to remain relatively flat.
- Revenue is concentrated: the top five customers represented approximately 56% of Q1 2019 revenue. Customer concentration, license renewals, shipment volumes, pricing and product mix can cause substantial quarterly volatility.
- The licensing cycle is lengthy and unpredictable. Failure to sign or renew licenses, customer financial distress, termination rights or unfavorable license terms could materially reduce revenue.
- The semiconductor industry is cyclical and highly competitive, and Rambus faces risks from alternative technologies, pricing pressure, customer consolidation and changes in demand.
- Rambus maintains a full valuation allowance on U.S. federal and state deferred tax assets. The total valuation allowance was $179.9 million, and approximately $24.5 million of unrecognized tax benefits remained outstanding. Several tax examinations were ongoing.
- Goodwill totaled $207.8 million and intangible assets totaled $55.5 million. A deterioration in business performance or market conditions could result in impairment charges.
- Rambus reported no material pending legal proceedings, but remains exposed to potential intellectual-property, indemnification, product-liability, cybersecurity and regulatory claims.
- The company does not hedge foreign-exchange exposure. International customers represented approximately 29% of Q1 2019 revenue, compared with 76% in Q1 2018.
- Management stated that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether royalty growth and memory-product volume can offset declining or fluctuating contract and other revenue.
- The sustainability, timing and renewal terms of major customer licenses, particularly given the 56% top-five customer concentration.
- Conversion, refinancing or cash-repayment requirements associated with the $172.5 million of convertible notes due in 2023.
- The collectability and timing of the $629.4 million unbilled receivables balance and the related financing-component revenue assumptions.
- The effect of ASC 606 and ASC 842 on revenue volatility, lease expense, reported margins and period-to-period comparability.
- Potential tax cash payments, outcomes of ongoing examinations and the realizability of deferred tax assets.
- Potential goodwill or intangible-asset impairment, intellectual-property disputes and cybersecurity or product-security incidents.