Rambus Inc. 2018 Q3 Form 10-Q Summary
Business context and reporting period
Rambus designs and licenses memory and interface technologies, security solutions, software, chips and related services for data-center, semiconductor, mobile-payment and smart-ticketing markets. The filing covers the three and nine months ended September 30, 2018. Reportable segments were Memory and Interfaces (MID) and Rambus Security (RSD); remaining activities were reported as Other.
Effective January 1, 2018, Rambus adopted ASC 606 using the modified retrospective method. Prior-period amounts were not recast, so reported 2018 and 2017 results are not directly comparable, particularly for royalty revenue and contract balances.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $59.8 million | $99.1 million | $162.6 million | $291.2 million |
| Royalty revenue | $33.6 million | $72.8 million | $85.0 million | $211.7 million |
| Product revenue | $11.8 million | $8.7 million | $27.2 million | $28.0 million |
| Contract and other revenue | $14.4 million | $17.7 million | $50.5 million | $51.5 million |
| Operating income (loss) | $(19.2) million | $17.0 million | $(82.8) million | $38.7 million |
| Net income (loss) | $(104.9) million | $7.7 million | $(155.9) million | $13.3 million |
| Diluted EPS | $(0.97) | $0.07 | $(1.44) | $0.12 |
| Cash flow from operations | Not separately provided in the financial statements | Not separately provided | $52.1 million | $57.8 million |
Q3 operating margin was approximately negative 32.1%; nine-month operating margin was approximately negative 50.9%. Reported Q3 net loss included an $89.8 million income-tax provision, primarily from an additional valuation allowance on U.S. deferred tax assets.
- Cash and cash equivalents were $134.5 million and marketable securities were $113.6 million at September 30, 2018, for total cash, cash equivalents and marketable securities of $248.2 million.
- Total liabilities were $335.7 million and stockholders’ equity was $1.008 billion.
- Convertible debt consisted of $172.5 million principal amount of 1.375% convertible senior notes due 2023, with a carrying value of $140.3 million.
- The remaining $81.2 million principal amount of 1.125% convertible notes due 2018 was repaid during Q3; 423,873 common shares were delivered in settlement of the in-the-money conversion feature.
- Operating cash flow for the first nine months was supported substantially by collections and changes in unbilled receivables. Unbilled receivables were $699.9 million at September 30, 2018.
- Financing cash outflows were $128.7 million in the first nine months, including repayment of the 2018 notes and $50.0 million of share repurchases.
Material changes versus the prior comparable period
- Reported Q3 revenue declined 39.7% and nine-month revenue declined 44.1%. Royalty revenue declined 53.8% in Q3 and 59.8% for nine months, primarily because ASC 606 changed the timing of recognition for fixed-fee and variable licensing arrangements.
- On an ASC 605 basis, Q3 2018 revenue would have been approximately $99.8 million rather than $59.8 million, and nine-month revenue would have been approximately $299.1 million rather than $162.6 million. These pro forma comparisons are supplied by the filing and are not the reported GAAP results.
- Product revenue increased 35.7% in Q3, primarily from higher memory-product sales, but declined 2.9% for the first nine months due partly to the lighting-division closure.
- Research and development expense increased 19.2% in Q3 and 10.2% for nine months, reflecting increased investment in engineering and technology development. Sales, general and administrative expense decreased 8.7% in Q3 and 3.6% for nine months.
- Rambus recorded $2.2 million of restructuring charges for the first nine months related primarily to the planned closure of its lighting division and Ohio manufacturing operations. The plan was expected to be substantially complete by year-end 2018.
- Rambus recorded an additional $87.2 million valuation allowance in Q3, resulting in a full valuation allowance against U.S. federal and state deferred tax assets. Total valuation allowance was $165.1 million at quarter-end.
- The company repurchased approximately 3.8 million shares for $50.0 million through an accelerated share repurchase program. Approximately 3.6 million shares remained available under the broader authorization.
Guidance, outlook, management commentary, risks and unusual items
- Management stated that existing cash, investments and operating cash flows should meet cash needs for at least the next 12 months.
- Management expected 2018 product revenue to increase, mainly from memory products, while engineering costs were expected to rise as investments continued. SG&A was expected to remain relatively flat in the near term.
- Management expected royalty revenue to be significantly lower in 2018 than in 2017 because of ASC 606 and warned of increased quarterly and annual volatility under the new recognition model. The accounting change does not affect billings or cash flow from the licensing arrangements.
- Contracted but unsatisfied performance obligations were approximately $10.3 million at September 30, 2018, primarily expected to be recognized over the next two years.
- Revenue concentration remained significant: the top five customers represented approximately 64% of Q3 revenue and 50% of nine-month revenue. International customers represented approximately 37% of Q3 revenue and 51% of nine-month revenue.
- Key risks include dependence on licensing renewals and customer product volumes, lengthy and unpredictable licensing cycles, semiconductor cyclicality, customer concentration, adoption of new products and security solutions, intellectual-property challenges, cybersecurity and product defects, international operations, tax audits, and possible impairment of goodwill or long-lived assets.
- The company reported no material pending legal proceedings. It was under tax examinations in the United States, India and France and had approximately $23.7 million of unrecognized tax benefits.
- Rambus expects to adopt the new lease accounting standard in the first quarter of 2019, which it expects will primarily increase reported assets and liabilities through recognition of operating lease right-of-use assets and liabilities.
Important facts for investors to verify
- Reconcile reported ASC 606 revenue with billings, collections and the unusually large $699.9 million unbilled-receivables balance; assess collectability and timing of cash conversion.
- Evaluate the sustainability of operating cash flow given the large contribution from changes in unbilled receivables and the substantial reported net losses.
- Review the terms, conversion features and February 2023 maturity of the $172.5 million convertible notes, including potential cash requirements upon conversion or a fundamental change.
- Assess customer concentration, license renewals, royalty-rate adjustments and dependence on customers’ shipment volumes and product pricing.
- Monitor the full U.S. tax valuation allowance, uncertain tax positions, ongoing examinations and the potential expiration of tax attributes.
- Track execution and remaining costs of the lighting-division closure, as well as possible goodwill or long-lived-asset impairment.
- Confirm the effects of ASC 606, future revenue volatility and the 2019 lease-standard adoption when comparing subsequent periods.