Rambus Inc. 2016 Q2 Form 10-Q Summary
Business context and reporting period
Rambus designs and licenses semiconductor, memory-interface, security, smart-ticketing, mobile-payment, sensing, lighting and display technologies. Revenue is generated primarily from patent and technology royalties, supplemented by contract development and product revenue. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Reportable segments were Memory and Interfaces Division (MID) and Cryptography Research Division (CRD); remaining activities were reported as Other. The company completed its acquisition of Smart Card Software Limited (SCS) on January 25, 2016 and announced pending acquisitions of Inphi Corporation’s Memory Interconnect Business and Semtech Corporation’s Snowbush IP.
Financial performance and key metrics
| Metric | Q2 2016 | Q2 2015 | Change |
|---|---|---|---|
| Total revenue | $76.5 million | $72.8 million | 5.1% increase |
| Royalties | $62.8 million | $62.4 million | 0.7% increase |
| Contract and other revenue | $13.7 million | $10.4 million | 31.1% increase |
| Operating income | $12.0 million | $15.6 million | 22.8% decrease |
| Operating margin | 15.7% | 21.3% | Down 5.6 points |
| Net income | $3.9 million | $6.9 million | 43.5% decrease |
| Diluted EPS | $0.03 | $0.06 | Decrease |
| Metric | Six months 2016 | Six months 2015 | Change |
|---|---|---|---|
| Total revenue | $149.2 million | $145.7 million | 2.4% increase |
| Royalties | $125.7 million | $129.4 million | 2.8% decrease |
| Contract and other revenue | $23.5 million | $16.4 million | 43.3% increase |
| Operating income | $21.3 million | $33.4 million | 36.3% decrease |
| Operating margin | 14.3% | 23.0% | Down 8.7 points |
| Net income | $5.8 million | $16.4 million | 64.8% decrease |
| Diluted EPS | $0.05 | $0.14 | Decrease |
Q2 expenses increased primarily because of higher sales, general and administrative costs, acquisition-related costs, amortization from SCS, headcount and stock-based compensation. Research and development expense was slightly lower in Q2 but increased in total engineering costs because of higher cost of revenue and amortization. The effective tax rate was 61.2% in Q2 and 64.9% for the first six months, compared with 45.8% and 40.7%, respectively, in the prior-year periods.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $188.0 million at June 30, 2016, compared with $143.8 million at December 31, 2015.
- Marketable securities were $71.3 million, down from $143.9 million; total cash, cash equivalents and marketable securities were $259.3 million versus $287.7 million at year-end.
- Operating cash flow for the first six months was $48.7 million, compared with $38.4 million in 2015.
- Investing cash flow was negative $12.4 million, including the SCS acquisition, compared with negative $0.3 million in 2015.
- Financing cash flow was positive $8.6 million, primarily from employee equity-plan proceeds.
- The company had $138.0 million principal amount of 1.125% convertible senior notes due in 2018, carried at $122.7 million. Total contractual obligations were $188.2 million, including the notes and related interest.
- Management stated that existing cash, investments and operating cash flow should be adequate for at least the next 12 months, but expected significant cash outflows in Q3 2016 for the pending acquisitions.
Material changes versus the prior comparable period
- Revenue growth was driven by contract and other revenue, including security technology development work and SCS revenue, while royalty revenue declined for the first six months.
- Patent royalty revenue decreased $1.2 million in Q2 and $7.1 million in the first half, primarily from lower revenue from AMD, IBM, Renesas and, for the first half, STMicroelectronics. Higher SK hynix and Toshiba revenue partly offset the decline.
- Operating profitability declined despite higher revenue because operating expenses increased and the prior-year periods included gains from intellectual-property sales that did not recur in 2016.
- SCS added approximately $47.2 million of goodwill and increased net intangible assets to $100.9 million from $64.3 million at year-end. Six-month amortization expense increased to $15.9 million from $12.6 million.
- The company completed the accelerated share repurchase program, receiving and retiring approximately 0.7 million additional shares in Q2. Approximately 11.5 million shares remained authorized for future repurchase at June 30, 2016.
- Foreign currency translation losses of $5.6 million in Q2 contributed to a comprehensive loss of $1.9 million, despite reported net income.
Guidance, outlook, risks and unusual items
- No specific numerical quarterly or annual revenue or earnings guidance is provided in the filing text. Management expects engineering and sales, general and administrative costs to remain higher in the near term, including costs associated with acquisitions.
- Inphi’s Memory Interconnect Business was to be acquired for $90 million in cash, and Snowbush IP for $32.5 million in cash plus potential payments tied to product sales through 2022. Both transactions were expected to close in Q3 2016, subject to customary conditions.
- The buffer chipset under development was being sampled, but management did not expect a material revenue contribution in 2016.
- Revenue is highly concentrated: the top five customers represented approximately 68% of Q2 revenue and 69% of first-half revenue. Micron, Samsung and SK hynix each represented at least 10% of revenue in both periods.
- International customers represented approximately 65% of revenue in Q2 and the first half, exposing the company to international, currency, economic and regulatory risks. Rambus does not hedge this indirect foreign-exchange exposure.
- The business depends on successful licensing, renewals, customer product volumes, semiconductor-cycle conditions and protection of intellectual property. License negotiations are lengthy and royalty revenue can fluctuate substantially.
- Rambus reported no material pending legal proceedings, but remains exposed to potential intellectual-property litigation, patent challenges, indemnification claims and customer disputes.
- The company had approximately $22.4 million of unrecognized tax benefits and maintained a $21.3 million valuation allowance against deferred tax assets. California and India tax examinations were ongoing.
- Goodwill and long-lived assets could require impairment charges if acquired businesses underperform or market conditions deteriorate.
- Management certified that disclosure controls and procedures were effective as of June 30, 2016, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the Inphi and Snowbush acquisitions closed as expected and their effects on revenue, expenses, goodwill, intangible assets and liquidity.
- The timing and collectability of scheduled royalty and settlement payments from SK hynix and Micron, including potential changes to payment levels.
- The maturity, conversion terms and refinancing or repayment plan for the $138.0 million convertible notes due in 2018.
- Progress in converting SCS, CRD, Snowbush and Inphi technologies into sustainable revenue and profitability.
- Renewal status and terms of major customer licenses, particularly those involving Samsung, SK hynix and Micron.
- Future royalty trends, customer concentration, patent validity and enforcement developments, and potential impairment of acquired assets.
- Changes in the effective tax rate, uncertain tax positions and realizability of deferred tax assets.