RMBS

Rambus Inc. 10-Q Summary: Quarter Ended March 31, 1999

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 1999, and the six months ended March 31, 1999. Rambus Inc. is a technology company that licenses interface technology for integrated circuits (ICs), primarily generating revenue through contract fees and royalties from licensees. The company operates in a single segment and relies heavily on a concentrated group of licensees, with significant international exposure, particularly in Japan, Korea, and Taiwan.

Key Financial Metrics

Liquidity: As of March 31, 1999, the company held $94.8 million in cash, cash equivalents, and marketable securities. Net cash provided by operating activities for the six-month period was $5.4 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 2.2% for the quarter and 7.3% for the six-month period compared to the prior year. Contract revenues grew 11.6% (quarter) and 15.2% (six months), driven largely by accelerated revenue recognition on the Texas Instruments (TI) DRAM contract following the sale of TI's DRAM business to Micron.
• Royalty Decline: Royalty revenues decreased 24.3% for the quarter and 13.4% for the six-month period. This decline is attributed to seasonal variations in Nintendo 64 shipments, a steep decline in DRAM prices, and the abandonment of PC graphics applications by licensees Cirrus Logic and Chromatic Research.
• Expense Increases: Total costs and expenses rose 11.6% for the quarter and 11.9% for the six-month period. Engineering costs (Cost of Contract Revenues + R&D) increased due to additional personnel and efforts to assist licensees with technology implementation.
• Other Income: Other income surged 119.5% for the quarter, primarily due to a $713,000 net gain on the sale of a security.

Outlook, Risks, and Management Commentary

• Revenue Outlook: Management expects contract revenues to decline gradually in the future barring further accelerated recognition events, as existing contracts expire and the pool of potential new licensees shrinks. Royalties are expected to remain volatile until Rambus-based ICs for PC main memory and the Sony PlayStation II reach the market.
• Concentration Risk: Revenue is highly concentrated; the top five licensees accounted for 45% of revenue in the quarter and 47% in the six-month period. NEC, TI, and Intel were significant contributors.
• Contingent Warrants: The company has granted warrants to Intel and other partners exercisable upon achieving specific product milestones. These will result in charges to operations upon achievement.
• Year 2000 Readiness: The company believes its internal systems will be compliant with minimal cost impact. However, it faces potential risk if licensees encounter Year 2000 issues that disrupt IC shipments and royalty payments.
• Deferred Revenue: The company holds $61.2 million in deferred revenue, representing non-refundable fees received but not yet recognized, which is scheduled to be recognized over the next five years.

Investor Verification Checklist

• Verify the sustainability of contract revenue growth given the one-time acceleration from the TI/Micron transaction.
• Monitor the timeline for the introduction of Rambus-based PC main memory ICs and the Sony PlayStation II, as these are critical for future royalty growth.
• Assess the impact of the top five licensees (45% of revenue) on future financial stability.
• Review the status of contingent warrants issued to Intel and other partners to understand potential future non-cash charges.
• Confirm the company's ability to maintain liquidity as operating cash flow is currently supported by the drawdown of deferred revenue rather than new billings.