Rambus Inc. 2020 Q3 Form 10-Q Summary
Business context and reporting period
Rambus is a semiconductor technology company providing memory interface chips, silicon intellectual property, security IP and related licensing and engineering services. Following the 2019 divestiture of its Payments and Ticketing businesses, the company operates as a single semiconductor segment. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $56.9 million | $57.4 million | $180.8 million | $164.1 million |
| Gross profit | $41.7 million | $44.8 million | $133.5 million | $127.3 million |
| Gross margin | 73.2% | 78.1% | 73.8% | 77.5% |
| Operating loss | $12.5 million | $22.9 million | $35.8 million | $91.3 million |
| Net loss | $12.8 million | $17.3 million | $31.5 million | $80.9 million |
| Diluted loss per share | $0.11 | $0.16 | $0.28 | $0.73 |
| Operating cash flow | $44.1 million | Not separately provided | $143.4 million | $93.1 million |
Q3 revenue consisted of $16.6 million of royalties, $29.8 million of product revenue and $10.5 million of contract and other revenue. For the nine-month period, these amounts were $53.3 million, $92.2 million and $35.4 million, respectively.
- Cash, cash equivalents and marketable securities totaled $520.2 million at September 30, 2020, up from $407.7 million at December 31, 2019.
- Cash and cash equivalents were $89.5 million; short-term marketable securities were $430.7 million.
- Convertible notes had a $172.5 million face value and $154.2 million carrying value, with maturity in 2023. The notes bear a 1.375% coupon.
- Total liabilities were $350.8 million and stockholders’ equity was $958.2 million at quarter-end.
- Operating cash flow benefited substantially from collections and a $126.3 million decrease in unbilled receivables during the first nine months.
- Capital expenditures were $20.8 million in the first nine months, compared with $4.2 million in the prior-year period.
Material changes versus the prior comparable period
- Q3 revenue declined 0.8%, while nine-month revenue increased 10.2% year over year.
- Product revenue increased 39.3% in Q3 and 98.9% for the nine months, primarily from greater adoption and market share gains in memory interface chips. Management stated that memory interface chip revenue was up 39% year over year in Q3.
- Royalty revenue decreased 14.6% in Q3 and 25.4% for the nine months, primarily due to the timing and structure of license renewals.
- Contract and other revenue decreased 36.4% in Q3 and 23.7% for the nine months, primarily reflecting the 2019 divestiture of the Payments and Ticketing businesses, partly offset by growth in Silicon IP.
- Gross margin declined 490 basis points in Q3 and 370 basis points for the nine months, mainly because product revenue carries higher associated costs and acquired-intangible amortization increased.
- Research and development expense declined 18.7% in Q3 and 12.4% for the nine months; sales, general and administrative expense declined 23.9% and 16.2%, respectively.
- Operating loss improved materially from the prior-year periods, partly because of lower operating expenses and the absence of the 2019 asset-held-for-sale impairment charge. The company also recorded a $1.8 million gain from a reduction in the fair value of an earn-out liability during the first quarter of 2020.
- Net loss improved from $80.9 million to $31.5 million for the nine months, although the company remained loss-making.
- The company extended its Micron license agreement by four years. No additional financial terms were provided in the filing text.
Guidance, outlook, commentary and risks
Management described the quarter as strong and stated that it delivered on its revenue and profit expectations. It expects product revenue to increase in 2020 compared with 2019, primarily from memory interface chips. Management expects research and development expense to increase in the near term as it continues investing in semiconductor, security and other technologies, while sales, general and administrative expense is expected to remain relatively flat. Royalty and contract revenue are expected to remain variable because of license renewals, customer shipment volumes, product mix, contract milestones and the timing of engineering deliverables. The filing does not provide a specific numerical revenue or earnings forecast.
- Management believes existing cash, marketable securities and operating cash flow will meet cash needs for at least the next 12 months.
- On October 29, 2020, the board authorized a new repurchase program for up to 20.0 million shares. No shares had been repurchased under the new program as of the filing date; the prior authorization had approximately 3.6 million shares remaining at September 30, 2020.
- COVID-19 created uncertainty around customers, suppliers, employees, sales cycles, product shipments and future financial results. The filing states that the ultimate impact remained uncertain.
- Revenue concentration remained significant: the top five customers represented approximately 49% of Q3 and nine-month 2020 revenue. International customers represented approximately 49% of Q3 revenue and 47% of nine-month revenue.
- Unbilled receivables totaled $401.7 million at September 30, 2020, including $260.4 million classified as long term. Contracted but unsatisfied performance obligations were approximately $24.3 million, primarily expected to be recognized over the next two years.
- Unrecognized tax benefits totaled approximately $130.8 million, including a $104.1 million reserve related to potentially refundable Korean withholding taxes. California and India tax examinations were ongoing.
- Material contractual obligations totaled $207.9 million, excluding lease commitments and uncertain tax benefits. This included the $172.5 million principal amount of convertible notes and $22.1 million of software license commitments.
- The company reported no material pending legal proceedings, but remains exposed to intellectual-property disputes, customer indemnification obligations, product claims and other ordinary-course litigation risks.
- Goodwill was $183.2 million and net intangible assets were $41.1 million. Future impairment charges remain possible if operating performance or market conditions deteriorate.
Most important facts for investors to verify
- Whether memory interface chip growth can offset declining and volatile royalty revenue.
- The sustainability and quality of the $143.4 million nine-month operating cash flow, particularly the contribution from collections of unbilled receivables.
- The timing and funding plan for repayment, refinancing or conversion of the $172.5 million convertible notes due in 2023.
- Customer concentration, license renewals and the effect of the Micron agreement extension on future revenue.
- Whether product growth can be maintained without further compression of gross margin.
- The eventual outcome of Korean tax refund claims, uncertain tax positions and ongoing tax examinations.
- The operational and financial effects of COVID-19, supply-chain constraints, semiconductor cyclicality and international trade restrictions.
- The company’s ability to execute the new share repurchase program while continuing investment in research and development and meeting debt and lease obligations.