Rambus Inc. 2016 Q1 Form 10-Q Summary
Business context and reporting period
Rambus develops and licenses semiconductor, memory-interface, security, mobile-payment, smart-ticketing, sensing, and lighting technologies. This unaudited quarterly filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. Reportable segments were Memory and Interfaces Division (MID) and Cryptography Research Division (CRD); remaining activities were reported as Other.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $72.7 million | $72.9 million | (0.3%) |
| Royalties | $62.9 million | $67.0 million | (6.1%) |
| Contract and other revenue | $9.8 million | $6.0 million | 64.8% |
| Operating income | $9.3 million | $17.9 million | (48.0%) |
| Operating margin | 12.8% | 24.5% | Down 11.7 points |
| Net income | $1.9 million | $9.5 million | (80.2%) |
| Diluted EPS | $0.02 | $0.08 | Down $0.06 |
| Net margin | 2.6% | 13.0% | Down 10.4 points |
| Cash flow from operations | $16.3 million | $14.9 million | Increase of $1.4 million |
Royalty revenue represented 86.5% of total revenue, compared with 91.8% in the prior-year quarter. Patent royalties declined to $59.1 million, primarily because of lower revenue from AMD, IBM, Renesas, and STMicroelectronics, partly offset by higher SK hynix and Toshiba revenue. Of patent royalties, $17.3 million related to settlement-based revenue from SK hynix and Micron.
Operating costs and expenses increased to $63.4 million from $55.0 million. Research and development was essentially flat at $28.5 million, while sales, general and administrative expense increased 24.8% to $23.1 million. The increase primarily reflected higher stock compensation, amortization, headcount costs, and $1.8 million of acquisition-related costs. The prior-year period included a $2.3 million gain from sale of intellectual property that did not recur.
The effective tax rate increased to 70.6% from 36.4%, primarily because excess tax benefits from equity-plan activity had been exhausted in 2015 and tax expense was recognized on certain equity exercises and expirations.
Liquidity, debt, and balance-sheet items
- Cash and cash equivalents were $136.6 million at March 31, 2016, compared with $143.8 million at December 31, 2015.
- Marketable securities declined to $88.9 million from $143.9 million. Total cash, cash equivalents, and marketable securities were $225.6 million, down from $287.7 million.
- Operating cash flow was $16.3 million. Investing cash flow was negative $27.5 million, primarily because of the SCS acquisition, partly offset by $54.6 million of securities maturities.
- The company had $138.0 million principal amount of 1.125% convertible senior notes due in 2018, with a carrying value of $121.1 million. Contractual obligations include $138.0 million of principal and $3.9 million of related interest payments in 2018.
- Management stated that existing cash, investments, and operating cash flow should meet cash needs for at least the next 12 months.
Material changes versus the prior comparable period
- Rambus acquired Smart Card Software Limited (SCS) on January 25, 2016, for total consideration of approximately $104.7 million, including $92.6 million paid at closing and $12.1 million of purchase adjustments. SCS added approximately $59.7 million of identified intangible assets and $47.2 million of goodwill.
- Contract and other revenue increased by $3.9 million, partly from security technology development and SCS revenue.
- Operating income and net income fell substantially as higher operating expenses, acquisition costs, amortization, and the absence of the prior-year intellectual-property gain more than offset the increase in contract revenue.
- Goodwill increased to $163.8 million from $116.9 million and net intangible assets increased to $114.3 million from $64.3 million, primarily due to SCS.
- The company issued common stock under employee plans for $3.8 million. No share repurchases occurred during the quarter, although the accelerated repurchase program remained outstanding and was expected to be completed by June 2016.
- The 2015 restructuring program was substantially completed; the remaining restructuring liability was $47,000 at March 31, 2016.
Outlook, commentary, risks, and unusual items
- No specific quarterly or annual revenue or earnings guidance is provided in the filing text.
- Management expects engineering costs to remain higher in the near term as it invests in semiconductor, lighting, security, and other technologies, including SCS-related costs. SGA expense was expected to decline after acquisition costs incurred primarily in Q1.
- Management expects SCS to be accretive to revenue within the first 12 months after acquisition, but pro forma earnings information was not provided because historical U.S. GAAP records were unavailable and integration remained preliminary.
- Management does not expect material revenue from the buffer chipset under development in 2016.
- Revenue is highly concentrated: the top five customers represented approximately 70% of Q1 revenue, and Micron, Samsung, and SK hynix each represented at least 10% of revenue. International customers represented approximately 65% of revenue.
- Future royalty revenue is exposed to customer shipment volumes, pricing, product mix, license renewals, customer concentration, semiconductor cyclicality, and lengthy and uncertain licensing negotiations.
- Rambus has no material pending legal proceeding reported at quarter-end, but remains exposed to intellectual-property disputes, patent challenges, indemnification claims, and potential litigation costs.
- Unrecognized tax benefits were approximately $22.1 million; the company could not reasonably estimate the timing or outcome of potential settlements. California and India tax examinations were ongoing.
- Goodwill and long-lived assets could require impairment charges if acquired businesses underperform or market conditions deteriorate.
Important facts for investors to verify
- Progress and profitability of integrating SCS, including actual revenue contribution, acquisition-related costs, and potential impairment risk.
- Renewal, extension, and payment terms for major licensing relationships, particularly Samsung, SK hynix, and Micron.
- Ability to sustain royalty revenue while expanding contract, product, and security-related revenue.
- Cash requirements and refinancing or repayment plans for the $138.0 million convertible notes due in 2018.
- Completion and final share count of the $100.0 million accelerated share repurchase program.
- Realizability of deferred tax assets, changes in the 70.6% effective tax rate, and outcomes of ongoing tax examinations.
- Customer concentration, international exposure, patent validity and enforcement, cybersecurity, product adoption, and semiconductor-market cyclicality.