Business Context and Reporting Period
Rambus Inc. filed an unaudited Form 10-Q for the quarter ended March 31, 2017. The company develops and licenses semiconductor, memory-interface, security, mobile-payment, smart-ticketing, lighting and related technologies, and also sells products and provides engineering and support services. Memory and Interfaces (MID) and Rambus Security (RSD) were reportable segments; Emerging Solutions and Lighting were included in Other.
During the quarter, Rambus signed a license agreement with Western Digital, introduced its Unified Payment Platform and launched a High Bandwidth Memory PHY solution for GLOBALFOUNDRIES technology.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $97.4 million | $72.7 million | +33.9% |
| Royalty revenue | $69.0 million | $62.9 million | +9.7% |
| Contract and other revenue | $28.4 million | $9.8 million | +189.6% |
| Operating income | $13.4 million | $9.3 million | +44.6% |
| Net income | $3.0 million | $1.9 million | +60.0% |
| Diluted EPS | $0.03 | $0.02 | Improved |
| Operating cash flow | $17.2 million | $17.8 million | Down $0.6 million |
Operating margin was 13.8%, compared with 12.8% in the prior-year quarter. Net margin was 3.1%, compared with 2.6%. Total operating costs and expenses were $83.9 million, or 86.2% of revenue, versus $63.4 million, or 87.2%, in Q1 2016. The effective tax rate was 71.0%, compared with 70.6%, and income tax expense was $7.4 million.
Cash and cash equivalents were $177.5 million at March 31, 2017, and marketable securities were $10.2 million, for total cash, cash equivalents and marketable securities of $187.6 million. Cash increased from $172.2 million at December 31, 2016, primarily due to operating cash flow and maturities of marketable securities.
Outstanding debt included $138.0 million principal amount of 1.125% convertible senior notes due in 2018, carried at $127.9 million, plus a $37.9 million long-term imputed financing obligation. Contractual obligations totaled $195.9 million, including $138.0 million of convertible notes due in 2018. The company stated that existing liquidity and operating cash flows should meet cash needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue increased $24.7 million, driven principally by contract and other revenue from memory products acquired through the Memory Interconnect and Snowbush transactions and higher security development projects.
- Patent license royalties increased approximately $4.2 million, while technology license royalties increased approximately $1.9 million.
- MID revenue increased to $70.6 million from $53.5 million, and RSD revenue increased to $23.2 million from $14.1 million.
- Engineering costs increased $15.0 million, or 36.8%, largely due to acquisitions, higher product-related costs, headcount, amortization, software tools, consulting and stock-based compensation.
- Sales, general and administrative expense increased $5.1 million, or 22.0%, primarily due to higher consulting, headcount, bonuses, stock compensation, travel and sales and marketing costs.
- Operating cash flow was broadly stable but declined modestly because of higher accounts receivable and lower accrued liabilities.
- Investing activities provided $25.1 million in Q1 2017, compared with $27.5 million used in Q1 2016, when the company paid approximately $92.6 million net for the Smart Card Software acquisition.
- The company adopted ASU 2016-09, recording a $38.2 million cumulative-effect reduction to accumulated deficit and increase to deferred tax assets at January 1, 2017. The adoption also contributed approximately $0.3 million of excess tax benefit in Q1 2017.
- No shares were repurchased during the quarter; approximately 11.5 million shares remained authorized for repurchase.
Guidance, Outlook, Commentary and Risks
Management did not provide a specific numerical revenue or earnings forecast in the filing. Management expects engineering costs to remain higher in the near term as Rambus invests in semiconductor, security, mobile-payment, smart-card and other technologies, including integration and operating costs related to acquisitions. Sales, general and administrative costs were expected to remain relatively flat in the near term.
- Revenue is concentrated in licensing and a limited customer base. The top five customers represented approximately 57% of Q1 2017 revenue, and Micron, Samsung and SK hynix each represented at least 10% of revenue.
- Licensing negotiations and renewals are lengthy, costly and uncertain. Royalty revenue may fluctuate with customer shipment volumes, pricing, product mix, contract terms and license renewals.
- International customers represented approximately 61% of revenue; the company does not hedge indirect foreign-exchange exposure.
- The business remains exposed to semiconductor cyclicality, customer consolidation, competition, technology substitution and uncertain adoption of newer products and acquired businesses.
- Rambus faces risks from intellectual-property litigation, patent challenges, indemnification obligations, security breaches, product defects and third-party manufacturing or service providers.
- The company maintains significant deferred tax assets and a $25.9 million valuation allowance against primarily state deferred tax assets. Unrecognized tax benefits were approximately $23.1 million, and tax examinations were ongoing in California, New York and India.
- Goodwill totaled $206.1 million and net intangible assets totaled $121.4 million. Underperformance or adverse market conditions could result in impairment charges.
- The 2018 convertible notes create a substantial 2018 maturity and could require significant cash repayment or refinancing. Non-cash interest expense is expected to increase as the notes approach maturity.
- The company reported no material pending legal proceeding and stated that its disclosure controls and procedures were effective as of March 31, 2017.
Important Facts for Investors to Verify
- Whether the sharp increase in contract and other revenue, particularly memory-product revenue, is sustainable or acquisition-driven and nonrecurring.
- The timing, terms and revenue contribution of the Western Digital license and other licensing renewals.
- Customer concentration and exposure to Micron, Samsung, SK hynix and other large semiconductor customers.
- Rambus’s ability to fund or refinance the $138.0 million convertible-note maturity in 2018 while continuing acquisitions, investment and potential share repurchases.
- Whether higher engineering and integration expenses generate sufficient growth and whether acquired businesses meet expected performance levels.
- The realizability of deferred tax assets, outcomes of tax examinations and potential settlement of approximately $23.1 million of unrecognized tax benefits.
- Potential future goodwill or intangible-asset impairment charges and the effect of upcoming revenue-recognition and lease accounting standards.