RAMBUS INC (NASDAQ:RMBS) files SEC Form 10-Q
Revenues. Total revenues for the three and nine months ended June 30, 1998
increased 35.2% and 55.0% to $9.2 million and $28.2 million, respectively, over
the comparable three- and nine-month periods in the previous year. Contract
revenues increased 40.2% and 54.1% to $7.5 million (82.3% of total revenues) and
$21.3 million (75.6% of total revenues) in the third quarter and first nine
months of fiscal 1998, respectively, over the comparable periods of fiscal 1997.
The increase in contract revenues was a result of the Company's entering into
contracts with new licensees and additional contracts with current licensees for
new developments and implementations, especially for development of Direct
Rambus, an extension of the Company's technology designed to provide a higher
bandwidth interface for PC main memory applications. The Company expects that
contract revenues will decline gradually over the next several quarters due to
the expiration of the time period for revenue recognition on contracts booked
previously, and also due to the Company's past success in signing licensees
having reduced the potential number of new licensees which can be added in the
future.
Royalties in the third quarter and first nine months of fiscal 1998 increased
16.2% to $1.6 million (17.7% of total revenues) and 57.6% to $6.9 million (24.4%
of total revenues), respectively, over the comparable periods in fiscal 1997.
The year-to-year increase in royalties was due to additional applications for
Rambus technology and increased volumes of existing applications. However,
royalties in the third fiscal quarter of 1998 decreased $904,000, or 35.7%, from
$2.5 million in the prior quarter. The Company believes that, as it had
anticipated and previously reported, this decline was primarily due to a
seasonal reduction in the shipments of Rambus ICs for use in the Nintendo 64
home video game. In addition, royalty revenue in the quarter was likely affected
adversely by a severe decline in DRAM prices. The Company anticipates that as
the demand for Nintendo 64 units increases seasonally, royalty revenue from this
source should improve.
The Company's current potential to generate royalties is largely dependent on
system sales by Nintendo and, to a lesser extent, sales by Cirrus Logic and
Chromatic Research of logic ICs 8
incorporating RACs for PC graphics and multimedia applications. Nintendo faces
intense competitive pressure in the home video game market, and both Cirrus
Logic and Chromatic Research have recently ended development of their current
lines of Rambus-based products. The markets addressed by all these companies are
characterized by extreme volatility, frequent new product introductions and
rapidly shifting consumer preferences, and there can be no assurance as to the
unit volumes of Rambus ICs that will be purchased in the future or the level of
royalty-bearing revenues that the Company will receive due to these
applications. None of the systems companies currently incorporating Rambus
interface technology into their products is contractually obligated to continue
using Rambus ICs. However, as Rambus ICs are incorporated into additional
applications, the Company believes that royalties will become an increasing
portion of revenues over the long term. Given the concentration of royalties
from a limited number of sources, however, it is likely that royalties will
continue to vary greatly from quarter to quarter.
As of June 30, 1998, the Company had 28 licensees compared to 21 at June 30,
1997. Because all of the Company's revenues are derived from its relatively
small number of licensees, the Company's revenues tend to be highly
concentrated. In the third quarter and first nine months of fiscal 1998, the
Company's top five licensees accounted for 43% and 52% of total revenues,
respectively. During these same periods, NEC accounted for 14% and 25% of
revenues, respectively, and LG Semicon accounted for 10% of revenues in the
third quarter. No other licensee accounted for more than 10% of revenues in
either period. The Company expects that it will continue to experience
significant revenue concentration for the foreseeable future. However, the
particular licensees which account for revenue concentration may vary from
period to period depending on the addition of new contracts, the expiration of
deferred revenue schedules under existing contracts, the volumes and prices at
which the licensees sell Rambus ICs to systems companies in any given period and
the royalty rates on those sales.
To date, companies based in Japan and Korea have accounted for most of the
Company's revenues, and for the substantial majority of its international
revenues. In the third quarter and first nine months of fiscal 1998,
international revenues comprised 70% and 75% of total revenues, respectively.
The Company expects that revenues derived from international licensees will
continue to represent a significant portion of its total revenues in the future.
All of the revenues from international licensees to date have been denominated
in United States dollars.
While a substantial portion of the Company's revenue is derived from Asian
sources, the Company does not consider itself to be abnormally vulnerable to
problems in the economies of Asian countries. A substantial portion of future
contract revenues will be based on nonrefundable payments of license and
engineering fees which have already been received from Asian and other licensees
but not yet recognized. Royalties generally are based on sales of Rambus ICs by
licensees to system companies located in the United States, Japan and, to a
lesser extent, Taiwan. The Company is not aware of any significant current or
planned future sales of Rambus ICs to system companies located in any other
Asian countries.
In a few cases, the Company has received nonrefundable, prepaid royalties
which offset the earliest royalty payments otherwise due from the licensee. As
of June 30, 1998, $3.4 million of such nonrefundable, prepaid royalties had
offset initial royalties, and the Company had a balance of $3.4 million
remaining to be offset against future royalties.
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Substantially all of the license fees, engineering service fees and
nonrefundable, prepaid royalties are bundled together as contract fees because
the Company generally does not provide or price these components separately.
The contracts also generally include rights to upgrades and enhancements.
Accordingly, Rambus recognizes contract revenues ratably over the period during
which post-contract customer support is expected to be provided. The excess of
contract fees received over contract revenue recognized is shown on the
Company's balance sheet as "deferred revenue." As of June 30, 1998, the
Company's deferred revenue was $68.4 million, substantially all of which is
scheduled to be recognized in varying amounts over the next five years.
Engineering Costs. Engineering costs, consisting of cost of contract
revenues and research and development expenses, increased 16.7% to $4.7 million
and 26.2% to $13.6 million in the third quarter and first nine months of fiscal
1998, respectively, over the comparable periods in fiscal 1997 due primarily to
an increase in engineering personnel. As a percentage of total revenue,
engineering costs decreased to 51.0% in the third quarter of fiscal 1998 from
59.1% in the comparable period in fiscal 1997, and decreased to 48.2% in the
first nine months of fiscal 1998 from 59.2% in the first nine months of fiscal
1997 as a result of the Company's growth in revenues.
Cost of Contract Revenues. Cost of contract revenues as a percentage of total
revenues increased to 27.2% in the third quarter of fiscal 1998 from 22.0% in
the comparable period of fiscal 1997, and increased to 22.8% in the first nine
months of fiscal 1998 from 21.4% in the first nine months of fiscal 1997. The
increase in cost of contract revenues as a percentage of total revenues was a
result of an increase in the proportion of the Company's engineering costs
attributable to the implementation of its technology for licensee-specific
processes, partially offset by the effect of the Company's growth in revenues.
The Company believes that the level of cost of contract revenues will continue
to fluctuate in the future, both in absolute dollars and as a percentage of
revenues, as new generations of Rambus ICs go through the normal development and
implementation phases.
Research and Development. Research and development expenses as a percentage of
total revenues decreased to 23.8% in the third quarter of fiscal 1998 from 37.1%
in the comparable period of fiscal 1997, and decreased to 25.4% in the first
nine months of fiscal 1998 from 37.8% in the first nine months of fiscal 1997.
The decrease in research and development expenses as a percentage of total
revenues was a result of the Company's growth in revenues and a decrease in the
proportion of engineering costs attributable to work on the Direct Rambus
interface design. The Company expects research and development expenses to
increase over time as it enhances and improves its technology and applies it to
new generations of ICs. The rate of increase of, and the percentage of revenues
represented by, research and development expenses in the future will vary from
period to period based on the research and development projects underway and the
change in research and development headcount in any given period, as well as the
rate of change in the Company's total revenues.
Marketing, General and Administrative. Marketing, general and administrative
expenses increased 18.7% to $2.7 million and 32.0% to $8.5 million in the third
quarter and first nine months of fiscal 1998, respectively, primarily due to a
buildup of marketing, sales and administrative support personnel in both the
U.S. and Japan, increased costs associated with applications engineering and
other technical support provided to systems companies, and increased
administrative costs associated with Rambus becoming a public company. As a
percentage of total revenue, marketing, general and administrative expenses
decreased to 29.3% in the third quarter of fiscal 1998 from 33.4% in the
comparable period in fiscal 1997, and decreased to 30.0% in the first nine
months of fiscal 1998 10
from 35.2% in the first nine months of fiscal 1997 due to the increased revenue
base. The Company expects marketing, general and administrative expenses to
increase in the future as the Company puts additional effort into marketing its
technology and assisting systems companies to adapt this technology to new
generations of products. The rate of increase of, and the percentage of revenues
represented by, marketing, general and administrative expenses in the future
will vary from period to period based on the trade shows, advertising and other
sales and marketing activities undertaken and the change in sales, marketing and
administrative headcount in any given period, as well as the rate of change in
the Company's total revenues.
Other Income. Other income consists primarily of interest income from the
Company's short-term cash investments, offset by interest expense on leases and
other equipment financing. Other income increased to $1.0 million (11.1% of
total revenues) in the third quarter of fiscal 1998 from $374,000 (5.5% of total
revenues) in the comparable period of fiscal 1997, and to $2.2 million (8.0% of
total revenues) in the first nine months of fiscal 1998 from $499,000 (2.7% of
total revenues) in the comparable period in fiscal 1997 primarily due to higher
interest income on a higher average invested balance of cash equivalents and
short-term marketable securities in the fiscal 1998 periods.
Provision for Income Taxes. The Company recorded a provision for income taxes
of $1.1 million in the third quarter of fiscal 1998 compared to a provision of
$352,000 recorded in the third quarter of fiscal 1997, and $3.4 million in the
first nine months of fiscal 1998 compared to a provision of $605,000 recorded in
the first nine months of fiscal 1997. The provision for both years was based on
an estimated federal and state combined rate of 40% on income before income
taxes.
At June 30, 1998 the Company had gross deferred tax assets of approximately
$29 million, primarily relating to the difference between tax and book treatment
of deferred revenue. The Company has established a partial valuation allowance
against its deferred tax assets due to the uncertainty surrounding the
realization of such assets. If it is determined that it is more likely than not
that the deferred tax assets are realizable, the valuation allowance will be
reduced.OTHER
The Company has granted to Intel Corporation a warrant for the purchase of
1,000,000 shares of its common stock at an exercise price of $10.00 per share.
The warrant will become exercisable only upon the achievement of certain
milestones, which will result in a charge to the statement of operations at the
time of achievement of the milestones based on the fair value of the warrant.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents and marketable securities of $83.6
million as of June 30, 1998 and total working capital of $68.2 million,
including a short-term component of deferred revenue of $26.4 million. Deferred
revenue represents the excess of cash received and due from licensees over
revenue recognized on license contracts, and the short-term component represents
the amount of this deferred revenue which will be recognized over the next
twelve months. Without the short-term component of deferred revenue, working
capital would have been $94.6 million as of June 30, 1998.
The Company's operating activities provided net cash of $12.3 million in the
first nine months of fiscal 1998 compared to a net cash provision of $13.8
million in the first nine months of fiscal
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1997. In the first nine months of fiscal 1998, net cash provided by operating
activities consisted mainly of net income, depreciation and amortization, and an
increase in deferred revenue partially offset by an increase in accounts
receivable and a decrease in taxes payable. The increases in deferred revenue
and accounts receivable were due to new contract billings in excess of revenues
recognized on the contracts. The decrease in taxes payable was the result of
income tax payments and provisions combined with adjustments to the Company's
tax accounts at June 30, 1998.
Net cash used in investing activities was $7.8 million in the first nine
months of fiscal 1998 compared to $40.9 million in the first nine months of
fiscal 1997. Net cash used in investing activities in the fiscal 1998 period
consisted of net purchases of marketable securities, equipment purchases and
equity investments.
Net cash provided by financing activities was $2.5 million in the first nine
months of fiscal 1998 compared to $35.3 million in the first nine months of
fiscal 1997. Net cash provided by financing activities in the fiscal 1998 period
was primarily due to sales of the Company's common stock pursuant to employee
stock plans.
The Company presently anticipates that existing cash balances will be adequate
to meet its cash needs for at least the next 12 months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None.
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PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS(d) Use of Proceeds
The Company completed its initial public offering pursuant to a Registration
Statement on Form S-1 (File No. 333-22885) declared effective by the Securities
and Exchange Commission on May 13, 1997 and issued 3,162,500 shares (including
the underwriter's over-allotment option) of its Common Stock, par value $0.001
per share, to the public at a price of $12.00 per share. The managing
underwriters for the initial public offering were Morgan Stanley & Co.
Incorporated, Hambrecht & Quist LLC and Robertson, Stephens & Company LLC. The
offering has been terminated and all shares have been sold. The Company
received approximately $34,117,000 of cash from the initial public offering, net
of underwriting discounts, commissions, and other offering costs and expenses.
Since May 19, 1997 (the closing date of the Company's initial public
offering), the Company has used approximately $29.9 million of the net proceeds
from the Company's initial public offering to fund operating expenses and
increase working capital, $3.4 million to purchase and install machinery and
equipment, and $0.8 million to repay indebtedness. All of the proceeds
received by the Company from the initial public offering have now been used as
described above.
No payments constituted direct or indirect payments to directors, officers,
general partners of the issuer or their associates, or to persons owning ten
percent or more of any class of equity securities of the issuer or to affiliates
of the issuer. |
