Rambus Beats on Q1 Earnings; Outlook Tepid - Analyst Blog

Rambus Inc. RMBS posted first-quarter 2014 adjusted earnings per share of 16 cents, comprehensively beating the Zacks Consensus Estimate of a penny. Earnings increased from 6 cents reported in the year-ago quarter.

Adjusted earnings on a proportionate tax basis exclude amortization, restructuring charges, acquisition costs and other one-time items but include stock-based compensation expenses.

Nonetheless, tepid revenue guidance outlook took its toll on the stock and shares were down 7.72% in after-hours trade on Monday.

Quarter Details

Revenues came in at $78.3 million which not only increased 17.1% on a year-over-year basis but were also ahead of the Zacks Consensus Estimate of $73 million. Licensing agreements with Micron Technology MU, SK Hynix and Nanya Technology positively impacted revenues which more than offset lower royalty payments received from Samsung.

The company reported revenues from Memory and Interfaces Division (MID), Cryptography Research CRI and LED divisions of $61.2 million (up 2.5% year over year), $12.9 million (up 87.5% year over year) and $4.2 million (above 1,000% year-over-year increase) respectively.

Adjusted operating expenses (including stock-based compensation) in the first quarter were $46.8 million, down 9.3% from the year-ago quarter primarily due to lower-than-expected legal expenses and slow recruitment during the quarter. Operating expenses, as a percentage of revenues, contracted from 77.2% to 59.8% on a year-over-year basis.

Adjusted operating income came in at $31.5 million compared with $15.2 million in the year-ago quarter. Operating margin was 40.2% compared with 22.8% reported in the year-ago quarter.

Rambus' adjusted net income increased from $7.2 million or 6 cents per share to $18.6 million or 16 cents. Adjusted net income amortization, restructuring charges, acquisition costs and other one-time items but include stock-based compensation expenses.

Rambus exited the quarter with cash, cash equivalents and marketable securities of approximately $403.4 million, up from $387.7 million in the prior quarter. During the quarter, the company generated cash from operations of $17.0 million.

Guidance

Rambus expects its second-quarter results to be impacted by lower royalty revenues from PSV shipments and payment related issues from certain CRI clients. Thus, the company expects second-quarter revenues to range between $69 million and $74 million (mid-point $71.5 million), lower than the Zacks Consensus Estimate of $75 million.

Moreover, the company expects pro-forma operating expenses to be between $44.0 million and $47.0 million. Pro-forma net income is expected in the range of $12.0 to $17.0 million.

Nonetheless, the company reiterated the fiscal 2014 outlook. For fiscal 2014, the company expects customer licensing income to be between $295.0 million and $305.0 million. Moreover, the company expects pro-forma operating expenses to be between $180.0 million and $185.0 million and cash flow from operations are expected in the $75 to $85 million range.

Our Take

We are encouraged by Rambus' first-quarter results as both the top and bottom lines surpassed the Zacks Consensus Estimate. However, the company provided tepid revenue guidance due to seasonality in payments schedule of customers.

Rambus is going through a restructuring phase and we expect it to yield favorable results in the coming quarters. The company has resolved several of its legal disputes which lowered litigation expenses which in turn positively impacted the operating results. Additionally, the licensing agreements — the result of successful monetizing of its patents — remain a recurring revenue source for Rambus.

Moreover, with the rising popularity of energy-efficient lighting, LED products are finding place in the latest architectural, retail, commercial and residential lighting fixtures. We find Rambus in a favorable position to capitalize on this opportunity.

However, competition from Semiconductor Manufacturing International Corp. SMI and Advanced Micro Devices (AMD) as well as the oversupply in the semiconductor market are concerns.

Currently, Rambus sports a Zacks Rank #1 (Strong Buy).