Rambus(RMBS) - 2023 Q1 - Quarterly Report

Note Regarding Forward-Looking Statements PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets The company's total assets decreased from $1,012.6 million at December 31, 2022, to $962.6 million at March 31, 2023, primarily due to a reduction in cash and cash equivalents and unbilled receivables. Total liabilities also decreased from $233.3 million to $200.9 million, mainly driven by the settlement of convertible notes | Metric | Dec 31, 2022 (in thousands) | Mar 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Assets | $1,012,594 | $962,630 | $(49,964) | | Total Liabilities | $233,297 | $200,901 | $(32,396) | | Total Stockholders' Equity | $779,297 | $761,729 | $(17,568) | | Cash and cash equivalents | $125,334 | $99,876 | $(25,458) | | Unbilled receivables (current) | $125,698 | $100,435 | $(25,263) | | Convertible notes (current) | $10,378 | $— | $(10,378) | Condensed Consolidated Statements of Operations For the three months ended March 31, 2023, Rambus reported a net income of $3.3 million, a significant improvement from a net loss of $66.2 million in the prior-year period. This turnaround was primarily driven by a substantial reduction in the loss on extinguishment of debt and loss on fair value adjustment of derivatives, coupled with increased product revenue | Metric | 3 Months Ended Mar 31, 2023 (in thousands) | 3 Months Ended Mar 31, 2022 (in thousands) | Change (in thousands) | YoY Change | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | :-------------------- | :--------- | | Total Revenue | $113,762 | $99,050 | $14,712 | 14.9% | | Product Revenue | $63,775 | $47,969 | $15,806 | 33.0% | | Royalties | $28,169 | $30,464 | $(2,295) | (7.5)% | | Contract and other revenue | $21,818 | $20,617 | $1,201 | 5.8% | | Gross Profit | $82,086 | $76,651 | $5,435 | 7.1% | | Operating Income | $1,942 | $8,321 | $(6,379) | (76.7)% | | Net Income (Loss) | $3,281 | $(66,218) | $69,499 | N/A | | Basic EPS | $0.03 | $(0.60) | $0.63 | N/A | | Diluted EPS | $0.03 | $(0.60) | $0.63 | N/A | Condensed Consolidated Statements of Comprehensive Income (Loss) Rambus reported total comprehensive income of $4.7 million for the three months ended March 31, 2023, a significant improvement from a comprehensive loss of $69.1 million in the same period last year, primarily driven by the shift from net loss to net income and an unrealized gain on marketable securities | Metric | 3 Months Ended Mar 31, 2023 (in thousands) | 3 Months Ended Mar 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net income (loss) | $3,281 | $(66,218) | $69,499 | | Foreign currency translation adjustment | $205 | $(293) | $498 | | Unrealized gain (loss) on marketable securities, net of tax | $1,223 | $(2,568) | $3,791 | | Total comprehensive income (loss) | $4,709 | $(69,079) | $73,788 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased by $17.6 million from December 31, 2022, to March 31, 2023, primarily due to the issuance of common stock for employee plans and acquisition earn-outs, offset by net income and unrealized gains on marketable securities | Metric | Dec 31, 2022 (in thousands) | Mar 31, 2023 (in thousands) | Change (in thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Total Stockholders' Equity | $779,297 | $761,729 | $(17,568) | | Net income | $— | $3,281 | $3,281 | | Issuance of common stock upon exercise of options, equity stock and employee stock purchase plan, net of withholding taxes | $— | $(29,905) | $(29,905) | | Stock-based compensation | $— | $13,063 | $13,063 | | Issuance of common stock in connection with the payment of year 1 earn-out related to the PLDA Group acquisition | $— | $5,022 | $5,022 | | Retirement of warrants | $— | $(10,457) | $(10,457) | Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2023, net cash provided by operating activities was $38.9 million, a decrease from $42.6 million in the prior year. Investing activities shifted from providing $204.8 million in 2022 to using $10.7 million in 2023, largely due to changes in marketable securities transactions. Financing activities used $54.2 million, a significant reduction from $175.9 million used in 2022, primarily due to lower payments for convertible notes and warrants | Metric | 3 Months Ended Mar 31, 2023 (in thousands) | 3 Months Ended Mar 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash provided by operating activities | $38,906 | $42,614 | $(3,708) | | Net cash provided by (used in) investing activities | $(10,705) | $204,756 | $(215,461) | | Net cash used in financing activities | $(54,210) | $(175,907) | $121,697 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $(25,818) | $71,239 | $(97,057) | | Cash, cash equivalents and restricted cash at end of period | $99,876 | $179,503 | $(79,627) | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed disclosures on the company's accounting policies and specific financial statement line items, including revenue recognition, earnings per share, intangible assets, goodwill, segment information, marketable securities, fair value measurements, leases, convertible notes, commitments, equity incentive plans, income taxes, litigation, and derivative instruments, offering crucial context for the condensed financial statements Note 1. Basis of Presentation The unaudited condensed consolidated financial statements include Rambus Inc. and its wholly-owned subsidiaries, prepared in accordance with SEC interim financial reporting rules, and should be read with the 2022 Form 10-K - Financial statements are unaudited, include wholly-owned subsidiaries, and are prepared per SEC interim rules, requiring review with the 2022 Form 10-K[27][28][29] Note 2. Revenue Recognition Rambus's contract balances show unbilled receivables decreased by $37.9 million and deferred revenue decreased by $2.8 million from December 31, 2022, to March 31, 2023. The company recognized $11.6 million of revenue from contract balances as of December 31, 2022, and has approximately $24.8 million in remaining performance obligations expected to be recognized over the next two years | Metric | Mar 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Unbilled receivables | $112,983 | $150,920 | $(37,937) | | Deferred revenue | $22,661 | $25,421 | $(2,760) | - Recognized $11.6 million revenue from contract balances as of Dec 31, 2022, during Q1 2023[30] - Remaining performance obligations totaled approximately $24.8 million as of March 31, 2023, expected to be recognized over the next 2 years[31] Note 3. Earnings (Loss) Per Share Rambus reported basic and diluted EPS of $0.03 for Q1 2023, a significant improvement from a loss of $0.60 per share in Q1 2022. The diluted share count for Q1 2023 was 111.2 million, including 2.9 million potentially dilutive common shares, while no dilutive securities were included in Q1 2022 due to the net loss | Metric | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Net income (loss) | $3,281 | $(66,218) | | Weighted-average shares outstanding - basic | 108,277 | 109,889 | | Effect of potentially dilutive common shares | 2,876 | — | | Weighted-average shares outstanding - diluted | 111,153 | 109,889 | | Basic net income (loss) per share | $0.03 | $(0.60) | | Diluted net income (loss) per share | $0.03 | $(0.60) | - Potentially dilutive securities totaling 3.4 million shares were excluded from diluted EPS calculation in Q1 2022 due to anti-dilutive impact from net loss[33] Note 4. Intangible Assets and Goodwill Goodwill remained stable at $292.0 million from December 31, 2022, to March 31, 2023. Net intangible assets decreased from $50.9 million to $46.9 million during the same period, primarily due to amortization of existing technology and customer contracts. Amortization expense for intangible assets was $3.9 million in Q1 2023, up slightly from $3.8 million in Q1 2022 | Metric | Dec 31, 2022 (in thousands) | Mar 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total goodwill | $292,040 | $292,040 | $0 | | Total intangible assets, net | $50,880 | $46,936 | $(3,944) | - Amortization expense for intangible assets was $3.9 million for Q1 2023, compared to $3.8 million for Q1 2022[35] | Years Ending December 31: | Amount (in thousands) | | :------------------------ | :-------------------- | | 2023 (remaining nine months) | $11,490 | | 2024 | $12,722 | | 2025 | $6,683 | | 2026 | $4,365 | | 2027 | $476 | | Thereafter | $— | | Total amortizable purchased intangible assets | $35,736 | | IPR&D | $11,200 | | Total intangible assets | $46,936 | Note 5. Segments and Major Customers Rambus operates as a single segment within the semiconductor space. Revenue concentration remains high, with the top five customers accounting for 61% of total revenue in Q1 2023 (up from 59% in Q1 2022). International customers contributed 44% of total revenue in both Q1 2023 and Q1 2022, with significant revenue from the USA, South Korea, and Asia-Other - Rambus operates as a single operating and reportable segment within the semiconductor space[38] | Customer | Mar 31, 2023 (% of total accounts receivable) | Dec 31, 2022 (% of total accounts receivable) | | :--------- | :------------------------------------------ | :------------------------------------------ | | Customer 1 | 25% | 16% | | Customer 2 | 11% | 23% | | Customer 3 | <10% | 14% | | Customer | Mar 31, 2023 (% of total revenue) | Mar 31, 2022 (% of total revenue) | | :--------- | :-------------------------------- | :-------------------------------- | | Customer A | 19% | 25% | | Customer B | 16% | <10% | | Customer C | 11% | <10% | | Customer D | 11% | 14% | | Geographic Region | 3 Months Ended Mar 31, 2023 (in thousands) | 3 Months Ended Mar 31, 2022 (in thousands) | | :---------------- | :--------------------------------------- | :--------------------------------------- | | USA | $63,656 | $55,684 | | South Korea | $14,144 | $1,465 | | Asia-Other | $12,704 | $17,792 | | Singapore | $11,328 | $14,045 | | Taiwan | $6,509 | $4,960 | | Japan | $2,415 | $3,535 | | Europe | $1,753 | $1,564 | | Canada | $1,253 | $5 | | Total | $113,762 | $99,050 | Note 6. Marketable Securities Rambus's total cash, cash equivalents, and marketable securities decreased from $313.2 million at December 31, 2022, to $292.1 million at March 31, 2023. The portfolio is primarily invested in money market funds, time deposits, U.S. government bonds, and corporate notes, with a weighted average return of 3.80% for money market funds and 6.98% for time deposits as of March 31, 2023. Gross unrealized losses were $2.4 million at March 31, 2023, deemed not material, and the company intends to hold these investments to maturity | Metric | Mar 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Total cash, cash equivalents and marketable securities | $292,137 | $313,226 | $(21,089) | | Money market funds (Fair Value) | $13,089 | $15,763 | $(2,674) | | Time deposits (Fair Value) | $9,646 | $— | $9,646 | | U.S. Government bonds and notes (Fair Value) | $96,250 | $96,371 | $(121) | | Corporate notes, bonds and commercial paper (Fair Value) | $90,360 | $106,355 | $(15,995) | | Investment Type | Weighted Average Rate of Return (Mar 31, 2023) | | :------------------------------------ | :--------------------------------------------- | | Money market funds | 3.80% | | Time deposits | 6.98% | | U.S. Government bonds and notes | 2.37% | | Corporate notes, bonds and commercial paper | 2.31% | - Gross unrealized losses on marketable securities were $2.4 million at March 31, 2023, and $3.6 million at December 31, 2022, which were not considered material[45] - The company intends to hold debt investments with unrealized losses for a sufficient period to allow for recovery of principal amounts[45] Note 7. Fair Value of Financial Instruments Rambus's assets carried at fair value, primarily marketable securities, totaled $209.3 million at March 31, 2023, with the majority classified as Level 2 inputs. Liabilities carried at fair value, specifically the earn-out consideration for the PLDA acquisition, increased from $14.8 million at December 31, 2022, to $21.7 million at March 31, 2023, due to a $6.9 million remeasurement adjustment recorded as an expense | Financial Instrument | Mar 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Total assets carried at fair value | $209,345 | $218,489 | $(9,144) | | Earn-out consideration related to PLDA acquisition (Level 3 liability) | $21,700 | $14,800 | $6,900 | - The fair value of the earn-out liability for the PLDA acquisition is remeasured quarterly, resulting in an additional expense of $6.9 million in Q1 2023 (vs. $1.2 million in Q1 2022)[48] - The 1.375% Convertible Senior Notes due 2023 were settled in Q1 2023, with a fair value of $19.6 million at December 31, 2022[51] Note 8. Leases Rambus leases office space under operating leases with remaining terms generally between one and eight years. As of March 31, 2023, the weighted-average remaining lease term was 7.0 years, and the weighted-average discount rate was 5.4%. Operating lease costs were $1.9 million for both Q1 2023 and Q1 2022 - Weighted-average remaining lease term for operating leases was 7.0 years as of March 31, 2023[54] - Weighted-average discount rate for operating leases was 5.4% as of March 31, 2023[54] | Metric | 3 Months Ended Mar 31, 2023 (in thousands) | 3 Months Ended Mar 31, 2022 (in thousands) | | :-------------------- | :--------------------------------------- | :--------------------------------------- | | Operating lease costs | $1,900 | $1,900 | | Cash paid for operating lease liabilities | $2,200 | $2,300 | Note 9. Convertible Notes The remaining $10.4 million aggregate principal amount of the 2023 Convertible Senior Notes was settled upon maturity in Q1 2023, with $10.4 million paid in cash and approximately 0.3 million shares issued for the conversion spread. This settlement also involved the retirement of remaining convertible senior note hedges and warrants, resulting in a $0.2 million loss on fair value adjustment of derivatives | Metric | Mar 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | | 2023 Notes | $— | $10,381 | | Total convertible notes | $— | $10,378 | - Settled remaining $10.4 million aggregate principal of 2023 Notes in Q1 2023, paying cash and issuing 0.3 million shares for conversion spread[56] - Retirement of remaining warrants resulted in a $0.2 million loss on fair value adjustment of derivatives in Q1 2023[57] | Metric | 3 Months Ended Mar 31, 2023 (in thousands) | 3 Months Ended Mar 31, 2022 (in thousands) | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | | Total interest expense on convertible notes | $15 | $421 | Note 10. Commitments and Contingencies As of March 31, 2023, Rambus had total material contractual obligations of $48.7 million, primarily for software licenses ($39.4 million) and acquisition retention bonuses ($5.4 million). The company also has approximately $21.1 million in unrecognized tax benefits not reflected in the table, with an inability to reasonably estimate the settlement outcome within the next 12 months | Contractual Obligation | Total (in thousands) | Remainder of 2023 (in thousands) | 2024 (in thousands) | 2025 (in thousands) | | :-------------------------- | :------------------- | :------------------------------- | :------------------ | :------------------ | | Other contractual obligations | $3,960 | $3,360 | $600 | $— | | Software licenses | $39,370 | $14,835 | $16,452 | $8,083 | | Acquisition retention bonuses | $5,364 | $2,507 | $2,507 | $350 | | Total | $48,694 | $20,702 | $19,559 | $8,433 | - Unrecognized tax benefits totaled approximately $21.1 million as of March 31, 2023, not included in the contractual obligations table, with an uncertain settlement timeline[59][60] - The company indemnifies customers for IP infringement, generally limiting liability to fees received, with fair value deemed immaterial[61] Note 11. Equity Incentive Plans and Stock-Based Compensation Stockholders approved an additional 5.2 million shares for the 2015 Equity Incentive Plan in April 2023, bringing total available shares for grant to 5.9 million as of March 31, 2023. Stock-based compensation expense for Q1 2023 was $13.1 million, up from $7.8 million in Q1 2022, primarily driven by nonvested equity stock units - Stockholders approved an additional 5.2 million shares for the 2015 Equity Incentive Plan on April 27, 2023[62] | Metric | Mar 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Total shares available for grant | 5,956 | 7,656 | | Metric | 3 Months Ended Mar 31, 2023 (in thousands) | 3 Months Ended Mar 31, 2022 (in thousands) | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | | Stock-based compensation expense | $13,063 | $7,778 | - Granted 1.1 million nonvested equity stock units in Q1 2023 (valued at $52.7 million) compared to 1.6 million in Q1 2022 (valued at $44.6 million)[71] - Unrecognized stock-based compensation for nonvested equity stock grants was $98.5 million at March 31, 2023, to be recognized over 2.6 years[73] Note 12. Stockholders' Equity Rambus had an outstanding authorization to repurchase approximately 9.7 million shares under its 2020 Repurchase Program as of March 31, 2023. No shares were repurchased in Q1 2023 under this program. The 2022 ASR Program, which involved a $100 million pre-payment and resulted in the retirement of 3.2 million shares, was completed in Q4 2022 - As of March 31, 2023, approximately 9.7 million shares remained authorized for repurchase under the 2020 Repurchase Program[76] - No shares were repurchased under the 2020 Repurchase Program during the three months ended March 31, 2023[74] - The 2022 ASR Program, which involved a $100 million pre-payment and resulted in the retirement of 3.2 million shares, was completed in Q4 2022[75] Note 13. Income Taxes Rambus recorded a provision for income taxes of $0.2 million in Q1 2023, down from $0.5 million in Q1 2022, with effective tax rates of 5.8% and (0.8)% respectively. The company maintains a full valuation allowance on its U.S. federal and California deferred tax assets due to a cumulative loss position, but anticipates a reasonable possibility of reversal in 2023 if profitability improvements are sustained. Unrecognized tax benefits totaled $169.9 million as of March 31, 2023, including $148.8 million related to refundable withholding taxes in South Korea | Metric | 3 Months Ended Mar 31, 2023 (in millions) | 3 Months Ended Mar 31, 2022 (in millions) | | :-------------------------- | :---------------------------------------- | :---------------------------------------- | | Provision for income taxes | $0.2 | $0.5 | | Effective tax rate | 5.8% | (0.8%) | - Maintains a full valuation allowance on U.S. federal and California deferred tax assets due to cumulative loss position, but a reversal is possible in 2023 if operating results improve[80][141] - Unrecognized tax benefits totaled $169.9 million as of March 31, 2023, including $148.8 million related to refundable withholding taxes in South Korea[83] Note 14. Litigation and Asserted Claims Rambus is not currently a party to any material pending legal proceedings and believes the outcome of ordinary course matters will not materially adversely affect its financial position. However, litigation can still impact the company due to defense costs and diversion of management resources - Not currently a party to any material pending legal proceeding[86][175] - Believes ordinary course litigation will not materially adversely affect business, but acknowledges potential for defense costs and resource diversion[86][175] Note 15. Derivative Instruments and Hedging Activities Rambus initiated a Hedging Program in Q1 2023 using short-duration foreign currency forward contracts to manage exposure to euro-denominated monetary assets. These contracts are not designated as hedging instruments, and any fair value changes are recorded in interest income and other income (expense), net, but were deemed immaterial for Q1 2023 - Began using foreign currency forward contracts in Q1 2023 to manage exposure to euro-denominated monetary assets[88][169] - Contracts have a short duration (approx. one month) and their fair value changes are recorded in interest income and other income (expense), net, but were immaterial for Q1 2023[89][91][170] - Total notional value of outstanding contracts was $9.7 million (€9.1 million) as of March 31, 2023[91][170] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Business Overview Rambus is a leading provider of chips, silicon IP, and innovations for data center and other growing markets, focusing on accelerating and protecting data. The company leverages over 30 years of semiconductor design experience to deliver high-performance memory subsystems, addressing increased bandwidth, capacity, and security needs driven by cloud growth and AI - Rambus is an industry-leading provider of chips, silicon IP, and innovations for accelerating data and enabling performance improvements in data center and growing markets[95] - Focuses on high-performance memory subsystems, maximizing performance and security in data-intensive systems, driven by cloud growth and AI[95][96] - Strategic objectives include focusing product portfolio on semiconductors, optimizing operational efficiency, and leveraging cash generation for growth[97] Executive Summary Rambus achieved strong Q1 2023 results with $113.8 million in revenue, $80.1 million in operating expenses, and $38.9 million in net cash from operations, driven by demand for memory interface chips and Silicon IP, and stable royalties. The company also extended its patent license agreement with SK hynix by 10 years | Metric | Q1 2023 (in millions) | | :-------------------------- | :-------------------- | | Revenue | $113.8 | | Operating expenses | $80.1 | | Net cash provided by operating activities | $38.9 | - Extended comprehensive patent license agreement with SK hynix by 10 years through 2034[98] - Strong Q1 2023 results driven by demand in memory interface chips and Silicon IP solutions, and stable royalties[98] Operational Highlights Rambus's Q1 2023 revenue was $113.8 million, with product revenue increasing to 56% of total revenue (up from 48% in Q1 2022) due to memory interface chips. Royalty revenue decreased to 25% (from 31%), and contract and other revenue decreased to 19% (from 21%). Operating expenses increased, with R&D up $2.1 million and SG&A up $4.1 million, largely due to stock-based compensation and headcount. The company holds 2,389 U.S. and foreign patents and 613 pending applications Revenue Sources Product revenue, primarily from memory interface chips, increased to 56% of total consolidated revenue in Q1 2023 (from 48% in Q1 2022). Royalty revenue, derived from patent licenses, decreased to 25% (from 31%), while contract and other revenue, mainly from Silicon IP, decreased to 19% (from 21%) | Revenue Source | Q1 2023 (% of total revenue) | Q1 2022 (% of total revenue) | | :-------------------------- | :--------------------------- | :--------------------------- | | Product revenue | 56% | 48% | | Royalties | 25% | 31% | | Contract and other revenue | 19% | 21% | - Product revenue growth primarily driven by memory interface chips sold to major DRAM manufacturers and cloud providers[99] - Royalty revenue derived from a broad worldwide portfolio of patented inventions, licensed to leading semiconductor and electronic system companies[101] - Contract and other revenue primarily consists of high-speed interface and security Silicon IP[102] Costs and Expenses Cost of product revenue increased by $8.0 million in Q1 2023 due to higher sales volumes of memory interface chips. Cost of contract and other revenue increased by $1.1 million due to higher engineering services. R&D expenses rose by $2.1 million, mainly from stock-based compensation and headcount. SG&A expenses increased by $4.1 million, also driven by stock-based compensation and headcount - Cost of product revenue increased by approximately $8.0 million in Q1 2023 YoY, primarily due to increased sales volumes of memory interface chips[103] - Cost of contract and other revenue increased by approximately $1.1 million in Q1 2023 YoY, primarily due to higher engineering services[103] - Research and development expenses increased by approximately $2.1 million in Q1 2023 YoY, driven by stock-based compensation ($1.0M) and headcount-related expenses ($0.8M)[104] - Sales, general and administrative expenses increased by approximately $4.1 million in Q1 2023 YoY, primarily due to increased stock-based compensation ($4.2M) and headcount-related expenses ($0.8M)[105] Intellectual Property As of March 31, 2023, Rambus held 2,389 U.S. and foreign patents and had 613 patent applications pending, covering its semiconductor, security, and other technologies. The company actively files for patent protection to support its business strategy and believes its innovations offer performance, risk, and cost benefits to customers - As of March 31, 2023, Rambus held 2,389 U.S. and foreign patents[106] - As of March 31, 2023, Rambus had 613 patent applications pending[106] - Patents and applications cover semiconductor, security, and other technologies, aiming to provide improved performance, lower risk, and greater cost-effectiveness for customers[106] Trends Rambus faces high revenue concentration, with its top five customers accounting for 61% of Q1 2023 revenue (up from 59% in Q1 2022). International revenue remained significant at 44% of total revenue for both Q1 2023 and Q1 2022. The company's future revenue is influenced by technology adoption, license renewals (e.g., SK hynix extension), and strategic acquisitions/divestitures - Top five customers represented approximately 61% of revenue for Q1 2023, up from 59% for Q1 2022[108] - Revenue from international customers accounted for approximately 44% of total revenue for both Q1 2023 and Q1 2022[110] - Renewed or extended several license agreements, including SK hynix, during Q1 2023[111] - Continuously evaluates businesses and technologies for potential acquisitions (e.g., Hardent in 2022, AnalogX and PLDA in 2021) and divestitures[112] Results of Operations This section provides a detailed comparative analysis of Rambus's revenue, cost of revenue, gross profit, and operating expenses for the three months ended March 31, 2023, and 2022, highlighting key drivers of changes in financial performance Product Revenue Product revenue increased by $15.8 million (33.0%) to $63.8 million in Q1 2023 compared to Q1 2022, primarily driven by continued market share gains of memory interface chips. The company anticipates continued growth in product revenue for the remainder of 2023 | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | YoY Change | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Product revenue | $63.8 | $48.0 | $15.8 | 33.0% | - Increase primarily due to continued market share gains of memory interface chips[115] - Expects product revenue to continue increasing for the remainder of 2023 compared to 2022, mainly from memory interface chips[116] Royalties Royalty revenue decreased by $2.2 million (7.5%) to $28.2 million in Q1 2023 compared to Q1 2022, primarily due to the timing and structure of license renewals. Future royalties are expected to fluctuate based on new customer additions, renewals, and customer shipment volumes | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | YoY Change | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Royalties | $28.2 | $30.4 | $(2.2) | (7.5%) | - Decrease primarily due to the timing and structure of license renewals[117] - Expects patent royalties to vary based on success in adding new customers, renewing/extending agreements, and customer shipment volumes/prices[118] Contract and Other Revenue Contract and other revenue increased by $1.2 million (5.8%) to $21.8 million in Q1 2023 compared to Q1 2022, primarily due to higher revenue from Silicon IP offerings. This revenue is expected to fluctuate based on technology development contractual requirements and new contracts | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | YoY Change | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Contract and other revenue | $21.8 | $20.6 | $1.2 | 5.8% | - Increase primarily due to higher revenue associated with Silicon IP offerings[119] - Expects contract and other revenue to fluctuate based on technology development contractual requirements, work performed, and new contracts[120] Cost of Product Revenue Cost of product revenue increased by $8.0 million (43.6%) to $26.4 million in Q1 2023 compared to Q1 2022, primarily due to higher sales volumes of memory interface chips. The company expects these costs to remain higher in the near term due to anticipated increased product sales | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | YoY Change | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Cost of product revenue | $26.4 | $18.4 | $8.0 | 43.6% | - Increase primarily due to increases in sales volumes of memory interface chips[121] - Expects costs of product revenue to continue to be higher in the near term due to anticipated higher sales[122] Cost of Contract and Other Revenue Cost of contract and other revenue increased by $1.1 million (171.0%) to $1.7 million in Q1 2023 compared to Q1 2022, primarily due to higher engineering services supporting contracts. These costs are expected to vary with recognized contract and other revenue | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | YoY Change | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Cost of contract and other revenue | $1.7 | $0.6 | $1.1 | 171.0% | - Increase primarily due to higher engineering services associated with contracts[123] - Expects costs of contract and other revenue to vary from period to period based on recognized revenue[124] Research and Development Expenses Total R&D expenses increased by $2.1 million (5.2%) to $41.9 million in Q1 2023 compared to Q1 2022. This increase was primarily driven by higher stock-based compensation ($1.0 million), headcount-related expenses ($0.8 million), and engineering development tool costs ($0.6 million), partially offset by decreased allocated engineering costs. The company expects R&D expenses to be higher in the near term due to continued investments in product innovation | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | YoY Change | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Total research and development expenses | $41.9 | $39.8 | $2.1 | 5.2% | | Stock-based compensation | $4.2 | $3.2 | $1.0 | 33.0% | - Increase primarily due to stock-based compensation ($1.0M), headcount-related expenses ($0.8M), and engineering development tool costs ($0.6M), offset by decreased allocated engineering costs ($1.1M)[126] - Expects R&D expenses to be higher in the near term due to continued investments in semiconductor, security, and other technologies[127] Sales, General and Administrative Expenses Total SG&A expenses increased by $4.1 million (15.1%) to $31.0 million in Q1 2023 compared to Q1 2022, mainly due to increased stock-based compensation ($4.2 million) and headcount-related expenses ($0.8 million), partially offset by decreased acquisition-related costs. The company expects SG&A expenses to remain relatively flat in the near term | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | YoY Change | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Total sales, general and administrative expenses | $31.0 | $26.9 | $4.1 | 15.1% | | Stock-based compensation | $8.7 | $4.5 | $4.2 | 94.7% | - Increase primarily due to increased stock-based compensation ($4.2M) and headcount-related expenses ($0.8M), offset by decreased acquisition-related costs ($0.9M)[129] - Expects SG&A expenses to remain relatively flat in the near term[130] Amortization of Acquired Intangible Assets Total amortization of acquired intangible assets remained relatively flat at $3.9 million in Q1 2023 compared to $3.8 million in Q1 2022 | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | YoY Change | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Total amortization of acquired intangible assets | $3.9 | $3.8 | $0.1 | 4.1% | Change in Fair Value of Earn-Out Liability The change in fair value of the earn-out liability related to the PLDA acquisition resulted in an additional expense of $6.9 million in Q1 2023, significantly higher than the $1.2 million expense in Q1 2022, reflecting remeasurement adjustments for the remaining earn-out period | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | | Change in fair value of earn-out liability | $6.9 | $1.2 | $5.7 | - Additional expense of $6.9 million in Q1 2023 (vs. $1.2 million in Q1 2022) due to remeasurement adjustment for PLDA acquisition earn-out liability[133] Interest and Other Income (Expense), Net Rambus reported net interest and other income of $1.5 million in Q1 2023, a significant improvement from a net expense of $74.0 million in Q1 2022. This change was primarily due to the absence of a $66.5 million loss on extinguishment of debt and an $8.3 million loss on fair value adjustment of derivatives in Q1 2023, which were present in Q1 2022 related to convertible notes | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | | :------------------------------------ | :-------------------- | :-------------------- | :------------------- | | Interest income and other income (expense), net | $2.2 | $1.4 | $0.8 | | Loss on extinguishment of debt | $— | $(66.5) | $66.5 | | Loss on fair value adjustment of derivatives, net | $(0.2) | $(8.3) | $8.1 | | Interest expense | $(0.4) | $(0.6) | $0.2 | | Interest and other income (expense), net | $1.5 | $(74.0) | $75.5 | - Q1 2023 results reflect the absence of a $66.5 million loss on extinguishment of debt and an $8.3 million loss on fair value adjustment of derivatives, which occurred in Q1 2022 due to convertible notes repurchases and settlements[136] - Interest expense decreased due to the full payment of the 2023 Notes upon maturity in Q1 2023[137] Provision for Income Taxes The provision for income taxes decreased to $0.2 million in Q1 2023 from $0.5 million in Q1 2022, with effective tax rates of 5.8% and (0.8)% respectively. The provision is influenced by valuation allowances on U.S. deferred tax assets, foreign withholding taxes, and statutory tax expenses in foreign jurisdictions | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | YoY Change | | :-------------------------- | :---------------------------------------- | :---------------------------------------- | :------------------- | :--------- | | Provision for income taxes | $0.2 | $0.5 | $(0.3) | (60.9%) | | Effective tax rate | 5.8% | (0.8%) | N/A | N/A | - Provision driven by valuation allowance on U.S. deferred tax assets, foreign withholding taxes, and foreign statutory tax expense[139] - Paid $5.4 million in withholding taxes in Q1 2023, compared to $5.0 million in Q1 2022[140] - Maintains a full valuation allowance on U.S. federal and California deferred tax assets due to cumulative loss position, but a reversal is possible in 2023 if operating results improve[141] Liquidity and Capital Resources Rambus anticipates existing cash, cash equivalents, and marketable securities, along with cash flows from operations, will be sufficient to meet cash needs for at least the next 12 months. The company's liquidity is not constrained by the current credit environment or investment fair value fluctuations, and it continues to monitor credit risk Liquidity Rambus expects its current cash, cash equivalents, marketable securities, and operating cash flows to cover its cash needs for at least the next 12 months, with the majority of cash held in the U.S. The company does not foresee liquidity constraints from credit markets or investment fluctuations and actively monitors credit risk - Anticipates existing cash, cash equivalents, marketable securities, and cash flows from operations will be adequate for at least the next 12 months[145] - Majority of cash and cash equivalents are in the United States[145] - No anticipated liquidity constraints from current credit environment or investment fair value fluctuations; intent and ability to hold debt investments with unrealized losses for recovery[146] - As of March 31, 2023, there was an outstanding authorization to repurchase approximately 9.7 million shares under the 2020 Repurchase Program[150] Operating Activities Net cash provided by operating activities was $38.9 million in Q1 2023, a decrease from $42.6 million in Q1 2022. This was primarily driven by cash from customer licensing, product sales, and engineering services, with changes in operating assets and liabilities including decreases in unbilled receivables and increases in inventories | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | | Net cash provided by operating activities | $38.9 | $42.6 | $(3.7) | - Cash generated primarily from customer licensing, product sales, and engineering services fees[151][152] - Changes in operating assets and liabilities in Q1 2023 included decreases in unbilled receivables, accounts payable, accrued salaries and benefits, deferred revenue, and other liabilities, offset by increases in inventories, accounts receivable, and prepaids and other current assets[151] Investing Activities Cash used in investing activities was $10.7 million in Q1 2023, a significant shift from $204.8 million provided in Q1 2022. This change was mainly due to higher purchases of marketable securities ($45.6 million) and property, plant, and equipment ($7.7 million), partially offset by proceeds from sales and maturities of marketable securities | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (in millions) | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | | Net cash provided by (used in) investing activities | $(10.7) | $204.8 | $(215.5) | - Q1 2023 cash usage included $45.6 million for marketable securities purchases and $7.7 million for property, plant, and equipment[153] - Q1 2022 cash provided included $204.1 million from sales and $44.8 million from