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Rambus Up on Q4 Earnings Beat; Issues Strong Q1 Guidance

Zacks Equity Research

Shares of Rambus Inc. RMBS gained more than 6% in after-hours trade yesterday in response to the better-than-expected fourth-quarter 2015 results and encouraging first-quarter and full-year 2016 outlook.

Rambus’ adjusted earnings per share (including stock-based compensation but excluding all one-time items) of 16 cents came ahead of the Zacks Consensus Estimate of 13 cents and compared favorably with the year-ago quarter figure of 12 cents. The year-over-year improvement was mainly driven by higher revenues and stringent cost management.

On a GAAP basis, the company reported earnings of 11 cents, much better than 7 cents earned a year ago.

Quarter Details

Total revenue for the quarter increased 6.6% year over year to $76.8 million. The improvement was mainly driven by higher royalty revenues from International Business Machines Corporation IBM and SK Hynix as well as the renewal of patent licensing agreement with Toshiba during the quarter. These positives were somewhat offset by lower royalty revenues from STMicroelectronics STM and Renesas.

Moreover, reported revenues were toward the higher end of management’s guided range of $71 million to $77 million and surpassed the Zacks Consensus Estimate of $72 million.

Total operating costs and expenses of $56.4 million were 4% higher than the year-ago quarter primarily due to restructuring charges, lower gain from the sale of intellectual property and higher expenses related to software design tools, which were partially offset by lower prototyping costs, lower headcount related costs and lower consulting costs.

However, excluding one-time items, total operating costs and expenses decreased nearly 3% year over year to $46.7 million. As a percentage of revenues, it decreased 600 basis points to 60.8%.

This, in turn, positively impacted operating results. Adjusted operating income (including stock-based compensation but excluding all one-time items) came in at $30.1 million compared with $23.9 million in the year-ago quarter, increasing 25.7% year over year. Adjusted operating margin was 39.2% compared with 33.2% a year ago.

On a GAAP basis, net income was approximately $13 million, which improved from $7.8 million reported last year. Also, net income on an adjusted basis (including stock-based compensation but excluding all one-time items) was $18.9 million compared with $12.4 million.

Rambus exited the quarter with cash, cash equivalents and marketable securities of roughly $287.7 million, down $75.2 million from the Sep 30, 2015 balance of $362.9 million, due to the repurchase of 7.8 million stocks under the company’s accelerated share repurchase program.

Guidance

Buoyed by the better-than-expected fourth-quarter performance, Rambus issued encouraging first-quarter and full-year 2016 revenue outlook. For the first quarter, the company expects revenues between $71 million and $75 million (mid-point $73 million), higher than the Zacks Consensus Estimate of $72 million.

Full-year revenues are projected within $310 million to $325 million (mid-point $317.5 million), much higher than the Zacks Consensus Estimate of $294 million.

Acquisition of Smart Card Software Ltd

Concurrent with the fourth-quarter results, Rambus announced the acquisition of mobile payments technology developer, Smart Card Software Ltd., in a cash deal worth £64.7 million or over US$92 million.

With this acquisition, Rambus acquired two technologies. The first one is an advanced mobile payment platform developed by Bell Identification Ltd. (Bell ID) which also supports cloud-based services. The other one is a smart ticketing platform built by Ecebs Ltd. (Ecebs). Both the companies were wholly-owned subsidiaries of Smart Card Software.

Rambus intends to integrate these technologies into the Cryptography Research portfolio of products and services, thereby broadening the secure provisioning and management solutions offering. The acquisition is anticipated to be accretive to Rambus’ pro-forma earnings within the next 12 months.

Extension of Patent License Agreement

In a separate press release, Rambus declared that it has extended the patent license agreement with Advanced Micro Devices Inc. AMD by five years.

Our Take

Rambus reported strong fourth-quarter results with both the top line and the bottom line beating the respective Zacks Consensus Estimate. The quarterly revenues and earnings improved significantly from the year-ago period as well. Moreover, the company provided encouraging first-quarter and full-year 2016 revenue guidance.

Rambus is poised well to capitalize on the rising popularity of energy-efficient lighting, LED products in the latest architectural, retail, commercial and residential lighting fixtures. The recent acquisition of Smart Card Software will enhance its product offerings thereby boosting the top-line and the bottom-line performance over the long run, in our view.

Rambus is going through a restructuring phase and we expect it to yield favorable results. Additionally, licensing agreements — the result of successful monetization of Rambus’ patents — remain a recurring revenue source.

Currently, Rambus has a Zacks Rank #2 (Buy).

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