A few weeks ago I wrote an article on Rambus (NASDAQ:RMBS), and although I viewed the company favorably in that article, the Q4 earnings and news announcements since that short time ago clearly frame the company even more favorably.
We will start with a quick rehash of the earnings. Revenue for the quarter came in near the top of the guidance, at $76.8m, up 4% sequentially, and 7% year over year. This brought revenue for the year to $296.3 million, essentially flat from 2014. Net income for the quarter was $13 million, up from $7.8 million a year ago. Net income was $211 million for 2015, but much of that was due to income credit. Income before taxes, for the year, came in at $60.2 million, as opposed to $50.2 million from 2014. Total diluted shares for Q4 were 113,388, compared to 117,620 a year ago, due to the company's aggressive stock repurchasing plan.
The company guided to $310 to $325 million in revenue in 2016, with Q1 coming in at $71 million to $75 million. The year-to-year revenue increase is largely due to the purchase of Smart Card Software, which we will discuss hereunder. Due to some of the GAAP rules, the amount of money taken in will exceed the revenue due to money coming in from existing SCS contracts not being reported as revenue. This is why Q1 shows an actual decrease in revenue, quarter to quarter, and revenue for the entire year is up, although still below the expected amount of cash that will be received. Instead, this will be included in intangible assets until it is depleted.
As mentioned, the big acquisition was Smart Card Software, which includes Bell ID and Ecebs. Bell ID, as described by Ron Black "provides banks, governments, and enterprises the ability to issue and manage credentials on smartphones, smart cards, and connected devices." He described Ecebs as providing " ... smart card solutions for national government, local government, transport operators, banks and systems' integrators and is best known as a leading provider of ITSO compliant smart ticketing solutions." The important aspect of these technologies is that both will compliment the company's existing CryptoManager platform, and the synergy should help all the products involved.
Rambus also signed its first CryptoMedia customer, Kaleidescape. This software will be used in Kaleidescape's high-end 4K movies players, which will allow owners to play, store and share movies among several devices, while the content is protected. With 4K content not ramping as quickly as expected, the short term revenue expectations for this product are limited, but could grow as that format becomes more prevalent.
In my last article, I had mentioned the company had problems with a memory buffer chip used in servers and had missed a design window for a major customer. The company has resolved that problem, and has released the RB26 chip, which is a chipset used in server RDIMMs and LRDIMMs. In RDIMMs, a RCD (Register Clock Driver) is used whereas on a LRDIMM, both the RCD and data buffer chips can be implemented. Rambus uses distributed buffers in its data buffer chip, which reduces latency by 50%.
This is a significant departure for the company as it represents the first hardware sold by the company. Previously the company only licensed technology for other companies to build hardware. This is by no means the last chip the company will build, it only represents the first in the R+ line.
It's also significant as the company is leveraging its technology to work with existing memory standards rather than create its own. This has important implications as other memory types like 3D XPoint comes out from Intel (NASDAQ:INTC) and Micron (NASDAQ:MU), as well as competing storage class memory solutions. The company has previously indicated it saw making chips used to access storage class memory as a future opportunity, in fact. While unlikely to be a driver of revenue in 2016, this could be very significant in 2017 and beyond, as DDR4 assets itself more firmly as standard memory and Rambus releases new products to take advantage of the transformation of memory standards.
Another small footnote to earnings day was the announcement that AMD (NASDAQ:AMD) had extended its licensing agreement with Rambus. The details were not released, other than this was the third extension of the agreement. Clearly, while good news, it is not of great significance.
One of my reservations about this company is the lack of growth potential, and although this remains a possible issue, the recent acquisition does represent an important possible growth vector. While the R+ memory chips have the potential to bring in considerably more revenue than the old licensing model did, it is difficult to get very excited until we start seeing design wins and additional designs from the company. Clearly, the company believes its CRD division, which accounted for only $13.6 of the company's $76.8 million Q4 revenue, has the greatest chance for growth. Given that the company paid around $93.2 million for SCS, and stated it was 2.6x the yearly revenue, this implies roughly $36 million in yearly revenue. While in itself this would increase revenue over 10%, given the synergy between it and CryptoManager, this could potentially show greater growth.
Although growth concerns have not been completely eliminated, the company is a cash cow, with strong financials, very stable revenue and positive trajectories in two business units. There are companies with a greater chance to break out and grow dramatically, but the stability of this company coupled with positive strategic initiatives leaves it a very attractive investment. While strong profitability in 2016 is assured, I'd expect somewhat muted revenue growth for the year. However, we will hopefully see the seeds of growth planted this year, with greater revenue growth 2017 as they develop. I recommend anyone watching this coming to view 2016 through this pane of glass, and watch for new wins and new interest in Rambus' products and solutions.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RMBS over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.