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Shares of Rambus Inc.(RMBS - Snapshot Report) dropped 2.62% in after-hours trade on tepid revenue outlook for the third quarter despite the significant year-over-year increase in the company’s second-quarter earnings which also beat the Zacks Consensus Estimate.

 

Quarter Details

Revenues came in at $76.5 million which not only increased 32.1% on a year-over-year basis but came marginally ahead of the Zacks Consensus Estimate of $76.0 million. Reported revenues were at the high end of management’s guided range of $75.0 to $77.0 million. Licensing agreements with Micron Technology (MU - Analyst Report), SK Hynix, Nanya Technology and QUALCOMM (QCOM - Analyst Report) 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 LDT divisions of $58.6 million (up 19.0% year over year), $12.8 million (up 61.0% year over year) and $5.1 million (up 825.0% year over year), respectively.

Adjusted operating expenses (including stock-based compensation) in the second quarter were $48.6 million, down 3.3% from the year-ago quarter primarily due to slow recruitment during the quarter. Operating expenses, as a percentage of revenues, contracted from 86.8% to 63.6% on a year-over-year basis.

Adjusted operating income came in at $27.9 million compared with $7.6 million in the year-ago quarter. Operating margin was 36.4% compared with 13.2% reported in the year-ago quarter.

Rambus’ adjusted net income increased from $2.0 million to $16.9 million. Adjusted net income excludes amortization, restructuring charges, acquisition costs and other one-time items but includes stock-based compensation expenses calculated on a proportionate tax basis.

Rambus exited the quarter with cash, cash equivalents and marketable securities of approximately $246.4 million, down from $403.4 million in the prior quarter. During the quarter, the company generated cash from operations of $10.0 million.

Guidance

The company expects second-quarter revenues to range between $68.0 million and $73.0 million (mid-point $70.5 million), lower than the Zacks Consensus Estimate of $73.0 million at the mid-point. 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 $18.0 million.

Nonetheless, the company reiterated its 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 between $180.0 million and $185.0 million while pro-forma net income in the range of $64.0 to $74.0 million.

Our Take

We are encouraged by Rambus’ second-quarter results as both the top and bottom lines surpassed the Zacks Consensus Estimate. However, the company provided tepid revenue guidance due to lower deal signings.

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 Rambus’ patents — remain a recurring revenue source.

Moreover, with the rising popularity of energy-efficient lighting, LED products are finding a 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. and Advanced Micro Devices (AMD - Analyst Report) and customer concentration remain the headwinds for the company. The company’s investments in the CryptoManager platform and certain memory and interface technologies can also impact margins in the near term.

Currently, Rambus has a Zacks Rank #4 (Sell).

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