Quarterly Report (10-q)

Date : 05/03/2019 @ 5:38PM
Source : Edgar (US Regulatory)
Stock : Rambus Inc (RMBS)
Quote : 12.82  0.08 (0.63%) @ 8:59PM

Quarterly Report (10-q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
(Mark One)
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-22339
_______________________________
RAMBUS INC.
(Exact name of registrant as specified in its charter)
_______________________________
Delaware
 
94-3112828
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1050 Enterprise Way, Suite 700
 Sunnyvale, California
 
 
 
94089
(Address of principal executive offices)
 
 
 
(ZIP Code)
Registrant’s telephone number, including area code:
(408) 462-8000
________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, $.001 Par Value
RMBS
The NASDAQ Stock Market LLC
 
 
(The NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act:
None
________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ý   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ý
 
Accelerated filer o
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
 
Emerging growth company  o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  ý
The number of shares outstanding of the registrant’s Common Stock, par value $.001 per share, was 110,396,011 as of March 31, 2019 .



RAMBUS INC.
TABLE OF CONTENTS
 
 
PAGE
Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018
Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018
Condensed Consolidated Statements of Comprehensive  Income (Loss) for the three months ended March 31, 2019 and 2018
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

3


NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These forward-looking statements include, without limitation, predictions regarding the following aspects of our future:
Success in the markets of our products and services or our customers’ products;
Sources of competition;
Research and development costs and improvements in technology;
Sources, amounts and concentration of revenue, including royalties;
Success in signing and renewing license agreements;
Terms of our licenses and amounts owed under license agreements;
Technology product development;
Dispositions, acquisitions, mergers or strategic transactions and our related integration efforts;
Impairment of goodwill and long-lived assets;
Pricing policies of our customers;
Changes in our strategy and business model, including the expansion of our portfolio of inventions, products, software, services and solutions to address additional markets in memory, chip, mobile payments, smart ticketing and security;
Deterioration of financial health of commercial counterparties and their ability to meet their obligations to us;
Effects of security breaches or failures in our or our customers’ products and services on our business;
Engineering, sales and general and administration expenses;
Contract revenue;
Operating results;
International licenses, operations and expansion;
Effects of changes in the economy and credit market on our industry and business;
Ability to identify, attract, motivate and retain qualified personnel;
Effects of government regulations on our industry and business;
Manufacturing, shipping and supply partners and/or sale and distribution channels;
Growth in our business;
Methods, estimates and judgments in accounting policies;
Adoption of new accounting pronouncements, including adoption in 2019 of the new leasing standard on our financial position and results of operations;
Effective tax rates, including as a result of the new U.S. tax legislation;
Restructurings and plans of termination;
Realization of deferred tax assets/release of deferred tax valuation allowance;
Trading price of our common stock;
Internal control environment;
The level and terms of our outstanding debt and the repayment or financing of such debt;
Protection of intellectual property;
Any changes in laws, agency actions and judicial rulings that may impact the ability to enforce intellectual property rights;
Indemnification and technical support obligations;
Equity repurchase plans;
Issuances of debt or equity securities, which could involve restrictive covenants or be dilutive to our existing stockholders;

4


Effects of fluctuations in currency exchange rates;
Outcome and effect of potential future intellectual property litigation and other significant litigation; and
Likelihood of paying dividends.
You can identify these and other forward-looking statements by the use of words such as “may,” “future,” “shall,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” “projecting” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.
Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part II: Item 1A, “Risk Factors.” All forward-looking statements included in this document are based on our assessment of information available to us at this time. We assume no obligation to update any forward-looking statements.


5


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
RAMBUS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31,
2019
 
December 31,
2018
 
(In thousands, except shares
and par value)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
143,016

 
$
115,924

Marketable securities
162,850

 
161,840

Accounts receivable
43,810

 
50,863

Unbilled receivables
170,287

 
176,613

Inventories
8,192

 
6,772

Prepaids and other current assets
16,857

 
15,738

Total current assets
545,012

 
527,750

Intangible assets, net
55,507

 
59,936

Goodwill
207,828

 
207,178

Property, plant and equipment, net
22,637

 
57,028

Operating lease right-of-use assets
19,458

 

Deferred tax assets
4,411

 
4,435

Unbilled receivables, long-term
459,148

 
497,003

Other assets
7,419

 
7,825

Total assets
$
1,321,420

 
$
1,361,155

LIABILITIES &   STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
8,274

 
$
7,392

Accrued salaries and benefits
13,666

 
16,938

Deferred revenue
15,774

 
19,374

Income taxes payable, short-term
16,364

 
16,390

Operating lease liabilities
9,351

 

Other current liabilities
5,847

 
9,191

Total current liabilities
69,276

 
69,285

Convertible notes, long-term
143,612

 
141,934

Long-term imputed financing obligation

 
36,297

Long-term operating lease liabilities
12,308

 

Long-term income taxes payable
73,365

 
77,280

Other long-term liabilities
22,972

 
24,247

Total liabilities
321,533

 
349,043

Commitments and contingencies (Notes 11 and 15)


 


Stockholders’ equity:
 

 
 

Convertible preferred stock, $.001 par value:
 

 
 

Authorized: 5,000,000 shares
 

 
 

Issued and outstanding: no shares at March 31, 2019 and December 31, 2018

 

Common stock, $.001 par value:
 

 
 

Authorized: 500,000,000 shares
 

 
 

Issued and outstanding: 110,396,011 shares at March 31, 2019 and 109,017,708 shares at December 31, 2018
110

 
109

Additional paid-in capital
1,234,846

 
1,226,588

Accumulated deficit
(226,401
)
 
(204,294
)
Accumulated other comprehensive loss
(8,668
)
 
(10,291
)
Total stockholders’ equity
999,887

 
1,012,112

Total liabilities and stockholders’ equity
$
1,321,420

 
$
1,361,155

See Notes to Unaudited Condensed Consolidated Financial Statements

6


RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)  

 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands, except per share amounts)
Revenue:
 

 
 

Royalties
$
24,853

 
$
21,374

Product revenue
8,964

 
7,313

Contract and other revenue
14,567

 
17,739

Total revenue
48,384

 
46,426

Operating costs and expenses:
 

 
 

Cost of product revenue*
4,427

 
4,357

Cost of contract and other revenue
6,771

 
12,122

Research and development*
40,619

 
40,117

Sales, general and administrative*
27,645

 
30,198

Restructuring charges
331

 
3,245

Total operating costs and expenses
79,793

 
90,039

Operating loss
(31,409
)
 
(43,613
)
Interest income and other income (expense), net
7,413

 
9,116

Interest expense
(2,271
)
 
(4,421
)
Interest and other income (expense), net
5,142

 
4,695

Loss before income taxes
(26,267
)
 
(38,918
)
Provision for (benefit from) income taxes
309

 
(3,229
)
Net loss
$
(26,576
)
 
$
(35,689
)
Net loss per share:
 

 
 

Basic
$
(0.24
)
 
$
(0.33
)
Diluted
$
(0.24
)
 
$
(0.33
)
Weighted average shares used in per share calculation:
 

 
 

Basic
109,692

 
109,358

Diluted
109,692

 
109,358

_________________________________________
*    Includes stock-based compensation:
Cost of product revenue
$
1

 
$
3

Research and development
$
3,210

 
$
3,192

Sales, general and administrative
$
3,978

 
$
4,319


See Notes to Unaudited Condensed Consolidated Financial Statements

7


RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
 
Three Months Ended
 
 
March 31,
(In thousands)
 
2019
 
2018
Net loss
 
$
(26,576
)
 
$
(35,689
)
Other comprehensive income (loss):
 
 

 
 

Foreign currency translation adjustment
 
1,575

 
2,889

Unrealized gain (loss) on marketable securities, net of tax
 
48

 
(804
)
Total comprehensive loss
 
$
(24,953
)
 
$
(33,604
)

See Notes to Unaudited Condensed Consolidated Financial Statements

8


RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Gain (Loss)
 
 
 
Shares
 
Amount
 
 
 
 
Total
 
(In thousands)
Balances at December 31, 2018
109,018
 
$
109

 
$
1,226,588

 
$
(204,294
)
 
$
(10,291
)
 
$
1,012,112

Net loss

 

 

 
(26,576
)
 

 
(26,576
)
Foreign currency translation adjustment

 

 

 

 
1,575

 
1,575

Unrealized gain on marketable securities, net of tax

 

 

 

 
48
 
48
Issuance of common stock upon exercise of options, equity stock and employee stock purchase plan
1,378
 
1
 
1,069
 

 

 
1,070
Stock-based compensation

 

 
7,189
 

 

 
7,189

Cumulative effect adjustment from the adoption of ASC 842

 

 

 
4,469

 

 
4,469

Balances at March 31, 2019
110,396
 
$
110

 
$
1,234,846

 
$
(226,401
)
 
$
(8,668
)
 
$
999,887

 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Gain (Loss)
 
 
 
Shares
 
Amount
 
 
 
 
Total
 
(In thousands)
Balances at December 31, 2017
109,764
 
$
110

 
$
1,212,798

 
$
(636,227
)
 
$
(5,097
)
 
$
571,584

Net loss

 

 

 
(35,689
)
 

 
(35,689
)
Foreign currency translation adjustment

 

 

 

 
2,889
 
2,889
Unrealized loss on marketable securities, net of tax

 

 

 

 
(804
)
 
(804
)
Issuance of common stock upon exercise of options, equity stock and employee stock purchase plan
839
 

 
(3,842
)
 

 

 
(3,842
)
Repurchase and retirement of common stock under repurchase plan
(3,118
)
 
(3
)
 
(20,312
)
 
(29,685
)
 

 
(50,000
)
Stock-based compensation

 

 
7,514
 

 

 
7,514
Cumulative effect adjustment from adoption of ASU 2016-01

 

 

 
1,058

 

 
1,058

Cumulative effect adjustment from the adoption of ASC 606

 

 

 
626,288

 

 
626,288

Balances at March 31, 2018
107,485
 
$
107

 
$
1,196,158

 
$
(74,255
)
 
$
(3,012
)
 
$
1,118,998


See Notes to Unaudited Condensed Consolidated Financial Statements


9


RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)  

 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net loss
$
(26,576
)
 
$
(35,689
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Stock-based compensation
7,189

 
7,514

Depreciation
4,809

 
2,942

Amortization of intangible assets
4,988

 
10,531

Non-cash interest expense and amortization of convertible debt issuance costs
1,678

 
2,680

Deferred income taxes
(214
)
 
(8,834
)
Non-cash restructuring

 
670

Loss on equity investment
81

 

Gain from sale of marketable equity security

 
(155
)
(Gain) loss from disposal of property, plant and equipment
98

 
(45
)
Change in operating assets and liabilities:
 

 
 

Accounts receivable
7,372

 
(761
)
Unbilled receivables
44,181

 
47,778

Prepaid expenses and other assets
(1,153
)
 
(2,236
)
Inventories
(1,370
)
 
(595
)
Accounts payable
2,171

 
(1,531
)
Accrued salaries and benefits and other liabilities
(4,699
)
 
(1,113
)
Income taxes payable
(3,939
)
 
(562
)
Deferred revenue
(3,571
)
 
(3,817
)
Operating lease liabilities
(2,284
)
 

Net cash provided by operating activities
28,761

 
16,777

Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(664
)
 
(1,688
)
Purchases of marketable securities
(131,601
)
 
(79,207
)
Maturities of marketable securities
130,772

 
14,225

Proceeds from sale of property, plant and equipment

 
10

Net cash used in investing activities
(1,493
)
 
(66,660
)
Cash flows from financing activities:
 
 
 
Proceeds received from issuance of common stock under employee stock plans
4,856

 
1,058

Principal payments against lease financing obligation

 
(241
)
Payments of taxes on restricted stock units
(3,786
)
 
(4,900
)
Payments under installment payment arrangement
(1,240
)
 

Repurchase and retirement of common stock, including prepayment under accelerated
share repurchase program

 
(50,000
)
Net cash used in financing activities
(170
)
 
(54,083
)
Effect of exchange rate changes on cash and cash equivalents

 
483

Net increase (decrease) in cash and cash equivalents
27,098

 
(103,483
)
Cash and cash equivalents at beginning of period
116,252

 
225,844

Cash and cash equivalents at end of period
$
143,350

 
$
122,361

 
 
 
 
Non-cash investing and financing activities during the period:
 

 
 

Property, plant and equipment received and accrued in accounts payable and other liabilities
$
6,828

 
$
286


See Notes to Unaudited Condensed Consolidated Financial Statements

10


RAMBUS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Rambus Inc. (“Rambus” or the “Company”) and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements.
In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) necessary to state fairly the financial position and results of operations for each interim period presented. Interim results are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information. Certain information and Note disclosures included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto in Form 10-K for the year ended December 31, 2018 .
Operating Segment Definitions
Operating segments are based upon Rambus' internal organization structure, the manner in which its operations are managed, the criteria used by its Chief Operating Decision Maker ("CODM") to evaluate segment performance and availability of separate financial information regularly reviewed for resource allocation and performance assessment.
The Company determined its CODM to be the Chief Executive Officer and determined its operating segments to be: (1) Memory and Interfaces Division ("MID"), which focuses on the design, development, manufacturing through partnerships and licensing of technology and solutions that is related to memory and interfaces; (2) Rambus Security Division ("RSD"), which focuses on the design, development, deployment and licensing of technologies for chip, system and in-field application security, anti-counterfeiting, smart ticketing and mobile payments; and (3) Emerging Solutions Division ("ESD"), which includes the Rambus Labs team and the development efforts in the area of emerging technologies.
For the three months ended March 31, 2019 , only MID and RSD were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining operating segment was shown under “Other.”
Comparability
Effective January 1, 2019, Rambus adopted the new lease accounting standards. Prior periods were not retrospectively recast, so the consolidated balance sheet as of  December 31, 2018  and results of operations for the  three months ended  March 31, 2018  were prepared using accounting standards that were different than those in effect as of and for the  three months ended  March 31, 2019 . Therefore, the consolidated balance sheets as of  March 31, 2019  and December 31, 2018 are not directly comparable, nor are the results of operations for the  three months ended  March 31, 2019  and 2018.
Reclassifications
Certain prior periods' amounts were reclassified to conform to the current year’s presentation. None of these reclassifications had an impact on reported net income for any of the periods presented.
2. Recent Accounting Pronouncements
Recent Accounting Pronouncements Adopted
In February 2016, the FASB issued ASU No. 2016-02, "Leases." This ASU requires lessees to recognize right-of-use assets and liabilities for operating leases, initially measured at the present value of the lease payments, on the balance sheet. In addition, it requires lessees to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. In July 2018, the FASB issued ASU No. 2018-10, "Codification Improvements to Topic 842, Leases," and ASU No. 2018-11, "Leases (Topic 842)," which allow the application of the new guidance at the beginning of the year of adoption, recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, in addition to the method of applying the new guidance retrospectively to each prior reporting period presented. The

11


amendments in ASU No. 2018-10 and ASU No. 2018-11 have the same effective and transition requirements as ASU 2016-02 (collectively referred to as the "New Leasing Standard").
The Company adopted the New Leasing Standard as of January 1, 2019 using the alternative transition method provided by ASU No. 2018-11 and did not recast comparative periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. Additionally, the Company elected the practical expedient related to non-lease components in which the Company will not separate non-lease components from lease components. Finally, the Company made the policy election for the short-term leases exemptions, which allows the Company to not recognize lease assets and liabilities for leases having a term of 12 months or less. Upon adoption, the Company recognized $21.4 million and $23.9 million of lease assets and liabilities, respectively, on its unaudited condensed consolidated balance sheet. The difference between the lease assets and lease liabilities, net of the deferred tax impact which was not material, was recorded as an adjustment to the opening accumulated deficit. Additionally, in accordance with the New Leasing Standard, the Company was required to derecognize the Sunnyvale and Ohio facilities as imputed facility obligations (as accounted for under the previous leasing guidance) and recognize these facilities as operating leases on the unaudited condensed consolidated balance sheet. This change resulted in no longer recognizing interest expense associated with these imputed facility lease obligations, but instead, recognizing operating lease costs which will be included in operating costs and expenses on the unaudited condensed consolidated statement of operations. Furthermore, the Company derecognized $37.6 million of imputed financing obligation related to these facilities and $32.0 million of capitalized building property upon adoption of the New Leasing Standard. The adoption of the New Leasing Standard impacted the Company's opening accumulated deficit by $4.5 million .
Recent Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this ASU remove certain disclosures, modify certain disclosures and add additional disclosures. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13. The purpose of this ASU is to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact that this guidance will have on its financial condition and results of operations.
3. Revenue Recognition
The Company recognizes revenue upon transfer of control of promised goods and services in an amount that reflects the consideration it expects to receive in exchange for those goods and services. Unless indicated otherwise below, all of the goods and services are distinct and are accounted for as separate performance obligations.
Where an arrangement includes multiple performance obligations, the transaction price is allocated to these on a relative standalone selling prices basis. The Company has established standalone selling prices for all of its offerings - specifically, a same pricing methodology is consistently applied to all licensing arrangements; all services offerings are priced within tightly controlled bands and all contracts that include support and maintenance state a renewal rate or price that is systematically enforced.
Rambus’ revenue consists of royalty, product and contract and other revenue. Royalty revenue consists of patent and technology license royalties. Products consist of memory buffer chipsets sold directly and indirectly to module manufacturers and OEMs worldwide through multiple channels, including our direct sales force and distributors. Contract and other revenue consists of software license fees, engineering fees associated with integration of Rambus’ technology solutions into its customers’ products and support and maintenance fees.
1. Royalty Revenue
Rambus’ patent and technology licensing arrangements generally range between 1 and 7 years in duration and generally grant the licensee the right to use the Company's entire IP portfolio as it evolves over time. These arrangements do not typically grant the licensee the right to terminate for convenience and where such rights exist, termination is prospective, with no refund of fees already paid by the licensee. There is no interdependency or interrelation between the IP included in the portfolio licensed upon contract inception and any IP subsequently made available to the licensee, and the Company would be able to fulfill its promises by transferring the portfolio and the additional IP use rights independently. However, the numbers of additions to, and removals from the portfolio (for example when a patent expires and renewal is not granted to the Company) in

12


any given period have historically been relatively consistent; as such, the Company does not allocate the transaction price between the rights granted at contract inception and those subsequently granted over time as a function of these additions.
Patent and technology licensing arrangements result in fixed payments received over time, with guaranteed minimum payments on occasion, variable payments calculated based on the licensee’s sale or use of the IP, or a mix of fixed and variable payments.
For fixed-fee arrangements (including arrangements that include minimum guaranteed amounts), variable royalty arrangements that the Company has concluded are fixed in substance and the fixed portion of hybrid fixed/variable arrangements, the Company recognizes revenue upon control over the underlying IP use right transferring to the licensee, net of the effect of significant financing components calculated using customer-specific, risk-adjusted lending rates ranging between 3% and 6% , with the related interest income being recognized over time on an effective rate basis. Where a licensee has the contractual right to terminate a fixed-fee arrangement for convenience without any substantive penalty payable upon such termination, the Company applies the guidance in ASU No. 2014-09, Revenue from Contracts with Customers in Accounting Standards Codification (ASC) Topic 606 ("ASC 606" or "the New Revenue Standard") to the duration of the contract in which the parties have present enforceable rights and obligations and only recognizes revenue for amounts that are due and payable.
 
For variable arrangements, the Company recognizes revenue based on an estimate of the licensee’s sale or usage of the IP during the period of reference, typically quarterly, with a true-up being recorded when the Company receives the actual royalty report from the licensee.

2. Product Revenue
Product revenue is recognized upon shipment of product to customers, net of accruals for estimated sales returns and allowances, and to distributors, net of accruals for price protection and rights of return on products unsold by the distributors. To date, none of these accruals have been significant. The Company transacts with direct customers primarily pursuant to standard purchase orders for delivery of products and generally allows customers to cancel or change purchase orders within limited notice periods prior to the scheduled shipment date.
3. Contract and Other Revenue
Contract and other revenue consists of software license fees and engineering fees associated with integration of Rambus’ technology solutions into its customers’ related support and maintenance.
An initial software arrangement generally consists of a term-based or perpetual license, significant software customization services and support and maintenance services that include post-implementation customer support and the right to unspecified software updates and enhancements on a when and if available basis. The Company recognizes the license and customization services revenue based on man-days incurred during the reporting period as compared to the estimated total man-days necessary for each contract, and the support and maintenance revenue ratably over term. The Company recognizes license renewal revenue at the beginning of the renewal period. The Company recognizes revenue from professional services purchased in addition to an initial software arrangement on a cumulative catch-up basis if these services are not distinct from the services provided as part of the initial software arrangement, or as a separate contract if these services are distinct.
During the first quarter of 2016, the Company acquired Smart Card Software Ltd., which included Bell Identification Ltd. (Payment Product Group) and Ecebs Ltd. (Ticketing Products Group), which transact mostly in software and Software-as-a-Service arrangements, respectively.
The Company's Payment Product Group derives a significant portion of its revenue from heavily customized software in the mobile market, whereby the Payment Product Group’s software solution interacts with third-party solutions and other payment platforms to provide the functionality the customer requires. Historically, these third-party solutions have evolved at a rapid pace, with the Payment Product Group being required to deliver as part of its support and maintenance services the patches and updates needed to maintain the functionality of its own software offering. As the utility of the solution to the end customer erodes very quickly without these updates, these are viewed as critical and the customized software solution and updates are not separately identifiable. As such, these arrangements are treated as a single performance obligation; revenue is deferred until completion of the customization services, and recognized ratably over the committed support and maintenance term, typically ranging from 1 year to 3 years .
The Company's Ticketing Products Group primarily derives revenue from ticketing services arrangements that systematically consist of a software component, support and maintenance, managed services and hosting services. The software could be hosted by third-party hosting service providers or the Company. All arrangements entered into subsequent to the acquisition preclude customers from taking possession of the software at any time during the hosting term and the Company

13


has concluded that should a customer that was under contract as of the acquisition date ever request possession of the software, the Ticketing Products Group would have the ability to charge the customer, and enforce a claim to payment of a substantive fee in exchange for such right, and that the costs of setting up the environment needed to run the software would act as a significant disincentive to the customer taking possession of the software. Based on the above, the Company concluded that these services are a single performance obligation, with customers simultaneously receiving and consuming the benefits provided by the Ticketing Products Group’s performance, and recognize ticketing services revenue ratably over the term, commencing upon completion of setup activities. The Company recognizes setup fees upon completion. While these activities do not transfer a service to the customer, the Company elected not to defer and amortize these fees over the expected duration of the customer relationship due to the immateriality of the amounts charged.
Significant Judgments
Historically and with the exception noted below, no significant judgment has generally been required in determining the amount and timing of revenue from the Company's contracts with customers.
The Company has adequate tools and controls in place, and substantial experience and expertise in timely and accurately tracking man-days incurred in completing customization and other professional services, and quantifying changes in estimates.

Key estimates used in recognizing revenue predominantly consist of the following:
All fixed-fee arrangements result in cash being received after control over the underlying IP use right has transferred to the licensee, and over a period exceeding a year. As such, all these arrangements include a significant financing component. The Company calculates a customer-specific lending rate using a Daily Treasury Yield Curve Rate that changes depending on the date on which the licensing arrangement was entered into and the term (in years) of the arrangement, and takes into consideration a licensee-specific risk profile determined based on a review of the licensee’s “Full Company View” Dun & Bradstreet report obtained on the date the licensing arrangement was signed by the parties, with a risk premium being added to the Daily Treasury Yield Curve Rate considering the overall business risk, financing strength and risk indicators, as listed.

The Company recognizes revenue on variable fee licensing arrangements on the basis of estimates. In connection with the adoption of the New Revenue Standard, the Company has set up specific procedures and controls to ensure timely and accurate quantification of variable royalties, and implemented new systems to enable the preparation of the estimates and reporting of the financial information required by the New Revenue Standard.

Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to the Company's customers. The Company records contract assets when revenue is recognized prior to invoicing, and a contract liability when revenue is recognized subsequent to invoicing.
The contract assets are primarily related to the Company’s fixed fee IP licensing arrangements and rights to consideration for performance obligations delivered but not billed as of March 31, 2019 . The contract assets are transferred to receivables when the billing occurs.
The Company’s contract balances were as follows:
 
As of
(In thousands)
March 31, 2019
 
December 31, 2018
Unbilled receivables
$
629,435

 
$
673,616

Deferred revenue
15,995

 
19,566

During the three months ended March 31, 2019 , the Company recognized $8.0 million of revenue that was included in the contract balances as of December 31, 2018.
Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately $27.7 million as of March 31, 2019 , which the Company primarily expects to recognize over the next 2 years .

14



4. Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing the earnings by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, employee stock purchases, restricted stock and restricted stock units and shares issuable upon the conversion of convertible notes. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a net loss is reported.
The following table sets forth the computation of basic and diluted net income (loss) per share:
 
Three Months Ended March 31,
 
2019
 
2018
Net loss per share:
(In thousands, except per share amounts)
Numerator:
 

 
 

Net loss
$
(26,576
)
 
$
(35,689
)
Denominator:
 
 
 
Weighted-average shares outstanding - basic
109,692

 
109,358

Effect of potential dilutive common shares

 

Weighted-average shares outstanding - diluted
109,692

 
109,358

Basic net loss per share
$
(0.24
)
 
$
(0.33
)
Diluted net loss per share
$
(0.24
)
 
$
(0.33
)
For the three months ended March 31, 2019 and 2018 , options to purchase approximately 1.7 million and 1.8 million shares, respectively, were excluded from the calculation because they were anti-dilutive after considering proceeds from exercise and related unrecognized stock-based compensation expense. For the three months ended March 31, 2019 and 2018 , an additional 0.9 million and 3.6 million shares, respectively, were excluded from the weighted average dilutive shares because there was a net loss position for the periods.
5. Intangible Assets and Goodwill
Goodwill
The following tables present goodwill information for each of the reportable segments for the three months ended March 31, 2019 :
Reportable Segment:
 
As of December 31, 2018
 
Effect of Exchange Rates (1)
 
As of March 31, 2019
 
 
(In thousands)
MID
 
$
66,643

 
$

 
$
66,643

RSD
 
140,535

 
650

 
141,185

Total
 
$
207,178

 
$
650

 
$
207,828

(1) Effect of exchange rates relates to foreign currency translation adjustments for the period.
 

15


 
 
As of
 
 
March 31, 2019
Reportable Segment:
 
Gross Carrying Amount
 
Accumulated Impairment Losses
 
Net Carrying Amount
 
 
(In thousands)
MID
 
$
66,643

 
$

 
$
66,643

RSD
 
141,185

 

 
141,185

Other
 
21,770

 
(21,770
)
 

Total
 
$
229,598

 
$
(21,770
)
 
$
207,828

Intangible Assets
The components of the Company’s intangible assets as of March 31, 2019 and December 31, 2018 were as follows:
 
 
 
As of March 31, 2019
 
Useful Life
 
Gross Carrying
  Amount (1)
 
Accumulated
  Amortization (1)
 
Net Carrying
  Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
259,389

 
$
(217,734
)
 
$
41,655

Customer contracts and contractual relationships
1 to 10 years
 
67,395

 
(55,143
)
 
12,252

Non-compete agreements and trademarks
3 years
 
300

 
(300
)
 

In-process research and development
Not applicable
 
1,600

 

 
1,600

Total intangible assets
 
 
$
328,684


$
(273,177
)
 
$
55,507

 
 
 
As of December 31, 2018
 
Useful Life
 
Gross Carrying
  Amount (1)
 
Accumulated
  Amortization (1)
 
Net Carrying
  Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
258,903

 
$
(213,824
)
 
$
45,079

Customer contracts and contractual relationships
1 to 10 years
 
67,667

 
(54,410
)
 
13,257

Non-compete agreements and trademarks
3 years
 
300

 
(300
)
 

In-process research and development
Not applicable
 
1,600

 

 
1,600

Total intangible assets
 
 
$
328,470

 
$
(268,534
)
 
$
59,936


(1) The changes in gross carrying amount and accumulated amortization reflect the effects of exchange rates during the period.

During the three months ended March 31, 2019 and 2018 , the Company did not purchase or sell any intangible assets.

Included in customer contracts and contractual relationships are favorable contracts which are acquired software and service agreements where the Company has no performance obligations. Cash received from these acquired favorable contracts reduces the favorable contract intangible asset. For the three months ended March 31, 2019 and 2018 , the Company received $0.5 million and $0.9 million , respectively, related to the favorable contracts. As of March 31, 2019 and December 31, 2018 , the net balance of the favorable contract intangible assets was $0.5 million and $0.9 million , respectively.

16


Amortization expense for intangible assets for the three months ended March 31, 2019 and 2018 was $5.0 million and $10.5 million , respectively. The estimated future amortization of intangible assets as of March 31, 2019 was as follows (amounts in thousands):
Years Ending December 31:
Amount
2019 (remaining 9 months)
$
14,903

2020
20,023

2021
13,317

2022
2,062

2023
1,541

Thereafter
2,061

Total amortizable purchased intangible assets
$
53,907

In-process research and development
1,600

Total intangible assets
$
55,507


It is reasonably possible that the businesses could perform significantly below the Company's expectations or a deterioration of market and economic conditions could occur. This would adversely impact the Company's ability to meet its projected results, which could cause the goodwill in any of its reporting units or long-lived assets in any of its asset groups to become impaired. Significant differences between these estimates and actual cash flows could materially affect the Company's future financial results. If the Company determines that its goodwill or long-lived assets are impaired, it would be required to record a non-cash charge that could have a material adverse effect on its results of operations and financial position.

6.   Segments and Major Customers
For the three months ended March 31, 2019 , MID and RSD were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining operating segments were shown under “Other.”
The Company evaluates the performance of its segments based on segment operating income (loss), which is defined as revenue minus segment operating expenses. Segment operating expenses are comprised of direct operating expenses.
Segment operating expenses do not include sales, general and administrative expenses and the allocation of certain expenses managed at the corporate level, such as stock-based compensation, amortization, and certain bonus and acquisition costs. The “Reconciling Items” category includes these unallocated sales, general and administrative expenses as well as corporate level expenses.
The tables below present reported segment operating income (loss) for the three months ended March 31, 2019 and 2018 , respectively.
 
For the Three Months Ended March 31, 2019
 
MID
 
RSD
 
Other
 
Total
 
(In thousands)
Revenues
$
34,490

 
$
13,894

 
$

 
$
48,384

Segment operating expenses
23,979

 
14,221

 
2,483

 
40,683

Segment operating income (loss)
$
10,511

 
$
(327
)
 
$
(2,483
)
 
$
7,701

Reconciling items
 

 
 
 
 

 
(39,110
)
Operating loss
 

 
 
 
 

 
$
(31,409
)
Interest and other income (expense), net
 

 
 
 
 

 
5,142

Loss before income taxes
 

 
 
 
 

 
$
(26,267
)

17


 
For the Three Months Ended March 31, 2018
 
MID
 
RSD
 
Other
 
Total
 
(In thousands)
Revenues
$
33,967

 
$
10,018

 
$
2,441

 
$
46,426

Segment operating expenses
22,949

 
12,786

 
5,630

 
41,365

Segment operating income (loss)
$
11,018

 
$
(2,768
)
 
$
(3,189
)
 
$
5,061

Reconciling items
 

 
 
 
 

 
(48,674
)
Operating loss
 

 
 
 
 

 
$
(43,613
)
Interest and other income (expense), net
 

 
 
 
 

 
4,695

Loss before income taxes
 

 
 
 
 

 
$
(38,918
)
The Company’s CODM does not review information regarding assets on an operating segment basis. Additionally, the Company does not record intersegment revenue or expense.
Accounts receivable from the Company's major customers representing 10% or more of total accounts receivable at March 31, 2019 and December 31, 2018 , respectively, was as follows:
 
 
As of
Customer 
 
March 31, 2019
 
December 31, 2018
Customer 1 (MID reportable segment)
 
*

 
12
%
Customer 2 (MID reportable segment)
 
14
%
 
*

Customer 3 (MID reportable segment)
 
36
%
 
39
%
_________________________________________
*    Customer accounted for less than 10% of total accounts receivable in the period
Revenue from the Company’s major customers representing 10% or more of total revenue for the three months ended March 31, 2019 and 2018 , respectively, was as follows:
 
 
Three Months Ended
 
 
March 31,
Customer 
 
2019
 
2018
Customer A (MID reportable segment)
 
*

 
34
%
Customer B (MID reportable segment)
 
*

 
11
%
Customer C (MID reportable segment)
 
19
%
 
*

Customer D (MID reportable segment)
 
16
%
 
*

_________________________________________
*    Customer accounted for less than 10% of total revenue in the period
Revenue from customers in the geographic regions based on the location of contracting parties was as follows:
 
 
Three Months Ended
 
 
March 31,
(In thousands)
 
2019
 
2018
Taiwan
 
$
2,101

 
$
16,110

South Korea
 
1,281

 
8,601

USA
 
34,239

 
11,221

Japan
 
2,619

 
4,034

Europe
 
3,375

 
3,866

Canada
 
1,058

 
1,410

Singapore
 
1,884

 
92

Asia-Other
 
1,827

 
1,092

Total
 
$
48,384

 
$
46,426



18


7. Marketable Securities
Rambus invests its excess cash and cash equivalents primarily in U.S. government-sponsored obligations, commercial paper, corporate notes and bonds, money market funds and municipal notes and bonds that mature within three years. As of March 31, 2019 and December 31, 2018 , all of the Company’s cash equivalents and marketable securities had a remaining maturity of less than one year .
All cash equivalents and marketable securities are classified as available-for-sale. Total cash, cash equivalents and marketable securities are summarized as follows:
 
 
As of March 31, 2019
(In thousands)
 
Fair Value
 
Amortized
  Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Weighted
  Rate of
  Return
Money market funds
 
$
10,849

 
$
10,849

 
$

 
$

 
2.35
%
U.S. Government bonds and notes
 
41,479

 
41,482

 

 
(3
)
 
2.36
%
Corporate notes, bonds, commercial paper and other
 
212,149

 
212,209

 
3

 
(63
)
 
2.47
%
Total cash equivalents and marketable securities
 
264,477

 
264,540

 
3

 
(66
)
 
 

Cash
 
41,389

 
41,389

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
305,866

 
$
305,929

 
$
3

 
$
(66
)
 
 

 
 
As of December 31, 2018
(In thousands)
 
Fair Value
 
Amortized
  Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Weighted
  Rate of
  Return
Money market funds
 
$
10,080

 
$
10,080

 
$

 
$

 
2.23
%
U.S. Government bonds and notes
 
32,630

 
32,634

 

 
(4
)
 
2.28
%
Corporate notes, bonds, commercial paper and other
 
183,998

 
184,095

 

 
(97
)
 
2.37
%
Total cash equivalents and marketable securities
 
226,708

 
226,809

 

 
(101
)
 
 

Cash
 
51,056

 
51,056

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
277,764

 
$
277,865

 
$

 
$
(101
)
 
 


Available-for-sale securities are reported at fair value on the balance sheets and classified as follows:
 
As of
 
March 31,
2019
 
December 31,
2018
 
(In thousands)
Cash equivalents
$
101,627

 
$
64,868

Short term marketable securities
162,850

 
161,840

Total cash equivalents and marketable securities
264,477

 
226,708

Cash
41,389

 
51,056

Total cash, cash equivalents and marketable securities
$
305,866

 
$
277,764


The Company continues to invest in highly rated quality, highly liquid debt securities. As of March 31, 2019 , these securities have a remaining maturity of less than one year. The Company holds all of its marketable securities as available-for-sale, marks them to market, and regularly reviews its portfolio to ensure adherence to its investment policy and to monitor individual investments for risk analysis, proper valuation, and unrealized losses that may be other than temporary.


19


The estimated fair value of cash equivalents and marketable securities classified by the length of time that the securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018 are as follows:
 
Fair Value
 
Gross Unrealized Loss
 
March 31,
2019
 
December 31,
2018
 
March 31,
2019
 
December 31,
2018
 
(In thousands)
Less than one year
 

 
 

 
 

 
 

U.S. Government bonds and notes
$
36,490

 
$
32,630

 
$
(3
)
 
$
(4
)
Corporate notes, bonds and commercial paper
183,849

 
183,998

 
(63
)
 
(97
)
Total Corporate notes, bonds, and commercial paper and U.S. Government bonds and notes
$
220,339

 
$
216,628

 
$
(66
)
 
$
(101
)

The gross unrealized loss at March 31, 2019 and December 31, 2018 was not material in relation to the Company’s total available-for-sale portfolio. The gross unrealized loss can be primarily attributed to a combination of market conditions as well as the demand for and duration of the U.S. government-sponsored obligations and corporate notes and bonds. There is no need to sell these investments, and the Company believes that it can recover the amortized cost of these investments. The Company has found no evidence of impairment due to credit losses in its portfolio. Therefore, these unrealized losses were recorded in other comprehensive income. However, the Company cannot provide any assurance that its portfolio of cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require the Company in the future to record an impairment charge for credit losses which could adversely impact its financial results.
See Note 8, “Fair Value of Financial Instruments,” for discussion regarding the fair value of the Company’s cash equivalents and marketable securities.
8. Fair Value of Financial Instruments
The following table presents the financial instruments that are carried at fair value and summarizes the valuation of its cash equivalents and marketable securities by the above pricing levels as of March 31, 2019 and December 31, 2018 :
 
As of March 31, 2019
 
Total
 
Quoted
  Market
  Prices in
  Active
  Markets
  (Level 1)
 
Significant
  Other
  Observable
  Inputs
  (Level 2)
 
Significant
  Unobservable
  Inputs
  (Level 3)
 
(In thousands)
Money market funds
$
10,849

 
$
10,849

 
$

 
$

U.S. Government bonds and notes
41,479

 

 
41,479

 

Corporate notes, bonds, commercial paper and other
212,149

 

 
212,149

 

Total available-for-sale securities
$
264,477

 
$
10,849

 
$
253,628

 
$

 
As of December 31, 2018
 
Total
 
Quoted
  Market
  Prices in
  Active
  Markets
  (Level 1)
 
Significant
  Other
  Observable
  Inputs
  (Level 2)
 
Significant
  Unobservable
  Inputs
  (Level 3)
 
(In thousands)
Money market funds
$
10,080

 
$
10,080

 
$

 
$

U.S. Government bonds and notes
32,630

 

 
32,630

 

Corporate notes, bonds, commercial paper and other
183,998

 

 
183,998

 

Total available-for-sale securities
$
226,708

 
$
10,080

 
$
216,628

 
$


The Company monitors its investments for other-than-temporary impairment and records appropriate reductions in carrying value when necessary. The Company monitors its investments for other-than-temporary losses by considering current factors,

20


including the economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, reductions in carrying values when necessary and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in the market. Any other-than-temporary loss is reported under “Interest and other income (expense), net” in the condensed consolidated statement of operations.
During the second half of 2018, the Company made an investment in a non-marketable equity security of a private company. This equity investment is accounted for under the equity method of accounting, and the Company accounts for its equity method share of the income (loss) on a quarterly basis. As of March 31, 2019, the Company's 27.7% ownership percentage amounts to a $3.2 million equity interest in this equity investment and it is included in other assets on the accompanying consolidated balance sheets. The Company recorded an immaterial amount in its consolidated statements of operations representing its share of the investee's loss for the three months March 31, 2019 .
For the three months ended March 31, 2019 and 2018 , there were no transfers of financial instruments between different categories of fair value.
The following table presents the financial instruments that are not carried at fair value but require fair value disclosure as of March 31, 2019 and December 31, 2018 :
 
 
As of March 31, 2019
 
As of December 31, 2018
(In thousands)
 
Face
  Value
 
Carrying
  Value
 
Fair Value
 
Face
  Value
 
Carrying
  Value
 
Fair Value
1.375% Convertible Senior Notes due 2023 (the "2023 Notes")
 
$
172,500

 
$
143,612

 
$
162,952

 
$
172,500

 
$
141,934

 
$
150,075


The fair value of the convertible notes at each balance sheet date is determined based on recent quoted market prices for these notes which is a level 2 measurement. As discussed in Note 10, "Convertible Notes," as of March 31, 2019 , the 2023 Notes are carried at their aggregate face value of $172.5 million , less any unamortized debt discount and unamortized debt issuance costs. The carrying value of other financial instruments, including accounts receivable, accounts payable and other liabilities, approximates fair value due to their short maturities.


21


9. Leases
The Company leases office space, domestically and internationally, under operating leases. The Company's leases have remaining lease terms between 1 and 4 years. Operating leases are included in operating lease right-of-use ("ROU") assets, operating lease liabilities, and long-term operating lease liabilities in the Company's unaudited condensed consolidated balance sheets. The Company does not have any finance leases. The Company determines if an arrangement is a lease, or contains a lease, at inception. The Company assesses all relevant facts and circumstances in making the determination of the existence of a lease. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments over the term. Many of the Company's leases include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the Company does not separate non-lease components from lease components.
The Company used its incremental borrowing rate to measure the lease liabilities at the adoption date for its existing operating leases that commenced prior to January 1, 2019 which was based on the remaining lease term and remaining lease payments for such leases. On an ongoing basis, as most of the Company's leases do not provide an implicit rate, the Company will use its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company will use the implicit rate when readily determinable.
The table below reconciles the undiscounted cash flows for the first five years and total of the remaining years to the operating lease liabilities recorded on the unaudited condensed consolidated balance sheet as of March 31, 2019 (in thousands):
Years ending December 31,
Amount
2019 (remaining 9 months)
$
7,788

2020
6,731

2021
4,860

2022
3,107

2023
643

Thereafter

Total minimum lease payments
$
23,129

Less: amount of lease payments representing interest
(1,470
)
Present value of future minimum lease payments
$
21,659

Less: current obligations under leases
(9,351
)
Long-term lease obligations
$
12,308

As of March 31, 2019, the weighted average remaining lease term for the Company's operating leases is 2.9 years , and the weighted average discount rate used to determine the present value of the Company's operating leases is 4.5% .
Operating lease costs are included in research and development and selling, general and administrative costs on the statement of operations, and were $2.2 million for the three months ended March 31, 2019.
Cash paid for amounts included in the measurement of operating lease liabilities was $2.6 million for the three months ended March 31, 2019.
10. Convertible Notes
The Company’s convertible notes are shown in the following table:
(In thousands)
As of March 31, 2019
 
As of December 31, 2018
2023 Notes
$
172,500

 
$
172,500

Unamortized discount - 2023 Notes
(26,964
)
 
(28,517
)
Unamortized debt issuance costs - 2023 Notes
(1,924
)
 
(2,049
)
Total convertible notes
$
143,612

 
$
141,934

Less current portion

 

Total long-term convertible notes
$
143,612

 
$
141,934


22



Interest expense related to the notes for the three months ended March 31, 2019 and 2018 was as follows:
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
2023 Notes coupon interest at a rate of 1.375%
$
593

 
$
593

2023 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 4.9%
1,678

 
1,590

2018 Notes coupon interest at a rate of 1.125%

 
53

2018 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 5.5%

 
1,090

Total interest expense on convertible notes
$
2,271

 
$
3,326


11. Commitments and Contingencies
As of March 31, 2019 , the Company’s material contractual obligations were as follows (in thousands):
 
Total
 
Remainder   of 2019
 
2020
 
2021
 
2022
 
2023
Contractual obligations (1) (2)
 

 
 

 
 

 
 

 
 

 
 

Other contractual obligations
1,283

 
815

 
234

 
234

 

 

Software licenses (3)
8,489

 
3,997

 
2,995

 
1,497

 

 

Convertible notes
172,500

 

 

 

 

 
172,500

Interest payments related to convertible notes
9,494

 
1,186

 
2,372

 
2,372

 
2,372

 
1,192

Total
$
191,766

 
$
5,998

 
$
5,601

 
$
4,103

 
$
2,372


$
173,692

_________________________________________
(1)
The above table does not reflect possible payments in connection with uncertain tax benefits of approximately $24.5 million including $22.2 million recorded as a reduction of long-term deferred tax assets and $2.3 million in long-term income taxes payable as of March 31, 2019 . As noted below in Note 14, “Income Taxes,” although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
(2)
For the Company's lease commitments, refer to Note 9, "Leases".
(3)
The Company has commitments with various software vendors for agreements generally having terms longer than one year.
Refer to Note 2, "Recent Accounting Pronouncements" and Note 9, "Leases," for discussion related to the Company's facility leases due to the adoption of the New Leasing Standard on January 1, 2019.

23


Additionally, the Company's lease-related obligations as of December 31, 2018 were as follows (in thousands):
 
Total
 
2019
 
2020
 
2021
 
2022
 
2023
Lease-related obligations
 
 
 
 
 
 
 
 
 
 
 
Imputed financing obligation (1)
$
8,081

 
$
5,677

 
$
2,404

 
$

 
$

 
$

Leases
19,415

 
5,333

 
4,883

 
4,960

 
3,271

 
968

Total
$
27,496

 
$
11,010

 
$
7,287

 
$
4,960

 
$
3,271

 
$
968

_________________________________________
(1)
With respect to the imputed financing obligation, the main components of the difference between the amount reflected in the table above and the amount reflected on the unaudited condensed consolidated balance sheet are the interest on the imputed financing obligation and the estimated common area expenses over the future periods. The amount includes the amended Ohio lease and the amended Sunnyvale lease.

Indemnification
From time to time, the Company indemnifies certain customers as a necessary means of doing business. Indemnification covers customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement or any other claim by any third party arising as result of the applicable agreement with the Company. The Company generally attempts to limit the maximum amount of indemnification or liability that the Company could be exposed to under these agreements, however, this is not always possible. The fair value of the liability as of March 31, 2019 and December 31, 2018 is not material.
12. Equity Incentive Plans and Stock-Based Compensation
A summary of shares available for grant under the Company’s plan is as follows:
 
Shares Available
  for Grant
Shares available as of December 31, 2018
10,074,046

Stock options granted

Stock options forfeited
33,967

Nonvested equity stock and stock units granted (1) (2)
(5,907,629
)
Nonvested equity stock and stock units forfeited (1)
315,349

Total available for grant as of March 31, 2019
4,515,733

_________________________________________
(1)
For purposes of determining the number of shares available for grant under the 2015 Equity Incentive Plan (the “2015 Plan”) against the maximum number of shares authorized, each share of restricted stock granted reduces the number of shares available for grant by 1.5 shares and each share of restricted stock forfeited increases shares available for grant by 1.5 shares.
(2)
Amount includes approximately 0.9 million shares that have been reserved for potential future issuance related to certain performance unit awards granted in the first quarter of 2019 and discussed under the section titled "Nonvested Equity Stock and Stock Units" below.

24


General Stock Option Information
The following table summarizes stock option activity under the 2015 Plan for the three months ended March 31, 2019 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of March 31, 2019 .
 
Options Outstanding
 
 
 
 
 
Number of
  Shares
 
Weighted
  Average
  Exercise Price
  Per Share
 
Weighted
  Average
  Remaining
  Contractual
  Term (years)
 
Aggregate
  Intrinsic
  Value
 
(In thousands, except per share amounts)
Outstanding as of December 31, 2018
3,235,891

 
$
10.25

 
 
 
 

Options granted

 
$

 
 
 
 

Options exercised
(704,851
)
 
$
6.89

 
 
 
 

Options forfeited
(33,967
)
 
$
8.58

 
 
 
 

Outstanding as of March 31, 2019
2,497,073

 
$
11.22

 
4.72
 
$
2,779

Vested or expected to vest at March 31, 2019
2,473,989

 
$
11.20

 
4.69
 
$
2,779

Options exercisable at March 31, 2019
1,972,769

 
$
10.82

 
3.70
 
$
2,779


Employee Stock Purchase Plan
No purchases were made under the 2015 Employee Stock Purchase Plan ("2015 ESPP") during the three months ended March 31, 2019 and 2018 . As of March 31, 2019 , approximately 2.3 million shares under the 2015 ESPP remain available for issuance.
Stock-Based Compensation
For the three months ended March 31, 2019 and 2018 , the Company maintained stock plans covering a broad range of potential equity grants including stock options, nonvested equity stock and equity stock units and performance based instruments. In addition, the Company sponsors the 2015 ESPP, whereby eligible employees are entitled to purchase common stock semi-annually, by means of limited payroll deductions, at a 15% discount from the fair market value of the common stock as of specific dates.
Stock Options
There were no stock options granted during the three months ended March 31, 2019 . During the three months ended March 31, 2019 , the Company recorded stock-based compensation expense related to stock options of $0.2 million .
During the  three months ended  March 31, 2018 , the Company granted approximately 0.6 million stock options with an estimated grant-date fair value of $2.3 million . During the three  months ended March 31, 2018 , the Company recorded stock-based compensation expense related to stock options of  $0.6 million .
As of March 31, 2019 , there was $3.5 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 2.6 years.
Employee Stock Purchase Plan
For the three months ended March 31, 2019 , the Company recorded compensation expense related to the 2015 ESPP of $0.5 million . For the three months ended March 31, 2018 , the Company recorded compensation expense related to the 2015 ESPP of $0.5 million . As of March 31, 2019 , there was $0.2 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under the 2015 ESPP. That cost is expected to be recognized over one month.
Valuation Assumptions
The fair value of stock awards is estimated as of the grant date using the Black-Scholes-Merton (“BSM”) option-pricing model assuming a dividend yield of 0% and the additional weighted-average assumptions as listed in the table below.

25


The following table presents the weighted-average assumptions used to estimate the fair value of stock options granted that contain only service conditions in the periods presented.
 
Stock Option Plan
 
Three Months Ended
 
March 31, 2018
Stock Option Plan
 

Expected stock price volatility
29
%
Risk free interest rate
2.6
%
Expected term (in years)
5.8

Weighted-average fair value of stock options granted to employees
$
4.24

There were no stock options granted during the three months ended March 31, 2019 .
No shares were issued under the 2015 ESPP during the three months ended March 31, 2019 and 2018 , respectively.
 
 
 
 
Nonvested Equity Stock and Stock Units
The Company grants nonvested equity stock units to officers, employees and directors. During the three months ended March 31, 2019 , the Company granted nonvested equity stock units totaling approximately 3.4 million shares under the 2015 Plan. During the three months ended March 31, 2018 , the Company granted nonvested equity stock units totaling approximately 2.1 million shares under the 2015 Plan. These awards have a service condition, generally a service period of four years , except in the case of grants to directors, for which the service period is 1 year . For the three months ended March 31, 2019 , the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $32.2 million . For the three months ended March 31, 2018 , the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $26.8 million . During the first quarters of 2019 and 2018, the Company granted performance unit awards to certain Company executive officers with vesting subject to the achievement of certain performance conditions. The ultimate number of performance units that can be earned can range from 0% to 200% of target depending on performance relative to target over the applicable period. The shares earned will vest on the third anniversary of the date of grant. The Company's shares available for grant have been reduced to reflect the shares that could be earned at the maximum target.
For the three months ended March 31, 2019 , the Company recorded stock-based compensation expense of approximately $6.4 million related to all outstanding nonvested equity stock grants. For the three months ended March 31, 2018 , the Company recorded stock-based compensation expense of approximately $6.5 million related to all outstanding nonvested equity stock grants. Unrecognized stock-based compensation related to all nonvested equity stock grants, net of estimated forfeitures, was approximately $53.7 million at March 31, 2019 . This amount is expected to be recognized over a weighted average period of 2.9 years .
The following table reflects the activity related to nonvested equity stock and stock units for the three months ended March 31, 2019 :
Nonvested Equity Stock and Stock Units
 
Shares
 
Weighted-
  Average
  Grant-Date
  Fair Value
Nonvested at December 31, 2018
 
4,859,135

 
$
12.71

Granted
 
3,389,337

 
$
9.56

Vested
 
(1,076,198
)
 
$
12.49

Forfeited
 
(170,752
)
 
$
11.89

Nonvested at March 31, 2019
 
7,001,522

 
$
11.24



26


13.   Stockholders’ Equity
Share Repurchase Program
During the three months ended March 31, 2019 , the Company did not repurchase any shares of its common stock under its share repurchase program.
On January 21, 2015, the Company's Board approved a share repurchase program authorizing the repurchase of up to an aggregate of 20.0 million shares. Share repurchases under the plan may be made through the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules, and regulations. There is no expiration date applicable to the plan.
As of March 31, 2019 , there remained an outstanding authorization to repurchase approximately 3.6 million shares of the Company's outstanding common stock under the current share repurchase program.

The Company records stock repurchases as a reduction to stockholders’ equity. The Company records a portion of the purchase price of the repurchased shares as an increase to accumulated deficit when the price of the shares repurchased exceeds the average original proceeds per share received from the issuance of common stock.

14. Income Taxes

The Company recorded a provision for (benefit from) income taxes of $0.3 million and $(3.2) million for the three months ended March 31, 2019 and 2018 , respectively. The provision for income taxes for the three months ended March 31, 2019 is driven by a combination of the valuation allowance recorded on U.S. deferred tax assets and the projected annual effective tax rate for the foreign jurisdictions for 2019. The benefit from income taxes for the three months ended March 31, 2018 is mainly due to projected pretax losses from which the company can benefit from.

During the three months ended March 31, 2019 and 2018 , the Company paid withholding taxes of $4.3 million and $6.1 million , respectively.

As of March 31, 2019 , the Company’s unaudited condensed consolidated balance sheets included net deferred tax assets, before valuation allowance, of approximately $165.6 million , which consists of net operating loss carryovers, tax credit carryovers, amortization, employee stock-based compensation expenses and certain liabilities.
The Company periodically evaluates the realizability of its net deferred tax assets based on all available evidence, both positive and negative. During the third quarter of 2018, the Company assessed the changes in its underlying facts and circumstances and evaluated the realizability of its existing deferred tax assets based on all available evidence, both positive and negative, and the weight accorded to each, and concluded a full valuation allowance associated with U.S. federal and state deferred tax assets was appropriate. The basis for this conclusion was derived primarily from the fact that the Company completed its forecasting process during the third quarter of 2018. At a domestic level, losses are expected in future periods in part due to the impact of the adoption of ASC 606. In addition, the decrease in the U.S. federal tax rate from 35% to 21% as a result of U.S. tax reform has further reduced the Company's ability to utilize its deferred tax assets. In light of the above factors, the Company concluded that it is not more likely than not that it can realize its U.S. deferred tax assets. As such, during the third quarter of 2018, the Company set up and continues to maintain a full valuation allowance against its U.S. federal deferred tax assets. The Company has U.S. federal deferred tax assets related to research and development credits, foreign tax credits and other tax attributes that can be used to offset federal taxable income in future periods. These credit carryforwards will expire if they are not used within certain time periods. It is possible that some or all of these attributes could ultimately expire unused.
The Company has U.S. federal deferred tax assets related to research and development credits, foreign tax credits and other tax attributes that can be used to offset federal taxable income in future periods. These credit carryforwards will expire if they are not used within certain time periods. It is possible that some or all of these attributes could ultimately expire unused.
As of March 31, 2019 , the Company has a total valuation allowance of $179.9 million on U.S. federal, state and foreign deferred tax assets, resulting in net deferred tax liability of $14.3 million .
The Company maintains liabilities for uncertain tax positions within its long-term income taxes payable accounts and as a reduction to existing deferred tax assets to the extent tax attributes are available to offset such liabilities. These liabilities involve judgment and estimation and are monitored by management based on the best information available including changes in tax regulations, the outcome of relevant court cases and other information.

27


As of March 31, 2019 , the Company had approximately $24.5 million of unrecognized tax benefits, including $22.2 million recorded as a reduction of long-term deferred tax assets and $2.3 million in long-term income taxes payable. If recognized, approximately $2.3 million would be recorded as an income tax benefit. As of December 31, 2018 , the Company had $23.5 million of unrecognized tax benefits, including $21.4 million recorded as a reduction of long-term deferred tax assets and $2.1 million recorded in long-term income taxes payable.
Although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. At March 31, 2019 and December 31, 2018 , an immaterial amount of interest and penalties is included in long-term income taxes payable.
Rambus files income tax returns for the U.S., California, India, the U.K., the Netherlands and various other state and foreign jurisdictions. The U.S. federal returns are subject to examination from 2015 and forward. The California returns are subject to examination from 2010 and forward. In addition, any research and development credit carryforward or net operating loss carryforward generated in prior years and utilized in these or future years may also be subject to examination. The India returns are subject to examination from fiscal year ending March 2012 and forward. The Company is currently under examination by the IRS for the 2015 tax year and California for the 2010 and 2011 tax years. The Company’s India subsidiary is under examination by the Indian tax administration for tax years beginning with 2011, except for 2014, which was assessed in the Company's favor. The Company’s France subsidiary is under examination by the French tax agency for the 2013 to 2017 tax years. These examinations may result in proposed adjustments to the income taxes as filed during these periods. Management regularly assesses the likelihood of outcomes resulting from income tax examinations to determine the adequacy of their provision for income taxes and believes their provision for unrecognized tax benefits is adequate.
Additionally, the Company's future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where the Company has higher statutory rates or lower than anticipated in countries where it has lower statutory rates, by changes in valuation of its deferred tax assets and liabilities or by changes in tax laws or interpretations of those laws.

15. Litigation and Asserted Claims
Rambus is not currently a party to any material pending legal proceeding; however, from time to time, Rambus may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial position or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management attention and resources and other factors.

The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as described in more detail under “Note Regarding Forward-Looking Statements." Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes in condition, significance, value and effect. As a result of the factors described herein, and in the documents incorporated herein by reference, including, in particular, those factors described under “Risk Factors,” we undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with the Securities and Exchange Commission.
Rambus and CryptoManager TM are trademarks or registered trademarks of Rambus Inc. Other trademarks that may be mentioned in this quarterly report on Form 10-Q are the property of their respective owners.
Executive Summary
During the first quarter of 2019, our buffer chipset revenue increased from the same period last year. Additionally, we expanded our SerDes portfolio with a 32G SerDes PHY to enable 5G infrastructure and a 112G SerDes PHY to enable next-generation 400G and 800G communications systems. Key 2019 first quarter financial results included:

Revenue of $48.4 million;
Total operating costs and expenses of $79.8 million;
Diluted net loss per share of $0.24;
Cash flows provided by operating activities of approximately $28.8 million; and
Unbilled receivables of $629.4 million as of March 31, 2019.

Business Overview
Dedicated to making data faster and safer, Rambus creates innovative hardware, software and services that drive technology advancements from the data center to the mobile edge. Our architecture licenses, IP cores, chips, software, and services span memory and interfaces, security, and emerging technologies to positively impact the modern world. We collaborate with the industry, partnering with leading chip and system designers, foundries, and service providers. Integrated into a wide array of devices and systems, our products power and secure diverse applications, including Big Data, Internet of Things (IoT) security, mobile payments, and smart ticketing.

Building upon the foundation of technologies for memory, SerDes and other chip interfaces, we have expanded our portfolio of inventions and solutions to address chip and system security, mobile payments and smart ticketing. We intend to continue our growth into new technology fields, consistent with our mission to create value through our innovations and to make those technologies available through the shipment of products, the delivery of services, and licensing business models. Key to our efforts is continuing to hire and retain world-class inventors, scientists and engineers to lead the development and deployment of inventions and technology solutions for our fields of focus.

Our strategy is to continue to augment our patent license business model to provide additional technology, products and services while creating and leveraging strategic synergies to increase revenue. In support of our strategy, Rambus has transitioned to focus on two key high-growth markets - the data center and the mobile edge - with an approach and product roadmap that leverage our core competencies and supplement with ingredient components to both differentiate and accelerate our position in complementary markets.

Organization

We have organized the business into three operational units: (1) Memory and Interfaces, or MID, which focuses on the design, development, manufacturing through partnerships and licensing of technology and solutions that is related to memory and interfaces; (2) Rambus Security, or RSD, which focuses on the design, development, deployment and licensing of technologies for chip, system and in-field application security, anti-counterfeiting, smart ticketing and mobile payments; and (3) Emerging Solutions, or ESD, which includes the Rambus Labs team and the development efforts in the area of emerging technologies.

As of March 31, 2019 , MID and RSD met quantitative thresholds for disclosure as reportable segments. Results for the remaining operating segment was shown under “Other.” For additional information concerning segment reporting, see Note 6, “Segments and Major Customers,” of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.


29


Revenue Sources

On January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers in Accounting Standards Codification (ASC) Topic 606 (“ASC 606”, “the New Revenue Standard”) and all the related amendments using the modified retrospective method.
The most significant impacts of the New Revenue Standard relate to the following:
Revenue recognized for certain patent and technology licensing arrangements has changed under the New Revenue Standard. Revenue for (i) fixed-fee arrangements (including arrangements that include minimum guaranteed amounts), (ii) variable royalty arrangements that we have concluded are fixed in substance and (iii) the fixed portion of hybrid fixed/variable arrangements is recognized upon control over the underlying intellectual property (“IP”) use right transferring to the licensee rather than upon billing under ASC Topic 605, “Revenue Recognition” (“ASC 605”), net of the effect of significant financing components calculated using customer-specific, risk-adjusted lending rates and recognized over time on an effective rate basis. As a consequence of the acceleration of revenue recognition and for matching purposes, all withholding taxes to be paid over the term of these licensing arrangements were expensed on the date the licensing revenue was recognized.

Adoption of the New Revenue Standard resulted in revenue recognition being accelerated for variable royalties and the variable portion of hybrid fixed/variable patent and technology licensing arrangements. Under the New Revenue Standard, royalty revenue is being recognized on the basis of management’s estimates of sales or usage, as applicable, of the licensed IP in the period of reference, with a true-up being recorded in subsequent periods based on actual sales or usage as reported by licensees (rather than upon receiving royalty reports from licensees as was the case under ASC 605).

Adoption of the New Revenue Standard also resulted in revenue recognition being accelerated for certain professional services arrangements, including arrangements consisting of significant software customization or modification and development arrangements. Under the New Revenue Standard, such arrangements are accounted for based on man-days incurred during the reporting period as compared to estimated total man-days necessary for contract completion, as the customer either controls the asset as it is created or enhanced by us or, where the asset has no alternative use to us, we are entitled to payment for performance to date and expect to fulfill the contract. Revenue recognition is no longer capped to the lesser of inputs in the period or accepted billable project milestones as was the case under ASC 605.

Our inventions and technology solutions are offered to our customers through patent, technology, software and IP core licenses, as well as product sales and services. Today, our primary source of revenue is derived from patent licenses, through which we provide our customers a license to use a certain portion of our broad portfolio of patented inventions. The license provides our customers with a defined right to use our innovations in the customer’s own digital electronics products, systems or services, as applicable. The licenses may also define the specific field of use where our customers may use or employ our inventions in their products. License agreements are structured with fixed, variable or a hybrid of fixed and variable royalty payments over certain defined periods ranging for periods of up to ten years. Leading consumer product, industrial, semiconductor and system companies such as AMD, Broadcom, Cisco, Freescale, Fujitsu, IBM, Intel, Micron, Nanya, NVIDIA, Panasonic, Qualcomm, Renesas, Samsung, SK hynix, STMicroelectronics, Toshiba and Xilinx have licensed our patents. The vast majority of our patents were secured through our internal research and development efforts across all of our business units.

We also offer our customers technology licenses to support the implementation and adoption of our technology in their products or services. Our customers include leading companies such as IBM, Panasonic, Qualcomm, Samsung, Sony and Toshiba. Our technology license offerings include a range of technologies for incorporation into our customers’ products and systems. We also offer a range of services as part of our technology licenses which can include know-how and technology transfer, product design and development, system integration, and other services. These technology license agreements may have both a fixed price (non-recurring) component and ongoing use fees and in some cases, royalties. Further, under technology licenses, our customers typically receive licenses to our patents necessary to implement these solutions in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts with us.

Revenues from royalties accounted for 51% of our consolidated revenue for the three months ended March 31, 2019 , as compared to 46% for the three months ended March 31, 2018 .


30


The remainder of our revenue is product revenue, contract services and other revenue, which includes our product sales, IP core licenses, software licenses and related implementation, support and maintenance fees, and engineering services fees. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenue or account receivables in any given period. Product revenue accounted for 19% of our consolidated revenue for the three months ended March 31, 2019 , as compared to 16% for the three months ended March 31, 2018 . Contract and other revenue accounted for 30% of our consolidated revenue for the three months ended March 31, 2019 , as compared to 38% for the three months ended March 31, 2018 .

Expenses

Cost of product revenue for the three months ended March 31, 2019 increased approximately $0.1 million as compared to the same period in 2018 primarily due to increased cost of sales associated with higher sales of memory products.

Engineering expenses continue to play a key role in our efforts to maintain product innovations. Our engineering expenses for the three months ended March 31, 2019 decreased $4.8 million as compared to the same period in 2018 primarily due to decreased amortization costs of $4.8 million, headcount related expenses of $0.9 million and prototyping costs of $0.5 million, offset by increased consulting costs of $0.7 million, depreciation expense of $0.6 million and facilities costs of $0.5 million

Sales, general and administrative expenses for the three months ended March 31, 2019 decreased $2.6 million as compared to the same period in 2018 primarily due to decreased bonus accrual expense of $0.9 million, headcount related expenses of $0.6 million, sales and marketing costs of $0.5 million, depreciation expense of $0.5 million, consulting costs of $0.4 million and stock-based compensation expense of $0.3 million, offset by increased facilities costs of $0.7 million.
The increase in facilities costs were primarily due to the adoption of ASU No. 2016-02, "Leases," ASU No. 2018-10, "Codification Improvements to Topic 842, Leases," and ASU No. 2018-11, "Leases (Topic 842)" (collectively referred to as the “New Leasing Standard”) beginning in 2019 as discussed in “Results of Operations” of this Form 10-Q.

Intellectual Property

As of March 31, 2019 , our semiconductor, security and other technologies are covered by 2,138 U.S. and foreign patents. Additionally, we have 551 patent applications pending. Some of the patents and pending patent applications are derived from a common parent patent application or are foreign counterpart patent applications. We have a program to file applications for and obtain patents in the United States and in selected foreign countries where we believe filing for such protection is appropriate and would further our overall business strategy and objectives. In some instances, obtaining appropriate levels of protection may involve prosecuting continuation and counterpart patent applications based on a common parent application. We believe our patented innovations provide our customers with the ability to achieve improved performance, lower risk, greater cost-effectiveness and other benefits in their products and services.

Trends
There are a number of trends that may have a material impact on us in the future, including but not limited to, the evolution of memory and SerDes technology, adoption of mobile payment, smart ticketing and security solutions, the use and adoption of our inventions or technologies generally, industry consolidation, and global economic conditions with the resulting impact on sales of consumer electronic systems.
We have a high degree of revenue concentration. Our top five customers represented approximately 56% of our revenue for the three months ended March 31, 2019 as compared to 59% for the three months ended March 31, 2018 . The particular customers which account for revenue concentration have varied from period-to-period as a result of the addition of new contracts, expiration of existing contracts, renewals of existing contracts, industry consolidation and the volumes and prices at which the customers have recently sold to their customers. These variations are expected to continue in the foreseeable future.
Our revenue from companies headquartered outside of the United States accounted for approximately 29% of our total revenue for the three months ended March 31, 2019 as compared to 76% for the three months ended March 31, 2018 . We expect that revenue derived from international customers will continue to represent a significant portion of our total revenue in the future. To date, the majority of the revenue from international customers has been denominated in U.S. dollars. However, to the extent that such customers’ sales to their customers are not denominated in U.S. dollars, any revenue that we receive as a result of such sales could be subject to fluctuations in currency exchange rates. In addition, if the effective price of licensed products sold by our foreign customers were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for licensed products could fall, which in turn would reduce our revenue. We do not use financial

31


instruments to hedge foreign exchange rate risk. For additional information concerning international revenue, see Note 6, “Segments and Major Customers,” of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
Our licensing cycle for new licensees as well as renewals for existing licensees is lengthy, costly and unpredictable without any degree of certainty. We may incur costs in any particular period before any associated revenue stream begins, if at all. Our lengthy license negotiation cycles could make our future revenue difficult to predict because we may not be successful in entering into licenses with our customers in the amounts projected, or on our anticipated timelines.

The semiconductor industry is intensely competitive and highly cyclical, limiting our visibility with respect to future sales. To the extent that macroeconomic fluctuations negatively affect our principal customers, the demand for our products and technology may be significantly and adversely impacted and we may experience substantial period-to-period fluctuations in our operating results.

The royalties we receive from our semiconductor customers are partly a function of the adoption of our technologies by system companies. Many system companies purchase semiconductors containing our technologies from our customers and do not have a direct contractual relationship with us. Our customers generally do not provide us with details as to the identity or volume of licensed semiconductors purchased by particular system companies. As a result, we face difficulty in analyzing the extent to which our future revenue will be dependent upon particular system companies.
Global demand for effective security technologies continues to increase. In particular, highly integrated devices such as smart phones are increasingly used for applications requiring security such as mobile payments, corporate information and user data. Our RSD operating segment is primarily focused on positioning its DPA countermeasures, security cores, CryptoManager™ technology solutions, and the introduction of in-field applications mobile payments and smart ticketing solutions to our offerings to capitalize on these trends and growing adoption among technology partners and customers.
Cost of product revenue in the aggregate increased and as a percentage of revenue decreased during the three months ended March 31, 2019 as compared to the same period in the prior year. Engineering costs in the aggregate and as a percentage of revenue decreased during the three months ended March 31, 2019 as compared to the same period in the prior year. S