Rambus, Inc. Books a Ton of Accounting Changes

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Technology researcher Rambus (NASDAQ: RMBS) just delivered a solid fourth-quarter report -- if you're willing to overlook a few new wrinkles in the company's tax and revenue accounting. Mr. Market didn't do that, so Rambus shares plunged on the news.

Rambus' fourth quarter by the numbers

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The technology developer exceeded the high end of its own revenue guidance while adjusted earnings landed right in line with management's projections. Both of these headline-friendly metrics were also at or above the analyst consensus.

The top line surprise rested on 8% year-over-year growth in Rambus' memory and interface technology licensing operations. GAAP operating profits landed at $15.7 million, up from just $500,000 in the year-ago period, but the financial gains were erased before reaching the bottom line. The Trump administration's tax reform triggered a lower valuation of Rambus' deferred tax assets, resulting in a $32 million non-cash tax charge.

On balance, the company's effective tax rate will drop from 35% to 24%. The new rate is still higher than the 21% corporate tax rate for U.S. businesses thanks to higher taxes on Rambus' substantial business in South Korea.

Revenue accounting standard ASC 606

The accounting fun doesn't stop there.

Revenue guidance for the first quarter of 2018 stopped at roughly $44 million, down from $97.4 million in the first quarter of 2017. The sudden plunge stems from the adoption of new accounting rules for revenue recognition regarding long-term license contracts -- the heart of Rambus' business. There's no change to the accounting rules for operating costs, so the skimpy top-line sales will lead to adjusted net losses of approximately $0.16 per share.

The Financial Accounting Standards Board introduced the new rules in 2014, several years ahead of their implementation. This way, businesses and investors had plenty of time to adjust their expectations. Contract revenues are now recognized when the related products or services are delivered, not when the agreement is signed. For Rambus, this moves the bulk of the company's royalty revenues a few years down the road.

The company also offered hypothetical guidance figures under the expired rules, pointing to revenues in the neighborhood of $97 million and adjusted earnings near $0.20 per share. That would still work out to a mixed quarter, since analysts were looking for first-quarter earnings of $0.18 per share on sales just north of $100 million.

What's next?

Rambus shares fell more than 9% in Tuesday's trading. The stock is trading at a fairly reasonable 19 times trailing earnings today, but that ratio will be short-lived due to the looming arrival of new revenue accounting rules.

On the upside, these accounting shenanigans won't affect Rambus' cash profits. The same money is still flowing in and out, just under different assumptions when it comes to calculating operating profits and tax payments. Rambus generated $59.8 million in operating cash flows during the fourth quarter along with minimal capital expenses.

Looking ahead, Rambus is developing high-speed memory and data transfer technologies for use in data center equipment and mobile devices. These are long-term growth markets with thriving, competitive ecosystems around the world.

This company has come a long way from the predatory patent troll it once was. This version of Rambus is a muscular cash machine with solid long-term growth prospects.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.