Rambus and Xperi have both released their results for the fourth quarter of 2017 and, bucking the licensing headwinds, turned in solid performances. Their numbers also provided the first indications of how licensing businesses are preparing for a major accounting change which took effect in the US at the end of last year.
Rambus reported revenues for the quarter of $101.9 million, up by a little more than $4 million year-on-year, and full year results of $393.1 million, an increase of just under $60 million from 2016. Royalties, including patent licensing, accounted for almost $78 million in Q4 and $289.5 million for the year overall.
For Xperi, the business formerly known as Tessera, revenue for the quarter hit $126 million and $373 million for the year overall (both were better than expected). More details on the company’s numbers will no doubt emerge when it holds its earnings call next month, but along with Rambus’s results they confirm that for the top end of the market - and particularly for those that develop their own patented technology - conditions are relatively robust.
The results come as all public companies are adopting new accounting rules which came into effect on December 15th. Known as ASC 606, the new regulations change the way in which businesses have to account for revenues over time (the changes kick in for private companies at the start of next year) and promise to have a big impact on firms that make a big chunk of their revenues from licensing.
According to the new rules: “Companies must recognise revenue when goods and services are transferred to the customer, in an amount that is proportionate to what has been delivered at that point.” That is a lot more straightforward for a company selling actual products rather than trying to monetise its IP, but effectively it means that large licensing deals that previously might have been recognised as revenue upfront will now be accounted for over a longer period.
As part of its earnings release, Xperi included a helpful slide deck which explained how the changes might impact its business. They used the example of a fixed fee $40 million four-year licence agreement which before, in revenue terms, would have been recognised across all four years but will now be recognised upfront in year one. The rule change is a major shift in accounting policy and its possible impact has had some PIPCO executives worried for a while.
Judging from the Rambus results the immediate impact seems to be that investors will have to get to used to much lower guidance for quarterly results, but it’s not clear yet what the full effect will be. One of the things that has dogged some PIPCOs in the eyes of the investment community is the typically lumpy revenue that pure licensing businesses generate – with one big deal falling just inside or outside a quarter significantly skewing results. This accounting change is certainly not going to help that problem and adds to the cloud of uncertainty that IP executives face. We’ll keep tracking its impact as more PIPCOs report their 2017 numbers.