Rambus Inc. 2019 Form 10-K Summary
Business context and reporting period
Rambus reported results for the fiscal year ended December 31, 2019. The company refocused on a single semiconductor segment providing high-speed interface IP, memory interface chips, embedded security IP, architecture licenses and related services. In 2019, Rambus divested its Payments and Ticketing businesses to Visa and acquired Northwest Logic and the Secure Silicon IP and Protocols business from Verimatrix.
Fourth-quarter 2019 revenue was $59.9 million, while full-year revenue was $224.0 million. Rambus had approximately 685 employees at year-end, including approximately 480 engineering employees.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $224.0 million | $231.2 million | Down 3.1% |
| Royalty revenue | $90.8 million | $130.5 million | Down 30.4% |
| Product revenue | $73.0 million | $38.7 million | Up 88.6% |
| Contract and other revenue | $60.3 million | $62.1 million | Down 2.9% |
| Operating costs and expenses | $328.6 million | $318.2 million | Up 3.3% |
| Operating loss | $104.5 million | $87.0 million | Loss increased |
| Net loss | $90.4 million | $158.0 million | Loss reduced |
| Diluted loss per share | $0.81 | $1.46 | Improved |
| Cash flow from operations | $128.5 million | $87.1 million | Up $41.4 million |
Operating margin was approximately negative 46.6%, compared with negative 37.6% in 2018. Net margin was approximately negative 40.4%, compared with negative 68.3% in 2018. Product revenue represented 32.6% of total revenue, compared with 16.7% in 2018, while royalties declined to 40.5% from 56.4%.
At December 31, 2019, cash, cash equivalents and marketable securities totaled $407.7 million, including $102.2 million of cash and cash equivalents and $305.5 million of marketable securities. Total assets were $1.34 billion and stockholders’ equity was $970.9 million.
Convertible debt had a face value of $172.5 million and a carrying value of $148.8 million. The 1.375% convertible senior notes mature on February 1, 2023. Rambus stated that existing liquidity and operating cash flow should satisfy cash needs for at least the next 12 months.
Material changes versus prior comparable period
- Revenue declined modestly because a $39.7 million decrease in royalty revenue largely offset an $34.3 million increase in product revenue.
- Memory Interface Chip and Silicon IP revenue increased 64% to $114.5 million, with memory product revenue nearly doubling year over year.
- Research and development expense decreased slightly to $156.8 million from $158.3 million, while total engineering costs declined 6.6% to $181.0 million, primarily due to lower amortization and headcount-related costs.
- Restructuring and other charges increased to $8.8 million from $2.2 million. The 2019 restructuring plan reduced the workforce by approximately 80 employees and was expected to be substantially complete in early 2020.
- Rambus recorded a $7.4 million loss on the Payments and Ticketing divestiture. The sale generated $82.5 million of gross proceeds and $76.0 million of net cash proceeds.
- Investing cash outflows increased to $141.5 million, including $66.8 million for acquisitions and $6.5 million for property, plant and equipment.
- Rambus adopted the new leasing standard in 2019, recording operating lease right-of-use assets of $37.0 million and operating lease liabilities of $46.2 million at year-end.
- Rambus did not repurchase shares in 2019. Approximately 3.6 million shares remained authorized for repurchase.
Outlook, commentary, risks and unusual items
Management expected product revenue, particularly memory product revenue, to increase in 2020. It also expected higher product costs and engineering spending as it continued investing in semiconductor, security and other technologies. Sales, general and administrative costs were expected to remain relatively flat.
Revenue remains difficult to forecast because licensing negotiations are lengthy and unpredictable, customer royalties depend partly on shipment volumes and product mix, and ASC 606 creates greater volatility in the timing of fixed-fee license revenue. The company’s adoption of ASC 606 also limits direct comparability with 2017.
- Revenue concentration is significant: the top five customers represented approximately 46% of 2019 revenue, and Broadcom and SK hynix each represented at least 10%.
- The business is exposed to semiconductor cyclicality, price erosion, intense competition and alternative technologies.
- Royalty revenue depends on renewals, new license agreements, customer product adoption and the accuracy of customer shipment reporting.
- The company faces intellectual property enforcement, patent validity, infringement, indemnification and potential litigation risks, although it reported no material pending legal proceedings at year-end.
- Rambus maintains a full valuation allowance against its U.S. federal deferred tax assets. The 2019 tax provision was $3.4 million despite the pretax loss, and the effective tax rate was negative 3.9%.
- Unrecognized tax benefits increased to $115.7 million, including amounts related to potential Korean withholding-tax refunds and ongoing tax examinations.
- The new San Jose headquarters lease carries approximately $41.0 million of future required payments, while total operating lease liabilities were $46.2 million at year-end.
- Rambus identified COVID-19, international trade restrictions, geopolitical conditions, cybersecurity incidents and supply-chain disruptions as potential risks in its forward-looking disclosures.
Most important facts for investors to verify
- Whether growth in Memory Interface Chips and Silicon IP can offset continued structural or timing-related declines in royalty revenue.
- The sustainability and concentration of revenue from Broadcom, SK hynix and other major customers.
- The amount and timing of cash required to repay or refinance the $172.5 million of convertible notes due in 2023.
- Whether the Northwest Logic and Verimatrix acquisitions generate the expected design wins, revenue growth and operating synergies.
- The effect of ASC 606 on recurring cash collections versus reported revenue and quarterly volatility.
- The realizability of deferred tax assets and the ultimate resolution of $115.7 million of unrecognized tax benefits.
- The operating impact of the restructuring program, headquarters relocation and related lease obligations.
- Future patent expirations, licensing renewals, litigation developments and changes in semiconductor industry demand.