Rambus Inc. Form 10-K Summary
Business context and reporting period
Rambus develops and licenses semiconductor, memory-interface, SerDes, security, mobile-payment and smart-ticketing technologies, and sells related products and services. The filing covers the fiscal year ended December 31, 2017; fourth-quarter 2017 results are included in the annual and supplementary quarterly data.
Reportable segments were Memory and Interfaces (MID) and Security (RSD). Emerging Solutions and Lighting were reported under Other. Patent and technology licensing remained central to the business, although product and contract revenue continued to expand.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $393.1 million | $336.6 million | +16.8% |
| Royalty revenue | $289.6 million | $264.6 million | +9.4% |
| Product revenue | $36.5 million | $26.1 million | +40.1% |
| Contract and other revenue | $67.0 million | $45.9 million | +45.9% |
| Operating income | $54.4 million | $33.6 million | +61.7% |
| Operating margin | 13.8% | 10.0% | +3.8 points |
| Net income (loss) | $(22.9) million | $6.8 million | Declined |
| Diluted EPS | $(0.21) | $0.06 | Declined |
| Net cash from operations | $117.4 million | $95.6 million | +22.8% |
Royalty revenue represented approximately 73.7% of 2017 revenue, compared with 78.6% in 2016. Research and development expense increased to $149.1 million from $129.8 million, while sales, general and administrative expense increased to $110.9 million from $95.1 million. Total operating costs and expenses were $338.7 million, or 86.2% of revenue.
The reported net loss was driven primarily by a $63.9 million income-tax provision, including a $21.5 million deferred tax asset valuation allowance and a $20.7 million provisional deferred-tax remeasurement charge related to U.S. tax reform. The filing reports no material impairment charge in 2017.
At December 31, 2017, cash, cash equivalents and marketable securities totaled $329.4 million, compared with $172.2 million at year-end 2016. Cash and cash equivalents were $225.8 million and marketable securities were $103.5 million. Management stated that available liquidity and operating cash flow were expected to meet cash needs for at least the next 12 months, including repayment of the 2018 convertible notes.
Fourth-quarter 2017 results
| Metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Revenue | $101.9 million | $97.6 million |
| Operating income | $15.7 million | $0.5 million |
| Net income (loss) | $(36.2) million | $(3.4) million |
| Diluted EPS | $(0.33) | $(0.03) |
Fourth-quarter 2017 net loss included the $21.5 million deferred tax asset valuation allowance and $20.7 million deferred-tax remeasurement charge. Fourth-quarter 2016 included an $18.3 million impairment of in-process research and development and a $6.8 million reduction in contingent consideration liability.
Material changes versus the prior comparable period
- MID revenue increased to $280.7 million from $239.8 million, and MID operating income increased to $194.7 million from $171.4 million.
- RSD revenue increased to $96.7 million from $76.2 million, and RSD operating income increased to $46.7 million from $24.3 million.
- Other revenue declined to $15.7 million from $20.6 million, while its operating loss widened to $18.1 million from $9.8 million, primarily reflecting weaker lighting-related activity.
- Engineering costs increased 16.5% to $204.5 million, reflecting acquisitions, higher headcount, software design tools, amortization and engineering services.
- Rambus issued $172.5 million of 1.375% convertible senior notes due 2023 and repurchased $56.8 million principal amount of its 2018 notes. Total convertible-note principal was $253.7 million at year-end.
- The company completed a $50.0 million accelerated share repurchase, retiring approximately 4.0 million shares in 2017. Approximately 7.4 million shares remained authorized for repurchase.
- The company adopted ASU 2016-09, producing a $38.2 million cumulative increase to deferred tax assets and reduction to accumulated deficit.
Guidance, outlook, commentary and risks
Management expects product revenue to increase in 2018 and expects continued investment in engineering, semiconductor, security, mobile-payment and other technologies. Sales, general and administrative costs were expected to remain relatively flat in the near term.
Revenue recognition was expected to change materially on adoption of ASC 606 on January 1, 2018 using the full retrospective method. Fixed-fee and minimum-guarantee IP licensing revenue was expected to be recognized earlier, while interest income would be recognized over time. Management cautioned that the new standard could materially increase quarterly revenue and earnings volatility and change the form of future guidance.
On January 30, 2018, Rambus announced plans to close its Lighting division and Brecksville, Ohio manufacturing operations. The company expected approximately $2 million to $5 million of restructuring and facility-related charges and an approximately $5 million gain related to the imputed financing obligation, primarily in the first quarter of 2018.
- Revenue is concentrated: the top five customers represented approximately 55% of 2017 revenue, and Micron, Samsung and SK hynix each represented at least 10% of revenue.
- Licensing revenue depends on customer shipments, renewals, negotiations, pricing and the semiconductor industry cycle.
- The company faces competition, rapid technology changes, patent challenges, potential litigation and the risk that customers adopt alternative technologies.
- Convertible debt creates refinancing and cash-repayment obligations, including $81.2 million principal due in August 2018 and $172.5 million due in February 2023.
- Goodwill and intangible-asset valuations depend on forecast revenue, margins, discount rates and successful commercialization of acquired technologies.
- International revenue was approximately 58% of total revenue in 2017, and the company does not hedge foreign-exchange exposure.
- The filing states that Rambus was not party to any material pending legal proceeding at year-end, although ordinary-course claims and intellectual-property disputes remain potential risks.
Most important facts to verify
- Reconcile 2017 operating improvement with the reported net loss and unusually high 155.8% effective tax rate.
- Assess the cash requirements and financing plan for the $81.2 million 2018 note maturity and the remaining contractual obligations.
- Evaluate the effect of ASC 606 retrospective restatement on historical revenue, deferred revenue, retained earnings and quarterly volatility.
- Monitor customer concentration, especially Samsung, SK hynix and Micron, and the renewal or modification of major license agreements.
- Confirm the timing and final cost or gain from the Lighting division closure and Brecksville exit.
- Review goodwill, acquired intangible assets and future amortization, particularly in light of commercialization and licensing assumptions.
- Verify the realization of deferred tax assets, the $50.9 million valuation allowance, uncertain tax benefits and the unresolved effects of U.S. tax reform.