Rambus Inc. 2016 Form 10-K Summary
Business context and reporting period
Rambus designs and licenses semiconductor, memory-interface, SerDes, security, mobile-payment and smart-ticketing technologies, and also sells chips, software and services. The filing covers the fiscal year ended December 31, 2016, with comparisons to 2015 and 2014. Rambus continued transitioning from a predominantly patent-licensing model toward products, customizable IP cores, software and services.
Reportable segments were Memory and Interfaces (MID) and Rambus Security (RSD); Emerging Solutions and Lighting were reported within Other. Rambus acquired Smart Card Software Ltd. for approximately $104.7 million, Inphi’s Memory Interconnect Business for $90.0 million, and Semtech’s Snowbush IP assets for $32.0 million during 2016.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $336.6 million | $296.3 million | 13.6% increase |
| Royalties | $264.6 million | $262.4 million | 0.8% increase |
| Contract and other revenue | $72.0 million | $33.9 million | 112.6% increase |
| Operating income | $33.6 million | $71.4 million | Decrease |
| Net income | $6.8 million | $211.4 million | Decrease |
| Diluted EPS | $0.06 | $1.80 | Decrease |
| Operating cash flow | $92.5 million | $76.4 million | Increase |
Revenue increased primarily from acquired memory products, security technology development projects and SCS-related activities. Patent royalties were $244.4 million, including $21.2 million of past royalty revenue from SK hynix and Micron settlements. Total royalties represented 78.6% of revenue, while patent-license royalties alone represented approximately 73% of consolidated revenue.
Operating costs and expenses increased to $303.0 million from $224.9 million. Research and development expense rose to $129.8 million from $111.1 million, and sales, general and administrative expense rose to $95.1 million from $70.6 million, primarily because of acquisitions, additional personnel, amortization and acquisition-related costs. Operating margin declined to approximately 10.0% from 24.1%.
The 2016 effective tax rate was 69.9%, compared with a tax benefit rate of 251.0% in 2015. The 2015 result included a $174.5 million benefit from releasing the valuation allowance on U.S. deferred tax assets. The 2016 result included an $18.3 million impairment of acquired in-process research and development, partially offset by a $6.8 million reduction in contingent consideration liability.
Cash, cash equivalents and marketable securities totaled $172.2 million at year-end, down from $287.7 million. Cash used in investing activities was $105.2 million, primarily reflecting the acquisitions. Cash provided by financing activities was $5.8 million. Current assets were $216.8 million versus current liabilities of $51.3 million.
Rambus had $138.0 million principal amount of 1.125% convertible senior notes due August 15, 2018, carried at $126.2 million after unamortized discount and issuance costs. Contractual obligations totaled $198.4 million, including the convertible notes and related interest. Management stated that existing liquidity and operating cash flow were expected to meet cash needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue rose 13.6%, but operating income fell 52.9% and net income fell sharply because of acquisition-driven costs, higher amortization, increased investment and the 2015 tax benefit that did not recur.
- Contract and other revenue more than doubled, reflecting memory-product sales and acquired security and technology-development activities.
- MID revenue increased to $239.8 million from $222.0 million, while segment operating income declined to $171.4 million from $174.2 million.
- RSD revenue increased to $76.2 million from $50.5 million, and segment operating income increased to $24.3 million from $21.4 million.
- Other revenue declined to $20.6 million from $23.8 million, and its operating loss widened to $9.8 million from $8.3 million.
- Cash balances declined by $115.5 million, principally due to approximately $202.5 million of acquisition spending net of acquired cash and increased working-capital needs.
- Rambus completed the accelerated share repurchase program, retiring approximately 0.7 million additional shares in 2016. Approximately 11.5 million shares remained authorized for repurchase at year-end.
- Fourth-quarter 2016 revenue was $97.6 million, operating income was $0.5 million and net loss was $3.4 million, reflecting the $18.3 million impairment charge and $6.8 million contingent-consideration benefit.
Guidance, outlook, commentary and risks
The filing does not provide a specific annual 2017 revenue or earnings forecast. Management expected engineering and sales, general and administrative costs to remain higher in the near term as Rambus invested in semiconductor, security, mobile-payment, smart-ticketing and other technologies, including integration of the acquisitions.
Management identified opportunities in memory and SerDes technology, security solutions, mobile payments, smart ticketing and LED lighting. The company also expects revenue to remain variable because licensing negotiations are lengthy, royalty payments depend partly on customer shipment volumes and product mix, and semiconductor markets are cyclical.
- Revenue concentration remains significant: the top five customers represented approximately 63% of 2016 revenue; Micron, Samsung and SK hynix each represented at least 10%.
- Approximately 64% of revenue came from customers headquartered outside the United States. Rambus does not hedge its indirect foreign-exchange exposure.
- Future royalties depend on renewing and expanding licenses, customer product adoption, customer reporting accuracy and the enforceability of Rambus patents.
- Goodwill and acquired intangible assets are material. Rambus recorded the Snowbush-related impairment because of delayed market timing, and further impairment could result if projected revenue or margins are not achieved.
- The convertible notes require $138.0 million principal repayment at maturity unless converted, repurchased or otherwise settled under their terms.
- Rambus faces semiconductor-cycle risk, pricing pressure, alternative technologies, customer consolidation, acquisition-integration risk, cybersecurity and product-defect risk, third-party manufacturing dependence, regulatory and tax uncertainty, and intellectual-property litigation risk.
- No material pending legal proceeding was reported at year-end, although ordinary-course claims and future intellectual-property litigation could materially affect results.
- Management and the external auditor concluded that disclosure controls and internal control over financial reporting were effective; SCS and the Memory Interconnect Business were excluded from the 2016 internal-control assessment because they were acquired during the year.
Most important facts for investors to verify
- Whether acquired memory, SerDes, security, mobile-payment and smart-ticketing businesses generate sustainable revenue and operating income after integration.
- The timing, terms and renewal prospects of major licenses, particularly those involving Samsung, SK hynix and Micron.
- Rambus’s ability to fund or refinance the $138.0 million convertible notes due in August 2018 while continuing acquisitions, investment and share repurchases.
- The sensitivity of goodwill and acquired intangible assets to slower product adoption, delayed commercialization or lower operating margins.
- Whether contract and other revenue growth can offset the highly concentrated and variable nature of royalty revenue.
- The recoverability of the $156.7 million net deferred tax asset and the outcome of approximately $21.9 million of unrecognized tax benefits.
- The effect of the expected adoption of the new revenue-recognition standard in 2018, which management expected to have a material impact on the financial statements.