Business Context and Reporting Period
Rambus Inc. filed its Form 10-K for the fiscal year ended December 31, 2015, including unaudited fourth-quarter information. The company develops and licenses semiconductor, memory-interface, cryptography, security, lighting, sensing and imaging technologies, and also sells products and provides engineering and other services. Revenue remains predominantly licensing-based, with royalties representing 88.6% of 2015 revenue.
Financial Performance and Position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $296.3 million | $296.6 million | (0.1%) |
| Operating income | $71.4 million | $75.3 million | (5.2%) |
| Operating margin | 24.1% | 25.4% | Down 1.3 points |
| Net income | $211.4 million | $26.2 million | Substantial increase |
| Diluted EPS | $1.80 | $0.22 | Substantial increase |
| Net cash from operations | $76.4 million | $76.5 million | Essentially flat |
| Cash, equivalents and marketable securities | $287.7 million | $300.1 million | Down $12.4 million |
| Convertible notes, carrying value | $120.9 million | $115.1 million | Up $5.8 million |
Patent royalties were $248.9 million, down $12.0 million, while technology-license royalties rose to $13.5 million from $10.6 million. Contract and other revenue increased 35.3% to $33.9 million, driven by security products and development projects, lighting projects and light-guide sales.
Income before taxes was $60.2 million, compared with $50.3 million in 2014. The reported $151.2 million income-tax benefit primarily reflected the release of a $174.5 million valuation allowance on U.S. federal and state deferred tax assets. The resulting 2015 net income and 71.2% net margin are therefore not representative of recurring operating profitability.
Fourth-quarter revenue was $76.8 million, operating income was $20.3 million and net income was $13.0 million. Third-quarter 2015 net income of $182.0 million included the deferred-tax valuation allowance reversal.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow was $76.4 million, supported principally by customer licensing receipts.
- Investing activities provided $1.1 million, including marketable-securities maturities and sales, partly offset by purchases of securities and $6.1 million of capital expenditures.
- Financing activities used $87.8 million, primarily reflecting the $100.0 million accelerated share repurchase program.
- Rambus had $143.8 million of cash and equivalents and $143.9 million of marketable securities at year-end. Management stated that liquidity and operating cash flow should cover cash needs for at least the next 12 months.
- The company had $138.0 million principal amount of 1.125% convertible senior notes due August 15, 2018. Contractual obligations totaled $180.8 million, including the notes, related interest, leases, software commitments and imputed financing obligations.
Material Changes Versus the Prior Comparable Period
- MID revenue declined $4.3 million to $222.0 million and segment operating income declined $11.3 million to $174.2 million, primarily from lower royalties from several customers.
- CRD revenue increased $1.2 million to $50.5 million, while segment operating income was approximately flat at $21.4 million.
- Other-segment revenue increased $2.9 million to $23.8 million, and its operating loss narrowed to $8.3 million from $13.2 million.
- Total engineering costs increased 2.9% to $156.4 million; sales, general and administrative costs decreased 5.6% to $70.6 million.
- The company recorded $3.6 million of restructuring charges under a plan involving an 8% workforce reduction, expected to be completed by the first quarter of 2016.
- Rambus repurchased and retired approximately 7.8 million shares under an accelerated share repurchase program for an initial $100.0 million payment. Approximately 12.2 million shares remained authorized for repurchase at year-end.
- In June 2015, Rambus extended its SK hynix license for six years through July 2024. The agreement provides for stated average quarterly cash payments of approximately $12.0 million, subject to specified payment terms and options.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear numerical revenue or earnings outlook. Management expects continued significant investment in engineering and expects sales, general and administrative costs to increase following the Smart Card Software acquisition. The company did not expect its R+ DDR4 buffer chipset to make a material revenue contribution through 2016.
On January 25, 2016, after the reporting date, Rambus acquired Smart Card Software Ltd. for approximately $93 million in cash to expand mobile-payment and smart-ticketing capabilities. The purchase-price allocation was not yet complete, so the filing does not provide clear values for the acquired assets and liabilities.
- Revenue is highly concentrated: the top five customers represented approximately 65% of 2015 revenue; Micron, Samsung and SK hynix each represented at least 10%.
- Royalty revenue declined 3.4% in 2015 and depends on customer shipment volumes, pricing, renewals and license terms.
- The business is exposed to semiconductor cyclicality, competition, technology adoption risk, customer consolidation and lengthy licensing cycles.
- International customers represented approximately 60% of revenue. Rambus invoices in U.S. dollars and does not hedge indirect foreign-exchange exposure.
- Patent validity, enforcement, potential intellectual-property claims, security breaches, product defects and indemnification obligations could materially affect results.
- Goodwill was not impaired in 2015, but impairment testing depends on uncertain revenue growth, margin, discount-rate and terminal-growth assumptions.
- Unrecognized tax benefits totaled $20.8 million, and tax examinations were ongoing in California and India.
Important Facts for Investors to Verify
- Whether the $174.5 million deferred-tax valuation allowance release is nonrecurring and how much deferred-tax benefit remains available.
- The sustainability and timing of royalty receipts from Samsung, SK hynix and Micron, including the terms of the extended SK hynix agreement.
- The effect of the Smart Card Software acquisition on 2016 revenue, expenses, goodwill and intangible assets.
- The ultimate number of shares and effective price under the unsettled accelerated share repurchase program, expected to conclude by June 2016.
- Cash requirements and refinancing or settlement plans for the $138.0 million convertible notes due in 2018.
- Progress toward commercial availability and customer adoption of the R+ DDR4 buffer chipset and other newer product offerings.