Rambus Inc. 2018 Form 10-K Summary
Business context and reporting period
Rambus designs and licenses semiconductor technologies, intellectual property, security solutions, software and services. Its principal operating units are Memory and Interfaces, Security, and Emerging Solutions. The filing covers the fiscal year ended December 31, 2018; quarterly information includes the quarter ended December 31, 2018.
- Primary markets include data centers, memory and SerDes interfaces, embedded security, IoT, automotive, mobile payments and smart ticketing.
- Royalties remained the largest revenue source, but product and contract revenue represented a larger proportion of total revenue than in prior years.
- The company closed its lighting division and Brecksville, Ohio manufacturing operations during 2018.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $231.2 million | $393.1 million | Down 41.2% |
| Royalty revenue | $130.5 million | $289.6 million | Down 55.0% |
| Product revenue | $38.7 million | $36.5 million | Up 6.0% |
| Contract and other revenue | $62.1 million | $67.0 million | Down 7.4% |
| Operating costs and expenses | $318.2 million | $338.7 million | Down 6.1% |
| Operating income (loss) | $(87.0) million | $54.4 million | Declined |
| Net income (loss) | $(158.0) million | $(22.9) million | Loss increased |
| Diluted loss per share | $(1.46) | $(0.21) | Declined |
| Net cash provided by operating activities | $87.1 million | $117.4 million | Down 25.8% |
2018 revenue was materially affected by adoption of ASC 606 using the modified retrospective method. Prior-period results were not restated and are therefore not directly comparable. Under ASC 605, management estimated 2018 revenue would have been approximately $401.1 million and net loss approximately $15.3 million, subject to the filing’s accounting presentation.
- 2018 revenue mix: royalties 56.4%, product revenue 16.7%, and contract and other revenue 26.9%.
- Research and development expense was $158.3 million, up from $149.1 million.
- Cash, cash equivalents and marketable securities totaled $277.8 million at year-end, compared with $329.4 million at December 31, 2017.
- Total assets were $1.36 billion and stockholders’ equity was $1.01 billion at year-end.
- Accounts receivable and unbilled receivables increased significantly, with unbilled receivables of $673.6 million at year-end, primarily reflecting ASC 606 contract assets.
Fourth-quarter 2018 results
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Total revenue | $68.6 million | $101.9 million |
| Operating income (loss) | $(4.2) million | $15.7 million |
| Net income (loss) | $(2.0) million | $(36.2) million |
| Diluted earnings (loss) per share | $(0.02) | $(0.33) |
Quarterly 2018 results reflect ASC 606 and should not be compared with 2017 without adjusting for the change in revenue recognition.
Material changes versus the prior comparable period
- Royalty revenue declined $159.1 million, primarily because ASC 606 changed the timing of recognition for fixed-fee and certain variable royalty arrangements; management stated that the accounting change did not affect billings or cash flows from those arrangements.
- Product revenue increased modestly, driven by higher memory product sales, while lighting product revenue declined following the division closure.
- Memory and Interfaces revenue declined to $168.5 million from $280.7 million, and Security revenue declined to $60.2 million from $96.7 million, primarily due to ASC 606.
- Research and development increased 6.2%, while total engineering costs declined 5.3% because of lower amortization, prototyping and depreciation costs.
- The company recorded $2.2 million of restructuring charges and terminated approximately 50 employees in connection with the lighting shutdown.
- Rambus repaid the remaining $81.2 million principal amount of its 2018 convertible notes and delivered 423,873 shares related to the in-the-money conversion feature.
- The company repurchased approximately 3.8 million shares for $50.0 million under an accelerated share repurchase program, leaving authorization for approximately 3.6 million additional shares.
Debt, liquidity and capital allocation
- The remaining convertible debt consisted of $172.5 million principal amount of 1.375% convertible senior notes due February 1, 2023, with a carrying value of $141.9 million after discounts and issuance costs.
- The 2023 Notes have an initial conversion price of approximately $18.93 per share. Related note hedges cover approximately 9.1 million shares, while warrants covering approximately 9.1 million shares have an initial strike price of approximately $23.30 per share.
- 2018 cash flow included $127.7 million of cash used in financing activities, primarily debt repayment, share repurchases and related taxes.
- Management expects existing cash, marketable securities and operating cash flow to meet cash needs for at least the next 12 months.
- Contractual obligations totaled $223.8 million, including $172.5 million of convertible notes and $10.7 million of related interest payments. Possible uncertain tax benefit payments of approximately $23.5 million were excluded from that table.
- Rambus has never declared or paid cash dividends.
Guidance, outlook, risks and unusual items
- Management expects product revenue, particularly memory products, to increase in 2019, but expects higher product costs and continued investment in engineering, infrastructure and technology.
- Sales, general and administrative costs were expected to remain relatively flat in the near term.
- Revenue and quarterly trends are expected to remain volatile because of lengthy licensing cycles, customer shipment volumes, contract timing and ASC 606 estimates and true-ups.
- The company recorded an $87.3 million income tax provision in 2018, largely due to establishing a full valuation allowance against U.S. federal and California deferred tax assets. The valuation allowance increased by $113.7 million during the year.
- Major risks include dependence on licensing revenue, customer concentration, semiconductor cyclicality, competition and alternative technologies, patent expiration and enforceability, litigation, international operations, cybersecurity, third-party manufacturing and the ability to commercialize newer security and product offerings.
- The five largest customers accounted for approximately 49% of 2018 revenue. Broadcom and NVIDIA each represented at least 10% of total revenue.
- Approximately 44% of revenue came from customers headquartered outside the United States. Rambus does not hedge its indirect foreign-exchange exposure.
- Goodwill totaled $207.2 million. No goodwill impairment was recorded, but the fair-value cushion declined to approximately 17% for Memory and Interfaces and 72% for Security, compared with substantially higher cushions in 2017.
- The company reported no material pending legal proceedings and concluded that its disclosure controls and internal control over financial reporting were effective as of December 31, 2018.
Most important facts for investors to verify
- Separate the economic performance of the licensing business from the reported revenue timing effects of ASC 606, including the substantial contract-asset balance and future cash collection profile.
- Review the sustainability and renewal terms of major customer licenses, particularly given the 49% top-five customer concentration.
- Assess whether memory product growth and security adoption can offset lower or more volatile royalty revenue.
- Monitor the $172.5 million 2023 convertible-note maturity, conversion exposure and potential warrant dilution.
- Evaluate the realizability of deferred tax assets and the potential effect of tax audits and approximately $23.5 million of unrecognized tax benefits.
- Test the sensitivity of goodwill and intangible asset valuations to lower revenue growth, margins or customer adoption.
- Confirm the remaining share-repurchase authorization and its effect on liquidity, share count and capital allocation.