Rambus Inc. — Form 10-Q Summary
Business Context and Reporting Period
Rambus is a technology solutions company focused primarily on licensing semiconductor, memory-interface, security, lighting, display and related intellectual property, with additional technology development and product initiatives. The filing covers the quarter and six months ended June 30, 2013; financial statements are unaudited.
Reportable segments were Memory and Interfaces Division (MID) and CTO; remaining activities, including CRI and LDT, were reported as All Other. Revenue remains primarily royalty-based, with significant customer and international concentration.
Financial Performance and Position
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Total revenue | $57.9 million | $56.2 million | $124.8 million | $119.1 million |
| Royalty revenue | $57.0 million | $55.7 million | $123.2 million | $117.8 million |
| Operating income (loss) | $5.7 million | $(21.7) million | $7.2 million | $(39.3) million |
| Net loss | $(7.8) million | $(32.2) million | $(18.2) million | $(60.1) million |
| Basic and diluted loss per share | $(0.07) | $(0.29) | $(0.16) | $(0.54) |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $5.2 million | $(30.6) million |
Revenue grew 3.0% year over year in the quarter and 4.8% for the first six months. Operating margins were 9.9% in Q2 and 5.8% for the first half, compared with operating losses of 38.7% and 33.0%, respectively, in the prior-year periods. Net margins were negative 13.5% in Q2 and negative 14.6% for the first half, compared with negative 57.3% and negative 50.5%.
At June 30, 2013, cash and cash equivalents were $155.3 million and marketable securities were $50.4 million, for total cash, cash equivalents and marketable securities of $205.6 million. Total assets were $562.8 million and stockholders’ equity was $314.5 million.
The $172.5 million principal amount of 5% convertible senior notes is due June 15, 2014 and was classified as current. Carrying value was $155.5 million and fair value was $177.8 million. The company stated that existing liquidity and operating cash flow should meet cash needs for at least the next 12 months and that it was evaluating repayment and financing alternatives.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, driven by higher patent royalties, including royalties from STMicroelectronics and a first-quarter one-time royalty associated with LSI; solutions-license royalties declined because of lower DDR2 and XDR-related shipments.
- Research and development expense declined 19.7% in Q2 and 17.1% for the first six months, primarily from lower retention-bonus accruals, headcount costs, patent-related legal costs and stock-based compensation.
- Marketing, general and administrative expense declined 56.1% in Q2 and 41.5% for the first six months, reflecting lower litigation expense, restructuring-related cost reductions, lower headcount and consulting costs, and an $8.5 million reversal of accrued SK Hynix litigation costs.
- The company recorded $2.2 million of restructuring charges in the first half of 2013 and expects to substantially complete the restructuring by year-end 2013.
- Operating cash flow improved to $5.2 million from a use of $30.6 million in the prior-year period. Investing cash flow was $(1.8) million, while financing cash flow was $2.9 million.
- A $1.4 million impairment charge was recorded on a non-marketable equity investment. The filing states that this adjustment increased Q2 and year-to-date net loss by $1.4 million and reduced earnings per share by $0.01 versus the July 18, 2013 preliminary release.
Guidance, Outlook, Commentary and Risks
Management expects royalty revenue to remain variable based on license renewals, new customer agreements, shipment volumes, sales prices and product mix. Engineering investment is expected to increase in the near term, while non-litigation marketing and administrative costs are expected to remain lower following restructuring. No specific revenue or earnings guidance is provided in the filing.
On June 11, 2013, Rambus settled all outstanding disputes with SK Hynix and entered into a semiconductor patent license agreement. SK Hynix is required to pay fixed cash amounts of $12 million per quarter for five years, beginning in the quarter ending September 30, 2013, subject to specified adjustments. Revenue recognition for the multiple-element arrangement was expected to begin when the first payment became due, subject to valuation and other recognition criteria.
Rambus also signed a license agreement and settled disputes with STMicroelectronics during the quarter. Significant litigation and patent-related proceedings remained pending, including matters involving Micron and other parties. The company states that adverse litigation outcomes could materially affect revenue, cash balances and cash flows.
- Customer concentration is high: the top five customers represented approximately 68% of Q2 revenue and 66% of first-half revenue. One customer represented 39% and 36%, respectively.
- International customers represented approximately 74% of Q2 revenue and 67% of first-half revenue; the company does not hedge indirect foreign-exchange exposure.
- Several material license agreements are scheduled to expire in 2015, creating renewal risk.
- The semiconductor industry is cyclical and competitive, and customer bankruptcies, consolidation, pricing pressure or lower product shipments could reduce royalties.
- The company has a full valuation allowance against U.S. deferred tax assets and recorded income-tax provisions despite pretax losses. Unrecognized tax benefits were approximately $16.7 million, and an IRS examination of 2010–2011 tax years began in the first quarter of 2013.
- Goodwill totaled $125.0 million and net intangible assets totaled $139.4 million. Lower-than-expected performance or unsuccessful licensing and commercialization efforts could result in impairment charges.
- Contractual obligations totaled $251.4 million, including $172.5 million of convertible notes, $19.5 million of acquisition retention bonuses and $43.3 million of imputed financing obligations. Potential uncertain-tax-benefit payments of approximately $16.7 million were excluded.
Key Facts for Investors to Verify
- Timing, accounting allocation and collectability of the SK Hynix settlement and the $12 million quarterly payments.
- How Rambus will fund or refinance the $172.5 million convertible notes due June 2014.
- Renewal status and economic terms of material license agreements expiring in 2015.
- Customer concentration, royalty reporting and exposure to semiconductor shipment volatility.
- Status and potential financial impact of remaining Micron, patent, regulatory and other litigation.
- Whether restructuring savings and reduced litigation expense are sustainable, given management’s expectation of higher engineering investment.
- Potential additional impairment of the non-marketable investment, goodwill or intangible assets.
- Realizability of deferred tax assets and developments in the IRS examination and uncertain tax positions.