Rambus Inc. — Form 10-Q Summary
Business Context and Reporting Period
Rambus is an intellectual-property and technology licensing company focused primarily on semiconductor technologies, with expanding activities in lighting, displays, security, digital media and non-volatile memory. The filing covers the quarter and six months ended June 30, 2012. The company appointed Ronald D. Black as president and chief executive officer on June 20, 2012; Harold Hughes retired from that role but remained on the board.
Financial Highlights
| Metric | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 |
|---|---|---|---|---|
| Total revenue | $56.2 million | $66.2 million | $119.1 million | $128.7 million |
| Royalty revenue | $55.7 million | $61.0 million | $117.8 million | $120.2 million |
| Contract revenue | $0.5 million | $5.2 million | $1.3 million | $8.5 million |
| Operating income (loss) | $(21.7) million | $(2.5) million | $(39.3) million | $5.9 million |
| Net income (loss) | $(32.2) million | $(10.6) million | $(60.1) million | $(14.8) million |
| Diluted loss per share | $(0.29) | $(0.10) | $(0.54) | $(0.14) |
| Cash flow from operations | Not separately provided | Not separately provided | $(30.6) million | $15.4 million |
Royalties represented 99.1% of quarterly revenue and 98.9% of six-month revenue. The reported operating margin was negative 38.7% for the quarter and negative 33.0% for the six-month period. Net margins were negative 57.3% and negative 50.5%, respectively.
Research and development expense increased to $38.3 million in the quarter and $76.7 million for the six months, compared with $24.2 million and $47.5 million in the prior-year periods. Marketing, general and administrative expense decreased to $32.2 million for the quarter and $67.0 million for the six months, primarily because of lower litigation costs. Interest expense was $6.7 million for the quarter and $13.3 million for the six months.
At June 30, 2012, cash and cash equivalents were $152.6 million, marketable securities were $50.7 million, and total cash, cash equivalents and marketable securities were $203.2 million, compared with $289.5 million at December 31, 2011. Total liabilities were $257.1 million and stockholders’ equity was $383.5 million.
The company had $172.5 million principal amount of 5% convertible senior notes due 2014, recorded at a carrying value of $140.2 million. It also reported a $45.8 million long-term imputed financing obligation. Total contractual obligations were $301.7 million, including $172.5 million of convertible notes, $40.7 million of acquisition retention bonuses and $57.7 million of imputed financing obligations.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 15.1%, while six-month revenue declined 7.5%. Royalty revenue declined 8.6% for the quarter and 2.0% for the six-month period.
- Contract revenue declined sharply because the company had no comparable new technology development contracts in 2012.
- Operating results deteriorated materially as increased engineering costs, amortization, acquisition-related retention bonuses and other expenses more than offset lower litigation costs.
- The company recorded a six-month operating loss of $39.3 million versus operating income of $5.9 million in 2011. The prior-year period included a $6.2 million gain from settlement; no comparable gain was recorded in 2012.
- Cash flow from operations shifted from $15.4 million provided in the first six months of 2011 to $30.6 million used in the first six months of 2012.
- Cash and marketable securities declined by approximately $86.2 million from year-end, partly reflecting operating cash use, acquisitions and capital expenditures.
- Engineering costs increased 50.9% in the quarter and 60.8% for the six months. Management attributed the increase primarily to additional employees, higher amortization, acquisition-related retention bonuses and consulting costs.
- Rambus acquired Unity Semiconductor for $35.0 million and completed other business and technology acquisitions totaling $13.2 million during the first six months. The acquired businesses generated no reported revenue during the periods.
- The company completed a stock-option exchange in June 2012. Employees surrendered options covering approximately 6.4 million shares and received replacement options covering approximately 2.8 million shares. Remaining compensation cost related to the replacement options was approximately $20.9 million.
Guidance, Outlook, Commentary and Risks
Management stated that existing cash, cash equivalents, marketable securities and expected operating cash flows should be adequate to meet cash needs for at least the next 12 months. No specific revenue or earnings guidance was provided in the filing.
Management expects engineering costs to remain elevated as Rambus invests in semiconductor, lighting, security and other technologies. Royalty revenue is expected to fluctuate with license renewals, new license agreements, licensee shipment volumes, pricing and product mix. The company noted a beginning uptick in the DRAM industry that it expected could positively affect revenue in the second half of 2012.
- Revenue is highly concentrated: the top five licensees represented approximately 71% of quarterly revenue and 72% of six-month revenue. Samsung, NVIDIA and other major licensees accounted for significant portions of revenue.
- Elpida, a significant licensee, entered bankruptcy proceedings in Japan in February 2012. Micron announced an agreement to acquire and support Elpida, subject to conditions and approvals. The filing states that the effect on Elpida’s license and future renewals could not be predicted.
- Several material license agreements are scheduled to expire in 2015, and renewal terms and royalty rates are uncertain.
- Rambus remains involved in extensive patent, antitrust, securities and other litigation. The company stated that adverse judgments, settlements or delays could materially affect revenue, cash balances, cash flows and licensing activity.
- In the San Francisco antitrust case, a jury verdict favored Micron and Hynix. Rambus appealed, and the company accrued $0.9 million for potential recoverable costs as of June 30, 2012.
- The ITC issued a July 2012 determination terminating an investigation with a finding of no violation, including findings that certain asserted patents were invalid or unenforceable. The filing states that Rambus’s appeal deadline had not yet arrived.
- The company maintains a full valuation allowance against U.S. deferred tax assets. It recorded a $7.7 million tax provision for the first six months despite its pretax loss, primarily because of withholding and foreign taxes.
- Unrecognized tax benefits were approximately $16.0 million, although the timing and outcome of potential settlements could not be reasonably estimated.
- Market, technology and execution risks include semiconductor cyclicality, competing memory technologies, dependence on licensee pricing and product adoption, international operations, acquisition integration, patent validity and enforcement, and the need to retain qualified personnel.
Important Facts for Investors to Verify
- Reconcile the sharp increase in research and development and acquisition-related costs with management’s expected timing for revenue generation from new technologies and acquisitions.
- Assess the sustainability of royalty revenue, particularly the concentration in Samsung, NVIDIA and other major licensees and the effect of license expirations and renewals.
- Monitor Elpida’s bankruptcy and Micron’s proposed acquisition for potential effects on collections, royalties and future licensing terms.
- Review the maturity, conversion terms and potential dilution or cash requirements associated with the $172.5 million of convertible notes due 2014.
- Track litigation, ITC and patent proceedings, including possible costs, adverse findings, licensing restrictions or changes to accrued liabilities.
- Evaluate liquidity in light of negative operating cash flow, $203.2 million of cash and securities, $301.7 million of contractual obligations and planned continued investment.
- Verify the recoverability of goodwill and intangible assets, which totaled $138.7 million and $186.2 million, respectively, at June 30, 2012.
- Confirm the implications of the new CEO appointment, stock-option exchange and continuing stock-based compensation expense.