Rambus Inc. Form 10-K Summary
Business context and reporting period
Rambus is an intellectual-property and technology licensing company focused primarily on semiconductor interfaces, memory technologies, lighting and displays, and security technologies. The filing covers the fiscal year ended December 31, 2011, with unaudited quarterly data for the fourth quarter ended December 31, 2011.
- Two business groups: Semiconductor Business Group and New Business Group; only the Semiconductor Business Group was reportable.
- At year-end, Rambus held 1,386 issued U.S. and foreign patents and had 1,059 pending patent applications.
- The company had 456 employees, including approximately 280 engineering employees.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Total revenue | $312.4 million | $323.4 million | Down 3.4% |
| Royalty revenue | $299.0 million | $320.2 million | Down 6.6% |
| Contract revenue | $13.4 million | $3.2 million | Up 313.0% |
| Operating income (loss) | $(1.5) million | $226.9 million | Material decline |
| Net income (loss) | $(43.1) million | $150.9 million | Returned to a loss |
| Diluted EPS | $(0.39) | $1.30 | Declined |
| Net cash from operations | $53.0 million | $235.2 million | Down $182.2 million |
- FY 2011 operating margin was approximately (0.5)%; net margin was approximately (13.8)%. Cost of revenue represented 7.7% of revenue, implying an approximate 92.3% gross margin before other operating expenses.
- Fourth-quarter 2011 revenue was $83.4 million, versus $90.9 million in fourth-quarter 2010. Fourth-quarter operating loss was $18.1 million and net loss was $28.7 million, compared with fourth-quarter 2010 net income of $33.1 million.
- Research and development expense increased to $115.7 million from $92.7 million, including $15.7 million of CRI employee retention bonuses.
- Marketing, general and administrative expense increased to $164.1 million from $119.5 million, primarily due to a $38.3 million increase in litigation expense.
- Cash, cash equivalents and marketable securities totaled $289.5 million at December 31, 2011, down from $512.0 million at December 31, 2010.
- Total assets were $693.7 million and stockholders' equity was $429.8 million at year-end.
- The company had $172.5 million of principal amount of 5% convertible senior notes due June 2014, carried at $133.5 million net of discount.
- Management stated that existing liquidity and operating cash flows were adequate to fund operations, capital expenditures and commitments for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue declined modestly because FY 2010 included substantial one-time Samsung settlement-related royalty recognition. Excluding non-recurring patent royalties, recurring patent royalties increased approximately $70.9 million in 2011.
- Contract revenue rose by $10.2 million due to new technology development contracts.
- Operating results deteriorated sharply as increased engineering, litigation, acquisition and legal expenses more than offset revenue. FY 2010 also benefited from a $126.8 million gain from settlement; FY 2011 recognized an additional $6.2 million, completing recognition of the $133.0 million Samsung-related settlement gain.
- Rambus acquired Cryptography Research, Inc. on June 3, 2011 for approximately $257.2 million, comprising $168.8 million of cash and approximately $88.4 million of stock. The acquisition added $96.99 million of goodwill and $159.2 million of identifiable intangible assets.
- CRI contributed approximately $17.4 million of revenue and $20.2 million of operating losses from acquisition through year-end.
- Rambus paid Samsung $100.0 million in August 2011 to repurchase and retire approximately 4.8 million shares under Samsung's put right. No shares were repurchased under the regular share repurchase program during 2011.
- Cash from operations fell substantially, largely because 2010 benefited from significant Samsung and Elpida licensing receipts.
Guidance, outlook, risks and unusual items
- Management expected engineering costs to remain higher than 2011 as it continued investing in semiconductor, lighting, security and other technologies. Litigation expense was expected to remain significant, volatile and difficult to predict.
- Revenue is highly concentrated: the top five licensees represented approximately 66% of FY 2011 revenue. Elpida, NVIDIA and Samsung each represented at least 10% of revenue.
- International customers represented approximately 67% of FY 2011 revenue. The company does not hedge the indirect foreign-exchange exposure affecting licensee sales and royalties.
- Material license agreements are scheduled to expire in 2015, and renewal terms and royalty rates may be less favorable or may not be secured.
- Rambus continues to face extensive patent, antitrust and other litigation. A November 2011 jury verdict in the San Francisco antitrust case favored Hynix and Micron; judgment was entered in February 2012, and Rambus stated that it intended to appeal. The company accrued $8.3 million for costs taxed against it in the remanded Hynix matter.
- At December 31, 2011, the company had $316.4 million of contractual obligations, including $172.5 million of convertible notes, $50.0 million of CRI retention bonuses and $60.4 million of imputed financing obligations. Approximately $201.9 million was scheduled for 2014, primarily the notes.
- Unrecognized tax benefits totaled $16.6 million, and the company maintained a $141.0 million valuation allowance against gross deferred tax assets.
- No goodwill impairment was recorded in 2011, but management identified sensitivity to revenue, margin, discount-rate and cash-flow assumptions, particularly for the CRI and lighting businesses.
- Subsequent to year-end, Rambus acquired Unity Semiconductor for approximately $35.0 million in cash and incurred a separate $5.0 million retention-bonus commitment.
Most important facts for an investor to verify
- Expected recurring royalty revenue after the expiration or renewal of major license agreements, particularly those scheduled for 2015.
- Customer concentration and the financial condition, shipment volumes and payment obligations of Samsung, Elpida, NVIDIA and other major licensees.
- Cash requirements through the June 2014 maturity of the $172.5 million convertible notes and the CRI retention-bonus payments.
- Progress, cost and potential outcomes of the Hynix, Micron, San Francisco antitrust, ITC and other intellectual-property proceedings.
- CRI and Unity integration, commercialization of new security and semiconductor technologies, and whether acquired businesses generate sufficient revenue to support their goodwill and intangible assets.
- The sustainability of operating cash flow given the sharp decline from 2010 and the company’s continued high research, legal and administrative spending.