Rambus Inc. 2012 Q1 Form 10-Q Summary
Business context and reporting period
Rambus is an intellectual-property and technology licensing company focused on semiconductor interfaces, memory, lighting and displays, security, digital media and related technologies. The filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Royalties represented 98.7% of first-quarter revenue. The company reported Semiconductor Business Group revenue of $57.1 million and All Other revenue of $5.8 million. The five largest licensees represented approximately 74% of revenue; NVIDIA, Renesas and Samsung each represented at least 10%.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $62.9 million | $62.5 million | 0.5% increase |
| Royalty revenue | $62.0 million | $59.2 million | 4.7% increase |
| Contract revenue | $0.8 million | $3.3 million | 75.1% decrease |
| Operating income (loss) | $(17.6) million | $8.4 million | Declined $25.9 million |
| Net income (loss) | $(27.9) million | $(4.2) million | Loss increased $23.7 million |
| Loss per diluted share | $(0.25) | $(0.04) | Worsened |
| Net cash used in operating activities | $(11.0) million | $(4.5) million | Higher cash use |
Operating margin declined to negative 27.9% from positive 13.4%; net margin declined to negative 44.3% from negative 6.7%. The filing does not present a conventional gross margin because cost of revenue is reported, but no gross-profit subtotal is provided. Cost of revenue was $7.2 million, or 11.4% of revenue, compared with $3.1 million, or 5.0%, in the prior period.
Research and development expense increased 64.7% to $38.4 million, primarily because of higher headcount, acquired-intangible amortization, acquisition-related retention bonuses, consulting and prototyping costs. Marketing, general and administrative expense increased 6.4% to $34.8 million, despite a $5.1 million reduction in litigation expense. Interest expense increased to $6.6 million from $6.0 million.
Cash, cash equivalents and marketable securities totaled $232.5 million at March 31, 2012, down from $289.4 million at December 31, 2011. Cash and cash equivalents increased to $188.5 million from $162.2 million, while marketable securities decreased to $44.0 million from $127.2 million, primarily reflecting maturities used to fund operations and acquisitions.
Rambus had $172.5 million principal amount of 5% convertible senior notes due 2014, carried at $136.8 million after discount. It also reported a $44.3 million long-term imputed financing obligation. Management stated that existing liquidity and operating cash flows were expected to meet cash needs for at least the next 12 months.
Material changes versus the prior comparable period
- Royalty revenue increased primarily from the full quarterly allocation of Samsung license payments beginning in the second quarter of 2011, new patent licenses and acquired CRI license agreements. These benefits were partly offset by lower licensee royalties and an expired license agreement.
- Solutions-license royalties declined $3.8 million to $4.4 million, largely because of lower XDR DRAM shipments associated with the Sony PlayStation 3.
- Contract revenue decreased $2.5 million because there were no new technology-development contracts recognized in the quarter.
- The prior-year period included a $6.2 million gain from the Samsung settlement; no comparable gain was recorded in 2012. The total Samsung settlement gain of $133.0 million had been fully recognized by the end of the first quarter of 2011.
- The company acquired Unity Semiconductor for $35.0 million, paying approximately $31.3 million in cash by March 31, 2012. Unity contributed nonvolatile-memory technology and patent assets and was assigned to the Semiconductor Business Group.
- The company completed an additional business combination and patent acquisition for $12.8 million, generating approximately $8.1 million of goodwill and $3.7 million of intangible assets. The acquired businesses generated no revenue during the reported periods.
- Amortization expense increased to $7.6 million from $2.0 million, and goodwill increased to $138.7 million from $115.1 million, primarily due to acquisitions.
- Net cash used in operating activities increased to $11.0 million from $4.5 million. Investing cash flow was positive $37.2 million in 2012, mainly because $82.9 million of securities matured, partly offset by $42.4 million of acquisition spending.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects engineering expenses to remain elevated and increase in the near term as it invests in semiconductor, lighting, security and other technologies. Future royalties are expected to fluctuate based on license renewals, new licenses, shipment volumes, pricing and product mix. Several material license agreements are scheduled to expire in 2015, and renewal terms are uncertain.
- Licensee concentration and credit risk: Revenue is concentrated among a small number of licensees. Elpida, a significant licensee, entered bankruptcy proceedings in Japan in February 2012, creating potential collection and royalty risks.
- Litigation: Rambus continues extensive patent, antitrust and other litigation. The Federal Circuit vacated the prior Hynix judgment and remanded the case; the district court later taxed Rambus approximately $8.1 million for Hynix-related bond premiums and costs. Rambus also lost a San Francisco antitrust jury trial against Micron and Hynix and filed an appeal.
- ITC and licensing settlements: Rambus settled outstanding litigation with NVIDIA in February 2012, and entered patent license agreements with NVIDIA and MediaTek. The ITC investigation involving Broadcom, Freescale, LSI, MediaTek and STMicroelectronics remained partly unresolved, including review of an initial determination finding no violation.
- Tax position: Rambus recorded a $3.9 million tax provision despite its pretax loss because it maintained a full valuation allowance against U.S. deferred tax assets. Unrecognized tax benefits totaled approximately $16.0 million.
- Contractual obligations: Reported obligations totaled $322.8 million, including $172.5 million of convertible notes, $57.4 million of acquisition retention bonuses, $59.1 million of imputed financing obligations and $21.6 million of note-related interest. Possible payments associated with uncertain tax benefits were excluded.
- Management transition: Chief Executive Officer Harold Hughes announced plans to retire, and the company began searching for a successor.
- Other financial risks: The business is exposed to semiconductor cyclicality, rapid technological change, patent challenges, international operations, customer pricing decisions, foreign withholding taxes, interest-rate movements and the potential dilution or cash requirements associated with convertible notes.
Important facts an investor should verify
- Whether major licensees renew agreements expiring in or around 2015 and whether royalty rates remain comparable.
- The effect of Elpida’s bankruptcy and any other licensee financial distress on royalty collections and future revenue.
- The status and potential financial impact of the Hynix, Micron, San Francisco antitrust, ITC and related patent proceedings.
- Whether Unity and other acquired technologies generate licensing revenue sufficient to offset acquisition costs, amortization and retention obligations.
- The company’s ability to return to positive operating cash flow while maintaining elevated research, development and litigation spending.
- The settlement terms and ongoing revenue contribution from NVIDIA and MediaTek.
- Future cash requirements related to the $172.5 million convertible notes due in 2014, including potential conversion-related dilution or cash settlement.
- Whether the CEO succession process affects business execution, licensing negotiations or employee retention.