Rambus Inc. Form 10-Q Summary
Business Context and Reporting Period
Rambus is an intellectual-property and technology licensing company focused primarily on semiconductor and chip-interface technologies, with diversification into lighting, displays, mobile and other technologies. The filing covers the three months ended March 31, 2011, compared with the three months ended March 31, 2010. Financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $62.5 million | $161.9 million | Down 61.4% |
| Royalty revenue | $59.2 million | $160.5 million | Down 63.1% |
| Contract revenue | $3.3 million | $1.3 million | Up 149.0% |
| Operating income | $8.4 million | $202.2 million | Down materially |
| Operating margin | 13.4% | 124.9% | Down materially |
| Net income (loss) | $(4.2) million | $150.9 million | Turned to loss |
| Diluted EPS | $(0.04) | $1.28 | Down $1.32 |
| Cash flow from operations | $(4.5) million | $177.5 million | Turned negative |
Operating expenses were $54.2 million in Q1 2011, compared with an operating recovery of $40.3 million in Q1 2010. Q1 2011 included a $6.2 million gain from the Samsung settlement, compared with a $95.9 million gain in the prior-year period. Research and development expense was $23.3 million, marketing, general and administrative expense was $32.7 million, and restatement-related legal costs were $1.2 million.
The effective tax rate was 266.1%, primarily due to Korean withholding taxes on Samsung royalty income, foreign taxes, foreign losses without current tax benefit and a full valuation allowance on U.S. deferred tax assets. The filing does not present a conventional gross margin because Rambus reports limited cost of revenue; cost of revenue was $3.1 million, or approximately 5.0% of revenue.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $182.2 million at March 31, 2011, down from $215.3 million at December 31, 2010.
- Marketable securities were $326.3 million, bringing total cash, cash equivalents and marketable securities to $508.6 million, compared with $512.0 million at year-end 2010.
- Total assets were $659.2 million and total liabilities were $206.1 million.
- The company had $172.5 million principal amount of 5% convertible senior notes due 2014, carried at $124.4 million after debt discount. The notes had a disclosed fair value of $219.9 million.
- The company also reported a $34.4 million long-term imputed financing obligation related primarily to its Sunnyvale headquarters lease.
- Management believes existing liquidity and expected operating cash flows are adequate for at least the next 12 months, including a potential payment of up to $100.0 million if Samsung exercises its put right on contingently redeemable shares in July or August 2011.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because Q1 2010 included substantial Samsung settlement-related patent-license revenue. Samsung paid $25.0 million in Q1 2011, allocated as $18.8 million of revenue and $6.2 million of settlement gain; approximately $375.0 million of additional payments were expected through 2014, subject to contractual adjustments.
- Patent royalties decreased by approximately $102.1 million, while technology-license royalties increased by $0.7 million, partly due to higher XDR DRAM shipments associated with Sony PlayStation 3 products.
- Engineering costs increased 12.4% to $26.5 million, reflecting additional headcount and amortization of acquired intangibles.
- Marketing, general and administrative costs increased 3.8% to $32.7 million, principally because litigation expense rose 30.9% to $9.2 million.
- Cash from operations fell from $177.5 million to negative $4.5 million, reflecting the lower earnings base and payment of accrued 2010 incentive compensation.
- Rambus renewed patent-license agreements with Panasonic and Toshiba during the quarter.
- No shares were repurchased in Q1 2011. Approximately 5.2 million shares remained authorized for repurchase.
Guidance, Outlook, Risks and Unusual Items
The filing provides no specific quantitative revenue or earnings guidance. Management expects royalties to remain the majority of revenue, but emphasizes that results will fluctuate based on license renewals, licensee shipment volumes, pricing, product mix, litigation outcomes and new licensing activity. Management also expects continued investment in semiconductor and lighting technologies and continued significant litigation expense.
- Revenue concentration remains high: the top five licensees represented approximately 74% of Q1 2011 revenue, and Elpida, NVIDIA, Samsung and Toshiba each represented at least 10% of revenue.
- Approximately 78% of Q1 2011 revenue came from customers headquartered outside the United States.
- Major intellectual-property litigation remains pending, including appeals involving Hynix and Micron, litigation involving NVIDIA and other semiconductor companies, and two 2010 ITC investigations. Outcomes could materially affect licensing revenue, legal costs and cash flows.
- The company faces substantial exposure to semiconductor cyclicality, technological substitution, customer consolidation, license-renewal risk, counterparties’ ability to pay, and the success of its newer lighting and display businesses.
- The March 2011 Japan earthquake and tsunami could disrupt licensees’ manufacturing and supply chains; management was forecasting a modest impact at the filing date.
- Samsung held a put right covering up to 4.8 million shares at an aggregate price of up to $100.0 million. The shares were classified as contingently redeemable common stock.
- Unrecognized tax benefits were approximately $13.1 million, and the filing states that potential settlement timing could not be reasonably estimated.
- Internal disclosure controls were evaluated as effective as of March 31, 2011, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether Samsung made the expected quarterly payments and whether any contractual adjustments affected the remaining approximately $375.0 million payment stream.
- The status and outcomes of the Hynix and Micron Federal Circuit appeals and the pending ITC and district-court proceedings.
- Whether Samsung exercised its put right and the resulting cash impact and share-count implications.
- Progress on Panasonic and Toshiba renewals and other license negotiations, including royalty rates and fixed versus volume-based payments.
- Revenue concentration, licensee shipment trends and the sustainability of royalty revenue after the significant Samsung-related comparison effect.
- Changes in litigation expense, tax rates, deferred-tax valuation allowances and unrecognized tax benefits.
- Cash generation relative to the 2014 convertible-note maturity, headquarters financing obligations and ongoing research, development and litigation spending.