Rambus Inc. 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended June 30, 2011. The filing was dated August 5, 2011. Rambus is an intellectual-property and technology licensing company organized into a Semiconductor Business Group and a New Business Group, which includes lighting, display, mobile, and data-security technologies.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $66.2 million, up 70.4% | $128.7 million, down 35.9% |
| Royalties | $61.0 million, up 59.6% | $120.2 million, down 39.5% |
| Contract revenue | $5.2 million, up 682.7% | $8.5 million, up 328.5% |
| Operating income (loss) | $(2.5) million | $5.9 million |
| Net income (loss) | $(10.6) million; $(0.10) per diluted share | $(14.8) million; $(0.14) per diluted share |
| Operating margin | (3.8)% | 4.6% |
| Net margin | (16.0)% | (11.5)% |
| Cash flow from operations | Not separately provided | $15.4 million |
- Gross margin was not separately presented, and the filing text does not provide a clear gross-profit value.
- Operating expenses for the quarter were $68.7 million, including $24.2 million of research and development, $37.7 million of marketing, general and administrative expense, and $0.7 million of restatement-related legal costs.
- Litigation expense included in marketing, general and administrative expense was $11.5 million in the quarter and $20.7 million for the first six months, increasing substantially from the comparable periods.
- At June 30, 2011, cash and cash equivalents were $179.8 million and marketable securities were $179.6 million, for total cash, cash equivalents, and marketable securities of $359.4 million.
- Cash decreased by $35.5 million during the first six months, primarily reflecting the CRI acquisition and capital expenditures, partly offset by marketable-securities maturities and financing inflows.
- Debt included $172.5 million principal amount of 5% convertible senior notes due 2014, carried at $127.3 million after discount. The filing also reported a $34.6 million long-term imputed financing obligation.
- Total contractual obligations were $304.8 million, including convertible notes, note interest, the CRI retention bonus, lease-related obligations, software licenses, and the imputed financing obligation.
Material changes versus prior comparable periods
- Second-quarter revenue increased primarily because the Samsung quarterly license payment was allocated fully to revenue and because of revenue from Elpida and NVIDIA agreements signed in the second half of 2010.
- First-half revenue declined sharply because the first quarter of 2010 included substantial revenue recognized from the Samsung settlement. The first half of 2010 also included a $106.2 million gain from settlement, compared with $6.2 million in the first half of 2011.
- Second-quarter revenue improved, but the company remained unprofitable because of litigation costs, corporate expenses, research and development, amortization, and interest expense.
- Research and development expense increased 6.4% for the first six months, while marketing, general and administrative expense increased 15.6%, driven principally by litigation and CRI-related costs.
- On June 3, 2011, Rambus acquired Cryptography Research, Inc. for approximately $257.2 million, consisting of $168.8 million in cash and 6.4 million common shares valued at $88.4 million. The acquisition added $159.2 million of identifiable intangible assets and $97.0 million of goodwill.
- CRI contributed no revenue and approximately $5.3 million of losses from the acquisition date through June 30, 2011.
- Common shares outstanding increased to approximately 109.6 million at June 30, 2011 from approximately 102.7 million at December 31, 2010, primarily reflecting shares issued for the CRI acquisition.
Outlook, commentary, risks, and unusual items
- No formal numerical revenue or earnings guidance is provided in the filing. Management expects royalties to remain the majority of revenue but states that future results are difficult to predict.
- Management expects royalty revenue to fluctuate based on license renewals, new licenses, licensee shipment volumes, pricing, product mix, and litigation outcomes. Rambus was negotiating renewals with existing and prospective licensees.
- Revenue concentration remained high: the top five licensees represented approximately 77% of second-quarter revenue and 75% of first-half revenue. Elpida, NVIDIA, and Samsung each represented at least 10% of first-half revenue.
- Rambus expects continued significant spending on engineering, research and development, marketing, administration, and litigation, which may pressure operating results and cash flow.
- Samsung exercised its put right on July 20, 2011, requiring Rambus to repurchase approximately 4.8 million shares for $100.0 million, expected to close around August 19, 2011. Management intended to fund the payment with available cash.
- The CRI transaction created a $50.0 million retention-bonus commitment, payable in three installments of approximately $16.7 million in 2012, 2013, and 2014, subject to employment and other conditions.
- Rambus remains involved in extensive patent, antitrust, and commercial litigation. In May 2011, the Federal Circuit vacated the Hynix final judgment and remanded for further proceedings, while affirming the core spoliation determination in the Micron matter and remanding that case as well. A jury trial against Micron and Hynix in California remained ongoing as of the filing.
- Rambus also faced ongoing ITC and federal litigation involving NVIDIA, Broadcom, LSI, MediaTek, and STMicroelectronics. The company stated that adverse judgments, settlements, delays, or inability to collect awards could materially affect revenue, cash, and results.
- The company maintained a full valuation allowance against U.S. deferred tax assets. Unrecognized tax benefits were approximately $13.1 million, although the timing and outcome of potential settlements could not be reasonably estimated.
- Management stated that available liquidity was adequate for operations, capital expenditures, contractual commitments, and the $100.0 million Samsung repurchase for at least the next 12 months.
Important facts for investors to verify
- Timing and cash impact of the Samsung share repurchase and the resulting post-transaction liquidity.
- Progress, outcomes, and potential financial exposure in the Hynix, Micron, NVIDIA, ITC, and other intellectual-property proceedings.
- Renewal status and terms of major patent-license agreements, including the effect of licensee concentration.
- CRI’s ongoing revenue contribution, profitability, integration progress, and retention-bonus obligations.
- Whether recurring royalty and contract revenue can support the company’s high litigation, research and development, and corporate cost structure.
- Ability to repay or refinance the $172.5 million convertible notes due 2014 and satisfy other contractual obligations.
- Potential changes in tax rates, deferred-tax-asset realizability, uncertain tax positions, and litigation accruals.