Rambus Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
Rambus is an intellectual-property and technology solutions company focused primarily on licensing semiconductor memory and interface technologies, with additional activities in security, anti-counterfeiting, lighting, displays and mobile media. The filing covers the unaudited quarter ended March 31, 2013, compared with the quarter ended March 31, 2012.
Reportable segments were Memory and Interfaces Division (MID) and CTO; remaining operating activities were aggregated as All Other. Revenue remained highly dependent on licensing and royalties, with royalties representing 99.0% of total revenue.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $66.9 million | $62.9 million | 6.4% increase |
| Royalty revenue | $66.2 million | $62.0 million | 6.7% increase |
| Contract revenue | $0.6 million | $0.8 million | 21.5% decrease |
| Operating income (loss) | $1.4 million | $(17.6) million | Improved by $19.0 million |
| Net loss | $(10.4) million | $(27.9) million | Loss narrowed by $17.5 million |
| Basic and diluted loss per share | $(0.09) | $(0.25) | Improved |
| Cash flow from operations | $15.3 million | $(11.0) million | Improved by $26.3 million |
- Operating margin improved to 2.2% from negative 27.9%; net loss margin improved to negative 15.5% from negative 44.3%.
- Cash, cash equivalents and marketable securities totaled $214.8 million at March 31, 2013, up from $203.3 million at December 31, 2012.
- Cash and cash equivalents were $157.2 million; marketable securities were $57.6 million. Substantially all investments had maturities of less than one year.
- Total assets were $581.7 million and stockholders’ equity was $315.8 million at quarter-end.
- Long-term convertible notes had a carrying value of $151.5 million and a face value of $172.5 million. The 5% notes mature in 2014, with $172.5 million of principal and $12.9 million of scheduled interest included in contractual obligations.
- Interest expense increased to $7.3 million from $6.6 million, partly because of non-cash amortization of the convertible debt discount and issuance costs.
Material changes versus the prior comparable period
- Revenue increased primarily because of a one-time royalty recognized under the LSI patent license agreement, which settled outstanding disputes with LSI. Patent-license royalty revenue increased approximately $4.2 million, while solutions-license royalties were relatively flat.
- Operating expenses declined to $65.4 million from $80.4 million. Research and development decreased 14.4% to $32.8 million, and marketing, general and administrative expense decreased 27.9% to $25.1 million.
- Engineering costs declined 16.4% to $38.1 million, reflecting lower acquisition-related retention bonus accruals, lower patent-related legal costs, lower stock-based compensation and a gain on asset sales.
- Marketing, general and administrative expense benefited from lower litigation expense, headcount-related costs, incentive-plan funding, retention bonus accruals, sales and marketing costs and other administrative spending.
- A $2.2 million restructuring charge was recorded in Q1 2013; no such charge was recorded in Q1 2012. The restructuring program is expected to be substantially complete by Q2 2013, with estimated aggregate costs of $6 million to $10 million.
- Investing cash flow changed from $37.2 million provided in Q1 2012 to $7.0 million used in Q1 2013, primarily because the prior-year period included $82.9 million of security maturities and the 2013 period included net purchases of marketable securities and capital expenditures.
Guidance, outlook, commentary, risks and unusual items
- Management stated that existing cash, marketable securities and expected operating cash flow should meet cash needs for at least the next 12 months, including repayment of the 2014 convertible notes in June 2014.
- Management expects engineering investment to increase in the near term to support semiconductor, lighting, security and other technology development. Non-litigation corporate expenses are expected to decline as restructuring proceeds.
- Royalty revenue is expected to fluctuate based on new licenses, renewals, customer shipment volumes, product mix, pricing and the proportion of fixed versus variable royalty arrangements. Several material license agreements expire in 2015.
- Customer concentration is significant: the top five customers represented approximately 70% of Q1 2013 revenue. LSI, Renesas and Samsung each represented at least 10% of revenue during the quarter.
- International customers represented approximately 62% of revenue. Rambus does not hedge the indirect foreign-exchange exposure associated with customers’ non-U.S.-dollar sales.
- Litigation remains a major contingency. In January 2013, a Delaware court found Rambus had spoliated documents in the Micron matter and ordered judgment against Rambus on patent-infringement claims; Rambus appealed in March 2013. The company also remained involved in SK Hynix, Micron, ITC and other intellectual-property proceedings.
- Rambus accrued approximately $8.1 million for SK Hynix appeal costs and approximately $0.9 million for costs awarded to Micron and Hynix in related proceedings.
- The company had approximately $16.8 million of unrecognized tax benefits and a full valuation allowance against U.S. deferred tax assets. The IRS began examining the company’s 2010–2011 tax years during Q1 2013.
- Contractual obligations totaled $274.9 million, including $172.5 million of convertible-note principal, $36.5 million of acquisition retention bonuses and $44.6 million of imputed financing obligations. The table excludes approximately $16.8 million of uncertain tax benefits.
- Rambus signed license agreements with LSI and EchoStar, selected Marvell as a CryptoFirewall customer, sold display patent assets to an Acacia Research subsidiary and entered into a five-year LED distribution agreement with a company related to the CEO’s brother-in-law. The related-party agreement was approved by the Audit Committee.
Most important facts for investors to verify
- Whether Q1 revenue growth was largely nonrecurring because of the LSI settlement-related royalty and how recurring royalty revenue develops thereafter.
- The timing and funding source for the $172.5 million convertible-note maturity in 2014, including potential effects of cash usage or refinancing.
- Outcomes of the Micron and SK Hynix appeals and other intellectual-property litigation, including possible effects on licensing rights, royalties, legal expenses and cash.
- Whether restructuring produces the anticipated reduction in operating expenses without impairing research, product development or customer relationships.
- Renewal prospects for material license agreements expiring in 2015 and the ongoing concentration of revenue among a small number of customers.
- Progress in commercializing security, lighting, display and other non-memory businesses, which remained less material than the core royalty business.