Rambus Inc. 2013 Form 10-K Summary
Business context and reporting period
Rambus is a technology solutions and intellectual-property licensing company focused on memory and interfaces, chip and system security, LED lighting, and emerging technologies. Revenue is primarily royalty-based: royalties represented 97.3% of 2013 revenue. The filing covers the fiscal year ended December 31, 2013, with quarterly data including the fourth quarter ended December 31, 2013.
During 2013, Rambus signed or expanded agreements with several semiconductor and technology companies, settled litigation with SK hynix, Micron, LSI and STMicroelectronics, renewed its long-term Samsung agreement, and expanded its strategy to monetize selected patent assets through sales.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $271.5 million | $234.1 million | 16.0% increase |
| Royalty revenue | $264.1 million | $232.4 million | 13.7% increase |
| Contract and other revenue | $7.4 million | $1.7 million | Increase |
| Operating income (loss) | $22.5 million | $(90.4) million | Improved |
| Net income (loss) | $(33.7) million | $(134.3) million | Loss narrowed |
| Basic and diluted loss per share | $(0.30) | $(1.21) | Improved |
| Net cash provided by operating activities | $51.3 million | $(17.5) million | Improved |
| Cash, cash equivalents and marketable securities | $387.7 million | $203.3 million | Increase |
- Gross margin was approximately 87.8%, based on revenue less cost of revenue. Operating margin was approximately 8.3%; net margin was approximately negative 12.4%.
- Research and development expense declined to $118.0 million from $140.5 million, while marketing, general and administrative expense declined to $76.4 million from $112.6 million.
- Interest expense increased to $32.9 million from $27.5 million, primarily reflecting the convertible notes and related amortization.
- The company recorded a $21.7 million income-tax provision despite a pretax loss, primarily because of withholding taxes, foreign taxes, state taxes and the valuation allowance on U.S. deferred tax assets.
- Total assets were $713.4 million and stockholders’ equity was $340.2 million at December 31, 2013.
Liquidity, debt and cash flow
- Operating cash flow was $51.3 million, compared with operating cash usage of $17.5 million in 2012.
- Investing cash usage was $2.3 million, primarily reflecting purchases and maturities of marketable securities, capital expenditures and patent-related investments.
- Financing cash flow was $140.8 million, including net proceeds from the issuance of the 2018 convertible notes.
- Convertible debt principal totaled $310.5 million at year-end: $172.5 million of 5% notes due June 15, 2014, and $138.0 million of 1.125% notes due August 15, 2018. The balance-sheet carrying value was $273.7 million after unamortized discounts.
- Management stated that cash, marketable securities and expected operating cash flow were adequate for at least the following 12 months and that the 2018 note issuance was intended in part to provide liquidity for repayment of the 2014 notes.
- Material 2014 obligations included $172.5 million of convertible notes, $5.9 million of related note interest, approximately $16.9 million of remaining CRI retention bonuses, and other contractual obligations.
Material changes versus the prior comparable period
- Revenue increased 16.0%, driven primarily by new license agreements with SK hynix, Micron, STMicroelectronics and LSI. MID revenue increased to $232.0 million from $215.0 million, and CRI revenue increased to $32.6 million from $17.8 million.
- Contract and other revenue increased to $7.4 million, primarily from the rollout of LED edge-lit products and services.
- Operating results improved substantially because of higher revenue, lower litigation expense, lower headcount-related costs, lower stock-based compensation and cost-saving measures.
- The 2013 results included $17.8 million of goodwill and long-lived-asset impairment charges and $5.5 million of restructuring charges. These compared with $35.5 million and $7.3 million, respectively, in 2012.
- Rambus recorded a $1.4 million gain from sale of intellectual property and a $0.5 million gain from settlement in 2013.
- Goodwill declined by $8.1 million after the company fully impaired goodwill associated with its Mobile Technology Division. Long-lived-asset impairments totaled $9.7 million, primarily related to LDT and CRI assets.
- Total engineering costs declined 10.5% to $151.2 million, while corporate and litigation-related expenses fell materially.
Guidance, outlook, commentary, risks and unusual items
- Management expects continued investment in engineering, infrastructure and technology development. Non-litigation marketing and administrative costs were expected to decline as restructuring initiatives progressed.
- The company expects to substantially complete its restructuring activities by the end of 2014. The strategy shifted away from lower-margin bulb products toward general lighting technologies and reduced spending on immersive media.
- Rambus signed agreements providing substantial future payments, including fixed quarterly payments from SK hynix of $12.0 million through the second quarter of 2018 and payments from Micron based on specified product sales, subject to quarterly and annual caps.
- Revenue remains highly concentrated. The top five customers represented approximately 62% of 2013 revenue, and Samsung represented 33% of revenue. International customers accounted for approximately 70% of revenue.
- The business is exposed to fluctuations in semiconductor demand, customer shipment volumes, pricing, license renewals, customer financial condition and industry consolidation. Some license agreements permit termination or contain most-favored-pricing provisions.
- Future results depend heavily on the successful adoption and licensing of Rambus technologies, protection and enforceability of its patents, and the outcome of current or future intellectual-property disputes. Although major disputes with SK hynix and Micron were settled, litigation involving Nanya and other potential claims remained relevant.
- Goodwill and long-lived-asset valuations rely on significant assumptions regarding revenue growth, margins, discount rates and terminal growth. Further impairments could result if operating performance falls below expectations.
- The company maintained a valuation allowance of $192.8 million against gross deferred tax assets of $195.3 million. A sustained return to profitability could result in a substantial future tax benefit if the allowance is released.
- The company reported effective disclosure controls and effective internal control over financial reporting, with an unqualified audit opinion from PricewaterhouseCoopers LLP.
Most important facts for an investor to verify
- Timing and funding source for repayment or refinancing of the $172.5 million 2014 convertible notes due June 15, 2014.
- Actual cash collections and revenue recognition from the SK hynix and Micron settlements and license agreements, including payment caps, adjustments and counterparty credit risk.
- Sustainability of the 2013 revenue increase after settlement-related and newly signed license agreements, particularly given customer concentration.
- Progress in shifting LDT toward general lighting and the commercial performance of LED products after the recorded impairments.
- Future patent litigation, regulatory proceedings and patent expirations, including matters involving Nanya and the potential effect on licensing revenue.
- Whether the company achieves sustained profitability sufficient to release some or all of its $192.8 million deferred-tax valuation allowance.
- Potential additional goodwill or long-lived-asset impairments if projected revenue, margins or licensing activity do not materialize.