Rambus Inc. Form 10-Q Summary
Business Context and Reporting Period
Rambus is an intellectual-property and technology licensing company focused primarily on semiconductor, memory-interface, security, lighting and display technologies. This unaudited filing covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. The company had 110.9 million common shares outstanding at September 30, 2012.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $57.5 million | $100.3 million | $176.6 million | $229.0 million |
| Royalty revenue | $57.4 million | $96.2 million | $175.1 million | $216.4 million |
| Contract revenue | $0.2 million | $4.0 million | $1.5 million | $12.6 million |
| Operating income (loss) | $(47.1) million | $10.7 million | $(86.4) million | $16.6 million |
| Net income (loss) | $(58.1) million | $0.5 million | $(118.2) million | $(14.3) million |
| Diluted EPS | $(0.52) | $0.00 | $(1.07) | $(0.13) |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided | $(19.7) million | $51.0 million |
Royalties represented 99.7% of quarterly revenue and 99.2% of nine-month revenue. Revenue less cost of revenue implied gross margins of approximately 86.9% in Q3 2012 and 87.9% in Q3 2011; the filing does not present a separately labeled gross-margin measure. Operating margins were $(47.1) million on $57.5 million of revenue in Q3 and $(86.4) million on $176.6 million for nine months.
At September 30, 2012, Rambus held $152.2 million of cash and cash equivalents and $54.9 million of marketable securities, or $207.1 million in total liquidity, versus $289.5 million at December 31, 2011. Convertible notes had a $172.5 million face value and $143.9 million carrying value, due in 2014. Total liabilities were $271.0 million and stockholders’ equity was $330.8 million.
Material Changes Versus Prior Comparable Period
- Quarterly revenue declined 42.6%; nine-month revenue declined 22.9%. Royalty revenue declined 40.4% in the quarter and 19.1% year to date.
- Contract revenue fell sharply because fewer technology-development contracts were recognized in 2012.
- Operating results shifted from profit to loss, primarily because of lower revenue, a $35.5 million impairment charge and $6.6 million of restructuring charges.
- Research and development expense increased 34.5% for the nine-month period to $107.4 million, while marketing, general and administrative expense declined 23.6% to $91.3 million, largely because of lower litigation expense.
- Cash used in operations was $19.7 million, compared with $51.0 million of cash provided in the prior-year period. Cash and marketable securities declined by approximately $82.4 million from year-end 2011.
- The company acquired Unity Semiconductor and other businesses or technology for approximately $59.5 million in aggregate cash consideration during the nine months, with related goodwill and intangible assets recorded.
Guidance, Outlook, Commentary and Risks
- Management expects the restructuring program to generate annual net cash savings of approximately $30 million to $35 million compared with the second-quarter 2012 run rate. Restructuring activities were expected to be substantially complete by the first quarter of 2013; total restructuring costs were estimated at $6 million to $8 million.
- Management stated that existing cash, cash equivalents, marketable securities and expected operating cash flows should meet cash needs for at least the next 12 months. However, operating cash flow was negative for the first nine months.
- The LDT strategy shifted away from higher-margin display-technology licensing toward general lighting. This change triggered a $35.5 million non-cash impairment, comprising $21.8 million of long-lived-asset impairment and $13.7 million of goodwill impairment.
- Revenue is highly concentrated: the top five customers represented approximately 68% of Q3 revenue and 69% of nine-month revenue. Samsung was at least 10% of Q3 revenue; NVIDIA and Samsung were each at least 10% of nine-month revenue.
- Royalty revenue is sensitive to licensee shipment volumes, pricing, product mix, renewals and litigation outcomes. Elpida, a significant licensee, entered bankruptcy proceedings, creating counterparty and renewal risk.
- A number of material license agreements are scheduled to expire in 2015. The filing provides no assurance that renewals will occur on comparable terms.
- Material litigation remains outstanding. The Hynix matter was remanded after an adverse spoliation finding, and Hynix sought additional invalidity relief. The Micron Delaware matter remained pending on remand. Rambus also appealed the ITC’s July 2012 no-violation determination.
- The company had approximately $301.8 million of stated contractual obligations, including $172.5 million of convertible notes, $40.7 million of acquisition retention bonuses, and $56.2 million of imputed financing obligations. Potential payments related to approximately $17.2 million of uncertain tax benefits were excluded.
- Rambus maintained a full valuation allowance against U.S. deferred tax assets. It reported approximately $17.2 million of unrecognized tax benefits and paid $11.8 million of withholding taxes during the first nine months.
Most Important Facts for Investors to Verify
- Whether royalty revenue stabilizes or continues to decline after the loss of one-time licensing revenue and weakness in semiconductor shipments.
- The timing, amount and terms of license renewals, particularly agreements expiring in 2015.
- Actual cash savings and execution risks from the restructuring program, including effects on research and development and licensing capacity.
- Cash generation, liquidity after scheduled obligations, and the company’s ability to address the $172.5 million convertible-note maturity in 2014.
- Developments and potential financial consequences in the Hynix, Micron, ITC, patent-reexamination and other intellectual-property proceedings.
- The financial condition and ownership transition of Elpida and the resulting impact on Rambus royalties and future licensing arrangements.
- Whether LDT and other emerging businesses generate sufficient licensing revenue to support their carrying values and avoid additional impairment charges.