Rambus Inc. Form 10-Q Summary
Business Context and Reporting Period
Rambus is a technology solutions company focused primarily on licensing semiconductor and memory-interface intellectual property, with additional activities in security, lighting and display technologies, and technology development. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, filed October 25, 2013.
Financial Highlights
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $73.3 million | $57.5 million | $198.1 million | $176.6 million |
| Royalty revenue | $71.0 million | $57.4 million | $194.2 million | $175.1 million |
| Operating income (loss) | $9.1 million | $(47.1) million | $16.3 million | $(86.4) million |
| Net loss | $(5.7) million | $(58.1) million | $(24.0) million | $(118.2) million |
| Net loss per diluted share | $(0.05) | $(0.52) | $(0.21) | $(1.07) |
| Cash flow from operations | Not separately provided | Not separately provided | $30.8 million | $(19.8) million |
Q3 operating margin was 12.4%, versus negative 81.9% in the prior-year quarter. The filing does not present a separate gross-margin line; revenue less cost of revenue implies an approximately 87.8% gross margin in Q3 2013 versus approximately 86.9% in Q3 2012. Nine-month operating margin was 8.3%, versus negative 48.9% in the prior-year period.
- Research and development expense declined to $27.6 million in Q3 and $91.2 million for nine months, from $30.7 million and $107.4 million, respectively.
- Marketing, general and administrative expense declined to $18.7 million in Q3 and $57.9 million for nine months, from $24.3 million and $91.3 million, respectively.
- Q3 included an $8.1 million goodwill impairment charge and $1.1 million of restructuring charges. The prior-year quarter included a $35.5 million impairment charge and $6.6 million of restructuring charges.
Cash, Liquidity and Debt
- Cash and cash equivalents were $308.0 million at September 30, 2013, compared with $149.0 million at December 31, 2012.
- Marketable securities were $58.4 million, bringing total cash, cash equivalents and marketable securities to $366.4 million, compared with $203.3 million at year-end 2012.
- Net cash provided by operating activities was $30.8 million for the first nine months, compared with cash used of $19.8 million in the prior-year period.
- Financing activities provided $138.8 million, primarily from issuing $138.0 million of 1.125% convertible senior notes due 2018. Net proceeds after issuance costs were approximately $134.4 million.
- Total convertible-note principal was $310.5 million, consisting of $172.5 million of 5% notes due June 2014 and $138.0 million of 1.125% notes due August 2018. The carrying value of the notes was $268.0 million after discounts.
- Management stated that existing liquidity and expected operating cash flows should meet cash needs for at least the next 12 months and that the 2018 note issuance was partly intended to support repayment of the 2014 notes.
Material Changes Versus the Prior Comparable Period
- Revenue increased 27.4% in Q3 and 12.2% for the nine-month period, primarily from SK hynix-related royalty revenue and, for the nine months, a one-time LSI royalty.
- Solutions-license royalties declined due to lower DDR2 shipments and lower royalties associated with Sony PlayStation 3-related XDR DRAM shipments.
- Contract and other revenue increased to $2.3 million in Q3 and $3.8 million for nine months, driven mainly by lighting technology development projects and LED product sales.
- Operating results improved materially because of higher revenue, reduced research and development spending, lower litigation and corporate costs, and significantly lower impairment and restructuring charges.
- Cash increased substantially following the 2018 note issuance and improved operating cash flow.
- Goodwill declined from $125.0 million at year-end 2012 to $116.9 million after an $8.1 million impairment related to the Mobile Technology Division and curtailed immersive-media spending.
Guidance, Outlook, Risks and Unusual Items
- Rambus expects engineering expenses to increase in the near term as it continues investing in semiconductor, lighting, security and other technologies. Non-litigation marketing and administrative costs were expected to remain relatively flat.
- The 2012 restructuring program was expected to be substantially complete by year-end 2013. The Q3 2013 restructuring plan, related primarily to workforce reductions following the curtailment of immersive-media spending, was expected to be substantially complete by the end of 2014; estimated total costs were $1.0 million to $3.0 million.
- The June 2013 SK hynix settlement and license agreement provides for $240.0 million of total consideration, including $238.1 million allocated to royalty revenue and $1.9 million to settlement gain. SK hynix is obligated to make quarterly cash payments of $12.0 million through the second quarter of 2018, subject to specified adjustments.
- Revenue is highly concentrated. The top five customers represented approximately 69% of Q3 revenue and 61% of nine-month revenue. Samsung, SK hynix and Elpida each represented at least 10% of Q3 revenue.
- Samsung payments are subject to conditions and are scheduled to expire at the end of 2014; several other material license agreements are scheduled to expire in 2015. Failure to renew or replace these licenses could materially reduce revenue.
- Elpida was acquired by Micron on July 31, 2013. The effect of this change of control on Rambus's relationship and future revenue was uncertain.
- Rambus remained subject to significant intellectual-property litigation, patent challenges and appeals. The filing states that reasonably possible losses in excess of accrued amounts were not material, but adverse litigation outcomes could materially affect revenue, cash flow and financial condition.
- The company recorded a $1.4 million impairment of a non-marketable equity investment during the first half of 2013 and maintained a full valuation allowance against U.S. deferred tax assets. Nine-month income-tax expense was $15.6 million despite a pretax loss, largely because of foreign withholding and other taxes.
- Rambus had approximately $401.1 million of contractual obligations, including convertible notes, interest, retention bonuses, leases and imputed financing obligations. Potential payments related to approximately $16.8 million of unrecognized tax benefits were excluded from that table.
Important Facts for Investors to Verify
- Whether SK hynix makes all scheduled $12.0 million quarterly payments and whether the agreement generates the expected royalty revenue through 2018.
- Renewal terms and expiration dates for Samsung and other significant license agreements, particularly in 2014 and 2015.
- The cash funding plan and conversion or repayment economics for the $172.5 million of 2014 notes due in June 2014.
- The sustainability of revenue after excluding settlement-related and other one-time royalty items.
- The impact of Micron’s acquisition of Elpida on licensing revenue and customer concentration.
- Developments in Micron litigation, patent reexaminations, appeals and other intellectual-property proceedings.
- Whether the immersive-media restructuring and goodwill impairment signal additional impairment or restructuring charges.
- Future operating cash flow, given continued research and development investment, litigation exposure, debt obligations and concentrated customer receipts.