Rambus Inc. Form 10-K Summary
Business context and reporting period
Rambus filed an annual report for the fiscal year ended December 31, 2012. The company develops and licenses patented technologies and solutions across memory and interfaces, security and anti-counterfeiting, lighting and displays, and mobile media. Revenue is primarily generated from patent and solutions-license royalties, with a smaller contract-services component. The filing also provides unaudited fourth-quarter 2012 data.
- Reportable segments: Memory and Interfaces Division (MID) and centralized technology/business incubation operations (CTO); other operations were combined as All Other.
- Employees: approximately 455, including approximately 300 engineers, at year-end.
- Intellectual property: 1,735 issued U.S. and foreign patents and 1,121 pending applications.
Financial performance and key metrics
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Total revenue | $234.1 million | $312.4 million | Down 25.1% |
| Royalty revenue | $232.4 million | $299.0 million | Down 22.3% |
| Contract revenue | $1.7 million | $13.4 million | Down $11.7 million |
| Operating income (loss) | $(90.4) million | $(1.5) million | Significant deterioration |
| Net income (loss) | $(134.3) million | $(43.1) million | Loss increased |
| Basic and diluted EPS | $(1.21) | $(0.39) | Lower |
| Net cash from operations | $(17.5) million | $53.0 million | Declined $70.5 million |
- Operating margin was approximately negative 38.6%, compared with negative 0.5% in 2011. Net margin was approximately negative 57.4%, compared with negative 13.8%.
- Cost of revenue was $28.4 million, research and development was $140.5 million, and marketing, general and administrative expense was $112.6 million.
- Research and development increased 21.4%, while marketing, general and administrative expense decreased 31.4%, primarily because litigation expense declined by $47.8 million.
- FY 2012 included a $35.5 million impairment charge for goodwill and long-lived assets and $7.3 million of restructuring charges.
- Cash, cash equivalents and marketable securities totaled $203.3 million at December 31, 2012, down from $289.5 million at year-end 2011. Cash and cash equivalents were $149.0 million.
- Total assets were $587.8 million and stockholders’ equity was $321.6 million at year-end, compared with $693.7 million and $429.8 million, respectively, in 2011.
- Outstanding convertible notes had a $172.5 million face amount and a $147.6 million carrying value. The notes bear 5% interest and mature June 15, 2014.
Fourth-quarter 2012
| Metric | Q4 2012 |
|---|---|
| Revenue | $57.4 million |
| Operating income (loss) | $(4.0) million |
| Net income (loss) | $(16.1) million |
| Basic and diluted EPS | $(0.14) |
The third quarter included $35.5 million of impairment charges and $6.6 million of restructuring charges. The fourth quarter included an additional $0.7 million of restructuring charges.
Material changes versus the prior comparable period
- Revenue declined primarily because 2011 included one-time royalty revenue from new patent-license agreements and 2012 reflected lower reported royalties from certain semiconductor customers.
- Solutions-license royalties decreased to $23.7 million from $31.4 million, reflecting lower DDR2-related shipments and lower XDR DRAM royalties associated with Sony PlayStation 3 shipments.
- Contract revenue fell sharply because the company had no comparable new technology-development contracts in 2012.
- Total engineering costs increased to $168.9 million from $139.8 million, driven by higher headcount costs, amortization, consulting expense and acquisition-related retention bonuses.
- Rambus acquired Unity Semiconductor for $35.0 million in cash and completed additional business and technology acquisitions totaling $13.2 million. The acquisitions added memory and mobile-technology assets but did not generate material reported revenue during the period.
- The company initiated a restructuring program in the third quarter to reduce corporate expenses and refine research and development efforts. Substantial completion was expected by the first quarter of 2013.
- Rambus changed its LDT strategy, reducing emphasis on higher-margin display licensing and increasing focus on general lighting. This change triggered the $35.5 million impairment charge, including $13.7 million of goodwill impairment and $21.8 million of long-lived asset impairment.
- Rambus appointed Ronald D. Black as president and chief executive officer in June 2012.
Guidance, outlook, risks and unusual items
- Management expected engineering costs to remain elevated as it continued investing in semiconductor, lighting, security and other technologies. Non-litigation marketing and administrative costs were expected to decline following restructuring.
- 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 in 2012.
- Revenue is highly concentrated: the top five customers represented approximately 68% of 2012 revenue, and Samsung represented at least 10%. International customers represented approximately 73% of revenue.
- Several material license agreements were scheduled to expire in 2015, creating renewal risk. Royalty revenue also varies with customer shipment volumes, product mix and reported sales.
- Elpida, a significant historical customer, entered bankruptcy proceedings in Japan in February 2012. The company also noted counterparty credit risk and the possibility of delayed or reduced payments.
- Rambus faced extensive intellectual-property litigation, including proceedings involving SK Hynix, Micron and other semiconductor companies. Adverse decisions could limit patent enforceability, reduce licensing revenue and increase legal costs.
- In January 2013, a Delaware court found Rambus had spoliated documents in the Micron matter and determined that the patents at issue were unenforceable against Micron; Rambus disclosed its intention to appeal.
- Rambus incurred $13.2 million of litigation expense in 2012, down from $61.0 million in 2011, but litigation spending remained volatile and material.
- Samsung license payments were expected to continue at approximately $25.0 million per quarter, subject to contractual adjustments, through the fourth quarter of 2014. Rambus received $87.8 million from Samsung in 2012.
- The company maintained a $206.5 million valuation allowance against deferred tax assets of approximately $211.0 million before the allowance. Recognition of these tax assets depends on achieving sufficient future taxable income.
- Contractual obligations totaled approximately $294.7 million, including $172.5 million of convertible notes due in 2014, $33.3 million of remaining CRI retention bonuses and $12.9 million of future note interest.
- Subsequent to year-end, Rambus amended its Sunnyvale lease to reduce space by approximately 31,000 square feet and agreed to approximately $1.4 million of termination and broker fees. In February 2013, it signed a patent license and settlement agreement with LSI running through 2018.
Most important facts for investors to verify
- Whether recurring royalty revenue stabilizes after the decline in 2012 and whether customer concentration, particularly Samsung exposure, changes.
- The timing, terms and financial impact of license renewals expected around 2015.
- Cash generation and the company’s ability to fund operations, litigation, acquisitions and the $172.5 million convertible-note maturity in 2014.
- Appeals and outcomes in the Micron, SK Hynix and other intellectual-property proceedings, including potential effects on patent enforceability and licensing revenue.
- Whether the restructuring produces the anticipated expense reductions without impairing research, engineering capacity or customer relationships.
- Commercial traction in general lighting, security, mobile media and Unity’s non-volatile-memory technology, including the risk of further asset impairments.
- Realization of deferred tax assets and resolution of approximately $16.8 million of unrecognized tax benefits.