Rambus Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010, including fourth-quarter supplementary data. Rambus is an intellectual-property and technology licensing company focused primarily on semiconductor interfaces, with expanding activities in lighting, displays, mobile communications and other technologies.
Business Context and Key Developments
- Rambus reorganized into the Semiconductor Business Group and New Business Group during 2010. The New Business Group, including lighting and display activities, was not a separately reportable segment.
- The company held approximately 1,180 U.S. and foreign patents and had approximately 850 patent applications pending at year-end.
- Rambus signed a major settlement and licensing arrangement with Samsung, renewed or extended agreements with AMD, Elpida and Renesas, and signed a lighting-technology license with GE Lighting.
Financial Performance
| Metric | 2010 | 2009 | Change or commentary |
|---|---|---|---|
| Total revenue | $323.4 million | $113.0 million | Increased 186.2% |
| Royalty revenue | $320.2 million | $108.0 million | Represented 99.0% of revenue versus 95.6% |
| Contract revenue | $3.2 million | $5.0 million | Decreased 35.4% |
| Operating income | $226.9 million | $(75.9) million | Improved substantially |
| Net income | $150.9 million | $(92.2) million | Returned to profitability |
| Diluted EPS | $1.30 | $(0.88) | Improved substantially |
| Operating margin | 70.2% | (67.1%) | Benefited materially from Samsung-related revenue and settlement gains |
| Effective tax rate | 27.5% | 0.6% | 2010 tax provision was $57.1 million |
Patent royalties increased to $288.4 million from $79.3 million, primarily because of agreements signed with Samsung and Elpida. Technology-license royalties increased to $31.8 million from $28.7 million. Research and development expense rose to $92.7 million from $67.3 million, while total marketing, general and administrative expense declined to $119.5 million from $128.2 million, largely because of lower litigation expense.
Cash Flow, Liquidity and Capitalization
| Metric | December 31, 2010 | December 31, 2009 |
|---|---|---|
| Cash, cash equivalents and marketable securities | $512.0 million | $460.2 million |
| Total assets | $663.2 million | $555.9 million |
| Total liabilities | $214.9 million | $300.5 million |
| Stockholders’ equity | $334.8 million | $255.3 million |
| Convertible notes, carrying value | $121.5 million | $248.0 million |
| Net cash from operating activities | $235.2 million | $(40.6) million |
| Net cash used in investing activities | $(181.5) million | $24.5 million |
| Net cash used in financing activities | $(127.5) million | $188.9 million |
- Cash provided by operations included approximately $300.2 million of net operating cash flow from Samsung and Elpida after applicable withholding taxes.
- Rambus repaid approximately $137.0 million of 2010 Notes at maturity and had $172.5 million principal amount of 5% convertible senior notes due June 2014 outstanding.
- The company repurchased approximately 9.5 million shares for $195.1 million during 2010; approximately 5.2 million shares remained authorized for repurchase at year-end.
- Samsung held shares subject to a one-time put right covering up to 4.8 million shares, with a potential repurchase obligation of up to $100.0 million during 2011.
- Management stated that available cash, securities and expected operating cash flow were adequate for at least the next twelve months.
Material Changes Versus Prior Period
- Revenue increased primarily because of the Samsung settlement and new or renewed licensing agreements, reversing the revenue decline reported in 2009.
- Rambus recognized $126.8 million of gain from settlement in 2010. The broader Samsung arrangement had an estimated fair value of $900.0 million, allocated among revenue, settlement gain and stock issuance.
- Samsung was a significant source of revenue and accounted for 56% of 2010 revenue; a second customer accounted for 15%. The top five licensees represented approximately 85% of revenue.
- International customers represented approximately 93% of revenue, compared with 83% in 2009.
- Research and development expense increased 37.8%, while litigation expense within marketing, general and administrative costs declined to $22.7 million from $55.5 million.
- The company completed acquisitions and patent purchases totaling approximately $27.7 million, primarily to expand lighting, display and other technology portfolios.
- The company completed construction and moved into new facilities in Sunnyvale, California and Brecksville, Ohio, increasing property, plant and equipment and creating approximately $27.9 million of long-term imputed financing obligations.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide a specific numerical revenue or earnings forecast in the filing. It expects royalty revenue to remain the majority of total revenue, but royalty results will vary with renewals, new licenses, shipment volumes, pricing and product mix.
- Engineering costs were expected to be lower in the near term because the 2010 employee bonus related to the Samsung settlement was a one-time item; longer-term headcount and infrastructure costs were expected to increase as Rambus invests in semiconductor and lighting technologies.
- Samsung payments were expected to continue at approximately $25.0 million per quarter, subject to contractual adjustments, through 2014. The filing estimated $400.0 million of remaining payments after December 31, 2010.
- Revenue concentration, dependence on semiconductor and display markets, customer cancellation rights, international exposure and reliance on licensee reporting create substantial volatility and collection risks.
- Rambus remained involved in significant patent litigation involving Hynix, Micron, NVIDIA and other parties. Appeals and trials could materially affect licensing revenue, legal expense, cash flow and patent enforceability.
- The Federal Circuit had not issued decisions on coordinated Hynix and Micron appeals as of the filing date. Additional ITC investigations involving NVIDIA and other semiconductor companies were pending.
- The company maintained a full valuation allowance against most U.S. deferred tax assets. Gross deferred tax assets before the allowance were approximately $78.3 million, with a $75.4 million valuation allowance at year-end.
- The filing identified approximately $11.8 million of unrecognized tax benefits and contractual obligations totaling approximately $266.1 million, excluding possible Samsung put payments and uncertain tax-benefit payments.
- The stockholder rights plan expired in July 2010 and was not renewed.
Important Facts for Investors to Verify
- Whether Samsung makes all remaining scheduled license payments and whether payments are adjusted by Samsung’s licensed DRAM revenue.
- The sustainability of 2010 revenue and profitability excluding the one-time Samsung settlement-related recognition.
- The renewal status and economics of remaining major license agreements, particularly those involving concentrated customers.
- The outcomes and timing of Hynix, Micron, NVIDIA, ITC and other intellectual-property proceedings.
- The potential cash requirement if Samsung exercises its put right for up to $100.0 million of shares.
- The ability of new lighting, display and mobile businesses to generate material licensing revenue relative to their research and development and acquisition costs.
- The maturity, conversion terms and potential dilution or cash requirements associated with the $172.5 million of 2014 convertible notes.
- The continued realizability of deferred tax assets and the effect of future settlements, litigation outcomes and tax audits on the effective tax rate.