Business Context and Reporting Period
Rambus Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. Rambus is an intellectual-property licensing company focused primarily on semiconductor and chip-interface technologies, with newer lighting, display and mobile technology activities through its New Business Group and Lighting and Display Technology group.
Revenue is predominantly royalty-based. The period included the January 2010 settlement and licensing agreement with Samsung, which materially affected revenue, operating income, cash flow and customer concentration.
Financial Highlights
| Metric | Three months ended September 30, 2010 | Three months ended September 30, 2009 | Nine months ended September 30, 2010 | Nine months ended September 30, 2009 |
|---|---|---|---|---|
| Total revenue | $31.7 million | $27.9 million | $232.5 million | $82.2 million |
| Royalty revenue | $31.2 million | $26.9 million | $229.9 million | $77.8 million |
| Operating income (loss) | $(11.5) million | $(20.7) million | $184.0 million | $(59.2) million |
| Net income (loss) | $(20.6) million | $(27.5) million | $117.8 million | $(68.9) million |
| Diluted EPS | $(0.18) | $(0.26) | $1.01 | $(0.66) |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $179.4 million | $(25.6) million |
- Third-quarter revenue increased 13.9%; nine-month revenue increased 182.8%, primarily because of Samsung-related settlement and license revenue.
- Approximate operating margin was negative 36.2% in the third quarter and 79.1% for the nine-month period. The nine-month margin was heavily affected by the Samsung settlement, including $116.5 million of gain from settlement.
- Approximate net margin was negative 64.8% in the third quarter and 50.7% for the nine-month period.
- Research and development expense was $23.0 million in the quarter and $67.7 million for nine months, up from $16.7 million and $50.3 million, respectively, primarily because of increased LDT headcount, patent research, amortization and the 2010 corporate incentive plan.
- Marketing, general and administrative expense declined to $27.9 million for the quarter and $88.9 million for nine months, compared with $29.9 million and $99.6 million, respectively, primarily because of lower litigation expense.
- At September 30, 2010, cash and cash equivalents were $218.2 million and marketable securities were $266.7 million, for total cash, cash equivalents and marketable securities of $484.9 million, compared with $460.2 million at December 31, 2009.
- Total assets were $598.6 million and total liabilities were $196.7 million at September 30, 2010. Stockholders’ equity was $288.5 million, excluding $113.5 million of contingently redeemable common stock.
- Outstanding debt consisted of $172.5 million principal amount of 5% convertible senior notes due 2014, carried at $118.8 million after unamortized discount. The prior $137.0 million of zero-coupon notes was repaid at maturity in February 2010.
Material Changes Versus the Prior Comparable Period
- Samsung paid Rambus $475.0 million through September 30, 2010 under the settlement and related license and stock purchase arrangements. Rambus expects approximately $425.0 million of additional payments through 2014, subject to contractual adjustments.
- The Samsung arrangement contributed $166.5 million of revenue and $116.5 million of settlement gain during the first nine months. The third-quarter allocation was $14.7 million to revenue and $10.3 million to settlement gain.
- Patent license revenue increased by approximately $149.8 million for the nine months, primarily because of Samsung-related revenue. Technology license royalties also increased, while contract revenue declined because of completed development contracts.
- Operating cash flow improved from an outflow of $25.6 million to an inflow of $179.4 million, largely because of Samsung-related earnings and related working-capital changes.
- Investing cash flow changed from an inflow of $92.2 million to an outflow of $119.5 million, reflecting greater purchases of marketable securities, facility build-out, capital expenditures and technology acquisitions.
- Financing cash flow changed from an inflow of $184.5 million to an outflow of $130.7 million, reflecting repayment of the 2010 Notes, $105.1 million of share repurchases and a $90.0 million prepaid share repurchase agreement, partly offset by $192.0 million received from Samsung for common stock.
- Rambus repurchased approximately 4.8 million shares for $105.1 million during the nine months and had authorization remaining to repurchase approximately 10.0 million shares. It also prepaid $90.0 million to JPMorgan for a future share delivery based on a valuation-period average price.
- The company corrected an approximately $641 million classification error in the prior-period cash-flow presentation involving purchases and maturities of cash equivalents. Management concluded that the correction was not material and did not change net cash used in investing activities.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that existing cash, investments and expected operating cash flow should be adequate for operations, capital expenditures and commitments for at least the next 12 months.
- Samsung payments are subject to adjustment based on licensed DRAM revenue and other contractual conditions. The remaining expected payments are not guaranteed and could vary or be affected by termination provisions.
- Revenue concentration is substantial: the top five licensees represented approximately 87% of third-quarter revenue and 90% of nine-month revenue. Samsung represented at least 10% of nine-month revenue and is expected to remain a significant source of revenue.
- Several license agreements expired or were subject to renewal negotiations during 2010. Failure to renew agreements on favorable terms could materially reduce future royalty revenue.
- Rambus continues significant litigation involving Hynix, Micron, NVIDIA and other parties. The Hynix judgment was approximately $401.2 million including accrued post-judgment interest as of October 2010, but appeals remained pending. Hynix had posted a full bond, and escrowed royalties remained subject to further court action.
- The ITC issued a limited exclusion order and cease-and-desist order concerning certain NVIDIA products that infringed three Rambus patents. Appeals had been filed and remained pending.
- The Federal Circuit had reheard coordinated Hynix and Micron appeals, with no decision issued as of the filing. The outcome could affect patent enforceability, licensing leverage and future revenue.
- Rambus recorded $52.5 million of income tax expense for the nine months, principally related to Korean withholding taxes and state alternative minimum taxes. A full valuation allowance remained against U.S. deferred tax assets, and unrecognized tax benefits totaled approximately $10.9 million.
- Contractual obligations totaled approximately $253.2 million, including $172.5 million of convertible-note principal, $34.1 million of related interest and $46.6 million of lease obligations. The company also had approximately $10.9 million of uncertain tax benefits not included in the contractual-obligations table.
- Rambus expects engineering and research investment to remain elevated, while litigation expense is expected to remain volatile and difficult to predict. The semiconductor industry remains cyclical, competitive and exposed to weak global demand, customer consolidation and technology substitution.
- The shareholder rights plan expired in July 2010 and was not renewed at that time. Management concluded disclosure controls and procedures were effective as of September 30, 2010.
Most Important Facts to Verify
- Whether Samsung makes the remaining approximately $425.0 million of scheduled payments and whether payment levels are adjusted under the license agreement.
- The outcome and timing of the Hynix and Micron appeals and the effect on patent enforceability, judgments, royalties and licensing negotiations.
- The status and financial impact of the NVIDIA ITC exclusion order and related Federal Circuit appeals.
- Renewal terms for expired or expiring license agreements and the sustainability of royalty revenue excluding Samsung settlement-related amounts.
- Customer concentration, particularly the dependence on Samsung and the top five licensees.
- Cash requirements for the 2014 convertible notes, share repurchase commitments, facility leases and ongoing litigation.
- Whether the LDT and lighting businesses generate meaningful licensing revenue and achieve commercial adoption.
- Changes in the U.S. deferred-tax valuation allowance, uncertain tax positions and Korean withholding-tax exposure.