Rambus Inc. — Form 10-Q Summary
Business Context and Reporting Period
Rambus is an intellectual-property and technology licensing company focused on semiconductor interfaces, lighting and display technologies, mobile applications, data security and related technologies. The filing covers the quarter and nine months ended September 30, 2011, and was filed October 31, 2011.
The company operated through the Semiconductor Business Group and New Business Group. On June 3, 2011, Rambus acquired Cryptography Research, Inc. (CRI), expanding its data-security licensing portfolio.
Financial Highlights
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $100.3 million | $31.7 million | $229.0 million | $232.5 million |
| Royalties | $96.2 million | $31.2 million | $216.4 million | $229.9 million |
| Contract revenue | $4.0 million | $0.6 million | $12.6 million | $2.6 million |
| Operating income (loss) | $10.7 million | $(11.5) million | $16.6 million | $184.0 million |
| Net income (loss) | $0.5 million | $(20.6) million | $(14.3) million | $117.8 million |
| Diluted EPS | $0.00 | $(0.18) | $(0.13) | $1.01 |
Q3 operating margin was approximately 10.7% and net margin approximately 0.5%. For the nine-month period, operating margin was approximately 7.2% and net margin was approximately negative 6.3%. Revenue was highly concentrated: the top five licensees represented approximately 78% of Q3 revenue and 68% of nine-month revenue.
Cash Flow, Liquidity and Capitalization
- Cash, cash equivalents and marketable securities totaled approximately $292.7 million at September 30, 2011, down from $512.0 million at December 31, 2010.
- Operating cash flow was $51.0 million for the first nine months, compared with $179.4 million in the prior-year period.
- Investing cash flow was negative $22.4 million, including $167.4 million paid for CRI, net of cash acquired.
- Financing cash flow was negative $83.0 million, primarily reflecting the $100.0 million cash repurchase of approximately 4.8 million shares put back to Rambus by Samsung.
- Convertible notes had a $172.5 million face value and $130.4 million carrying value at September 30, 2011, with 5% notes due in 2014. The notes had a disclosed fair value of $191.6 million.
- Total contractual obligations were $309.4 million, including $172.5 million of convertible notes, $50.0 million of CRI retention bonuses and $25.9 million of future convertible-note interest.
- Management stated that existing liquidity and operating cash flows were expected to fund operations, capital expenditures and commitments for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 215.9%, primarily from higher patent-license royalties, including Samsung and Freescale-related revenue and newly signed or acquired licenses. Nine-month revenue decreased 1.5%, reflecting the absence of substantial Samsung settlement revenue recognized in early 2010.
- Operating results improved in Q3 from a loss to income, but nine-month operating income fell sharply because 2010 included a $116.5 million Samsung settlement gain, compared with $6.2 million recognized in 2011.
- Engineering costs increased 63.1% in Q3 and 32.7% for the nine-month period, driven by additional personnel, CRI-related amortization and retention-bonus accruals.
- Marketing, general and administrative expense increased 75.2% in Q3 and 34.4% for the nine months, primarily due to substantially higher litigation expense.
- CRI contributed approximately $13.3 million of revenue and $7.6 million of operating losses from acquisition through September 30, 2011.
- Intangible assets increased to $189.4 million and goodwill to $115.1 million, largely due to the CRI acquisition.
- Rambus issued approximately 6.4 million shares as part of the CRI acquisition. Shares outstanding increased to approximately 110.0 million at September 30, 2011.
Outlook, Commentary, Risks and Unusual Items
- No specific quantitative revenue or earnings guidance is provided in the filing. Management expects royalties to remain the majority of revenue, but notes that results are difficult to forecast because of license renewals, shipment volumes, pricing, product mix and litigation outcomes.
- Management plans continued investment in research and development and in semiconductor, lighting, security and other technologies. It also expects litigation expense to remain significant, volatile and difficult to predict.
- Rambus received notice that Samsung exercised its contractual put right; the company paid $100.0 million in August 2011 and retired the shares.
- The CRI transaction created a $50.0 million retention-bonus commitment, payable in approximately $16.7 million installments in 2012, 2013 and 2014, subject to employment and other conditions.
- Major litigation remained active, including Hynix, Micron, NVIDIA, Broadcom, LSI, MediaTek and STMicroelectronics matters. The Federal Circuit vacated the prior Hynix judgment and remanded the case; Micron-related spoliation issues were also remanded. Two ITC investigations had determinations scheduled for early 2012.
- A California jury trial involving Micron and Hynix had begun deliberations as of September 30, 2011, with no verdict reported in the filing.
- Rambus identified substantial risks from patent validity and enforceability challenges, revenue concentration, semiconductor cyclicality, international operations, counterparty credit risk, technology adoption, CRI integration and potential security-technology vulnerabilities.
- The company maintained a full valuation allowance against U.S. deferred tax assets. Unrecognized tax benefits were approximately $16.6 million, and the timing of possible settlements was not reasonably estimable.
- Disclosure controls and procedures were assessed as effective at September 30, 2011; CRI’s internal controls were excluded from the current evaluation because it was acquired during the year.
Investor Verification Checklist
- Verify the sustainability of the sharp Q3 royalty increase and the extent to which it reflects recurring license economics versus settlement-related or otherwise unusual recognition.
- Assess the renewal status and economics of major licenses, particularly those contributing 10% or more of revenue.
- Evaluate CRI’s post-acquisition revenue contribution, operating losses, integration progress and $50.0 million retention obligation.
- Review the cash impact of Samsung’s $100.0 million share repurchase and the company’s ability to meet 2014 note and other contractual obligations.
- Monitor the outcomes and timing of the Hynix, Micron, NVIDIA and ITC proceedings, including potential effects on licensing revenue, litigation expense and cash flow.
- Reconcile reported profitability with recurring operating performance after excluding the significant 2010 Samsung settlement gain and acquisition-related costs.