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RMBS > SEC Filings for RMBS > Form 10-Q on 31-Oct-2011All Recent SEC Filings

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Form 10-Q for RAMBUS INC


31-Oct-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including any statements regarding trends in future revenue or results of operations, gross margin or operating margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning developments, performance or industry ranking; any statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Generally, the words "anticipate," "believes," "plans," "expects," "future," "intends," "may," "should," "estimates," "predicts," "potential," "continue," "projects" and similar expressions identify forward-looking statements. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes in condition, significance, value and effect. As a result of the factors described herein, and in the documents incorporated herein by reference, including, in particular, those factors described under "Risk Factors," we undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this report with the Securities and Exchange Commission.

Rambus, RDRAMTM, XDRTM, FlexIOTM and FlexPhaseTM are trademarks or registered trademarks of Rambus Inc. Other trademarks that may be mentioned in this quarterly report on Form 10-Q are the property of their respective owners.

Industry terminology, used widely throughout this report, has been abbreviated and, as such, these abbreviations are defined below for your convenience:

Double Data Rate                           DDR
Dynamic Random Access Memory               DRAM
Fully Buffered-Dual Inline Memory Module   FB-DIMM
Gigabits per second                        Gb/s
Graphics Double Data Rate                  GDDR
Input/Output                               I/O
Light Emitting Diodes                      LED
Lighting and Display Technology            LDT
Liquid Crystal Display                     LCD
Peripheral Component Interconnect          PCI
Rambus Dynamic Random Access Memory        RDRAMTM
Single Data Rate                           SDR
Synchronous Dynamic Random Access Memory   SDRAM
eXtreme Data Rate                          XDRTM

From time to time we will refer to the abbreviated names of certain entities and, as such, have provided a chart to indicate the full names of those entities for your convenience.

Advanced Micro Devices Inc.                        AMD
Broadcom Corporation                               Broadcom
Cryptography Research, Inc.                        CRI
Elpida Memory, Inc.                                Elpida
Freescale Semiconductor Inc.                       Freescale
Fujitsu Limited                                    Fujitsu
General Electric Company                           GE
Global Lighting Technologies, Inc.                 GLT
Hewlett-Packard Company                            Hewlett-Packard
Hynix Semiconductor, Inc.                          Hynix
Infineon Technologies AG                           Infineon
Inotera Memories, Inc.                             Inotera
Intel Corporation                                  Intel
International Business Machines Corporation        IBM
Joint Electronic Device Engineering Councils       JEDEC
LSI Corporation                                    LSI
MediaTek Inc.                                      MediaTek
Micron Technologies, Inc.                          Micron
Nanya Technology Corporation                       Nanya
NEC Electronics Corporation                        NEC
NVIDIA Corporation                                 NVIDIA
Qimonda AG (formerly Infineon's DRAM operations)   Qimonda
Panasonic Corporation                              Panasonic
Renesas Electronics                                Renesas
Samsung Electronics Co., Ltd.                      Samsung
Sony Computer Electronics                          Sony
Spansion, Inc.                                     Spansion
ST Microelectronics N.V.                           STMicroelectronics
Toshiba Corporation                                Toshiba


Table of Contents

Business Overview

We are a premier intellectual property and technology licensing company. Our primary focus is the creation, design, development and licensing of patented innovations, technologies and architectures that are foundational to nearly all digital electronics products and systems. Our patented innovations and technologies aim to improve the performance, power efficiency, time-to-market and cost-effectiveness of our customers' products, components and systems offered and used in semiconductors, computers, mobile applications, gaming and graphics, consumer electronics, lighting displays, general lighting and data security. By licensing our patented innovations and technologies, we hope to continuously enrich the end-user experience of the digital electronics products and systems marketed and sold by our customers and licensees. We believe we have established an unparalleled licensing platform and business model that will continue to foster the development of new foundational and leading innovations and technologies. As a result, our goal is to create significant licensing opportunities, and thereby perpetuate strong company operating performance and long term stockholder value.

While we have historically focused our efforts in developing and licensing patented innovations and technologies for the semiconductor industry, particularly in the area of chip interfaces, we have initiated diversification efforts to expand our portfolio of patented innovations and technologies into lighting and displays, mobile communications and additional semiconductor technologies. In the second quarter of 2011, we expanded our portfolio of patented innovations and technologies into data security technologies through the acquisition of CRI. We expect to continue this diversification initiative through the acquisition of assets and the hiring of the inventors, scientists and engineers who will lead the effort to further develop these patented innovations and technologies in these new areas of focus.

Rambus has two operating segments: Semiconductor Business Group ("SBG") which focuses on the design, development and licensing of semiconductor technology, and New Business Group ("NBG") which focuses on the design, development and licensing of lighting and display technologies, mobile, data security and other technologies. For additional information concerning segment reporting, see Note 11, "Business Segments and Major Customers," of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.

The key elements of our strategy are as follows:

Innovate: Develop and patent our innovative technology to provide fundamental competitive advantage when incorporated into semiconductors, and digital electronics products and systems.

Drive Adoption: Communicate the advantages of our patented innovations and technologies to the industry and encourage its adoption through demonstrations and incorporation in the products of select customers.

Monetize: License our patented inventions and technology solutions to customers for use in their semiconductor and system products.

As of September 30, 2011, our semiconductor, chip interface, lighting, display, mobile applications, data security and other technologies are covered by 1,333 U.S. and foreign patents. Additionally, we have 1,039 patent applications pending. Some of the patents and pending patent applications are derived from a common parent patent application or are foreign counterpart patent applications. We have a program to file applications for and obtain patents in the United States and in selected foreign countries where we believe filing for such protection is appropriate and would further our overall strategy and objectives. In some instances, obtaining appropriate levels of protection may involve prosecuting continuation and counterpart patent applications based on a common parent application. We believe that our patented innovations provide our customers means to achieve higher performance, improved power efficiency, lower risk, and greater cost-effectiveness in their digital electronics products and systems.

Our patented innovations and technologies are offered to our customers through either a patent license or a technology license. Our revenues are primarily derived from patent licenses, through which we provide a license to our broad portfolio of patented innovations primarily to semiconductor and system companies who use these innovations in the development and manufacture of their own products.

Our patent licensing agreements may provide a license to all or part of our patent portfolio for a particular use, product or technology. The patent license essentially provides our customers with a defined right to use our patented innovations in the customer's own digital electronics products and systems. Patent license agreements are generally structured with variable royalty payments, although some agreements include fixed payments over certain defined periods. Leading semiconductor companies, such as AMD, Elpida, NVIDIA, Panasonic, Renesas, Samsung and Toshiba, currently pay us royalties for patents they may use in their own products.


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We also offer our customers technology licenses. We typically offer technology licenses to support the implementation and adoption of our patented innovations and technologies through know-how and technology transfers, product design, development, and system integration consulting and engineering services. Our technology license offerings also include a range of solutions developed by Rambus, which include "leadership" solutions (which are Rambus-proprietary solutions widely licensed to our customers) and industry-standard solutions that we provide to our customers under license for incorporation into our customers' digital electronics products and systems. These technology license agreements may have both a fixed price (non-recurring) component and ongoing royalties. Further, under technology licenses, our customers typically receive licenses to our patents necessary to implement these solutions in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts with us. Our technology licensees include leading companies such as Elpida, IBM, Panasonic, Samsung, Sony and Toshiba.

The remainder of our revenue is contract services revenue which includes license fees and engineering services fees. Due to the often complex nature of implementing state-of-the art technology, we also offer engineering services to our customers to help them successfully integrate our solutions into their digital electronics products and systems. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenue or account receivables in any given period.

We intend to continue making significant expenditures associated with engineering, marketing, general and administration including litigation expenses, and expect that these costs and expenses will continue to be a significant percentage of revenue in future periods. Whether such expenses increase or decrease as a percentage of revenue will be substantially dependent upon the rate at which our revenue or expenses change.

We continue to pursue other revenue opportunities in order to grow our revenue. On June 3, 2011, we completed our largest acquisition to date, CRI, a security research and development and licensing company. We acquired all of the issued and outstanding common shares of CRI in exchange for cash of $168.8 million and Common Stock with a value of approximately $88.4 million at closing. This acquisition expands the breadth of Rambus' technologies available for licensing with complementary technologies from CRI that include patented innovations and solutions for content protection, network security and anti-counterfeiting. In connection with the acquisition of CRI, we are obligated to pay retention bonuses to certain CRI employees and contractors, subject to certain eligibility and acceleration provisions, including continued employment with us, in cash or stock at our election, in three equal amounts of approximately $16.7 million, on June 3, 2012, 2013 and 2014, respectively. The total retention bonus commitment is $50.0 million and may be forfeited in part or whole by the covered employees and contractors upon voluntary departure from employment or discontinuation of services. Any amounts forfeited will be paid by us to a designated charity. See Note 16, "Acquisition," of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further discussion.

Executive Summary

During the third quarter of 2011, we signed a patent license agreement with a major smartphone and tablet manufacturer for the use of CRI's Differential Power Analysis ("DPA") countermeasures patents. In addition, Verimatrix licensed our CryptoFirewallTM core for Pay TV solutions and we hired Dr. David Stork, a computational sensing and imaging expert to assist us in expanding our portfolio of patented innovations and technologies.

Research and development continues to play a key role in our efforts to maintain product innovations. Our engineering expenses for the three and nine months ended September 30, 2011 increased $15.3 million and $23.8 million, respectively, as compared to the same periods in 2010 primarily due to the additional headcount to support our business, additional amortization expense related to intangible assets acquired as well as the accrual of the CRI retention bonuses as discussed above, offset by the decrease in funding for our 2011 Corporate Incentive Plan ("CIP") which is lower than our 2010 CIP. As a percentage of revenue, as compared to the same periods in 2010, engineering expenses decreased for the three months ended September 30, 2011 primarily due to higher revenue and increased for the nine months ended September 30, 2011 primarily due to lower revenue and higher expenses. Marketing, general and administrative expenses in the aggregate increased $21.1 million and $30.5 million, respectively, for the three and nine months ended September 30, 2011 as compared to the same periods in 2010 primarily due to higher litigation expenses. As a percentage of revenue, as compared to the same periods in 2010, marketing, general and administrative expenses decreased for the three months ended September 30, 2011 primarily due to higher revenue. Our lower revenue combined with the increase in marketing, general and administrative expenses, has caused marketing, general and administrative expenses to increase as a percentage of revenue for the nine months ended September 30, 2011. Additionally, for the three and nine months ended September 30, 2011, we incurred costs of restatement and related legal activities of $0.8 million and $2.7 million, respectively, primarily due to litigation expense associated with a private shareholder lawsuit related to the 2006-2007 stock option investigation.


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Trends

There are a number of trends that we expect may or will have a material impact on us in the future, including global economic conditions with the resulting impact on sales, continuing pursuit of litigation against companies that we believe have infringed our patented technologies and shifts in our overall effective tax rate.

We have a high degree of revenue concentration, with our top five licensees representing approximately 78% and 68% of our revenue for the three and nine months ended September 30, 2011 as compared to 87% and 90% for the three and nine months ended September 30, 2010. As a result of our settlement with Samsung in 2010, Samsung is expected to account for a significant portion of our ongoing licensing revenue. For the three months ended September 30, 2011, revenue from Freescale, Samsung and a major smartphone and tablet manufacturer each accounted for 10% or more of our total revenue. For the nine months ended September 30, 2011, revenue from Elpida, Freescale, NVIDIA and Samsung each accounted for 10% or more of our total revenue. For the three months ended September 30, 2010, revenue from AMD, Fujitsu, Panasonic and Samsung each accounted for 10% or more of our total revenue. For the nine months ended September 30, 2010, revenue from Samsung accounted for 10% or more of our total revenue.

The particular licensees which account for revenue concentration have varied from period to period as a result of the addition of new contracts, expiration of existing contracts, industry consolidation and the volumes and prices at which the licensees have recently sold licensed semiconductors to system companies. These variations are expected to continue in the foreseeable future.

The semiconductor industry is intensely competitive and highly cyclical. Our visibility with respect to future sales is very limited at this time. To the extent that macroeconomic fluctuations negatively affect our principal licensees, the demand for our technology may be significantly and adversely impacted and we may experience substantial period-to-period fluctuations in our operating results.

The royalties we receive from our semiconductor business are partly a function of the adoption of our chip interfaces by system companies. Many system companies purchase semiconductors containing our chip interfaces from our licensees and do not have a direct contractual relationship with us. Our licensees generally do not provide us with details as to the identity or volume of licensed semiconductors purchased by particular system companies. As a result, we face difficulty in analyzing the extent to which our future revenue will be dependent upon particular system companies. System companies face intense competitive pressure in their markets, which are characterized by extreme volatility, frequent new product introductions and rapidly shifting consumer preferences.

The display industry is also intensely competitive and highly cyclical. We believe the potential percentage of transition to LED lightguides from cold cathode fluorescent lights ("CCFL") lightguides could be over 90% for cellular phones and notebook computers and could reach up to 50% for display monitors and LCD televisions in 2011. The tablet market is growing rapidly as a new category that primarily uses LED lightguides to achieve slim designs. Our LDT group has numerous patents in edge lit LED lightguide technology. Our plans are to license our technology to key companies that use LED edge lit display products.

The highly fragmented general lighting industry is undergoing a fundamental shift from incandescent technology to CCFL and LED driven technology by the need to reduce energy consumption and to comply with government mandates. LED lighting typically saves energy costs as compared to existing installed lighting. Our LDT group has numerous patents in LED edge lit lightguide technology which can be applied in the design of next generation LED lighting products. Our goal is to be a major player in the general lighting industry with our technology and towards that effort we have established a technology center in Brecksville, Ohio.

Our revenue from companies headquartered outside of the United States accounted for approximately 58% and 69% of our total revenue for the three and nine months ended September 30, 2011, respectively, as compared to 85% and 93% for the three and nine months ended September 30, 2010, respectively. We expect that revenue derived from international licensees will continue to represent a significant portion of our total revenue in the future. To date, all of the revenue from international licensees have been denominated in U.S. dollars. However, to the extent that such licensees' sales to their customers are not denominated in U.S. dollars, any royalties that we receive as a result of such sales could be subject to fluctuations in currency exchange rates. In addition, if the effective price of licensed semiconductors sold by our foreign licensees were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for licensed semiconductors could fall, which in turn would reduce our royalties. We do not use financial instruments to hedge foreign exchange rate risk.


Table of Contents

For additional information concerning international revenue, see Note 11, "Business Segments and Major Customers," of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.

Engineering costs in the aggregate increased and as a percentage of revenue decreased for the three months ended September 30, 2011, and in the aggregate and as a percentage of revenue increased for the nine months ended September 30, 2011, as compared to the same periods in the prior year. In the near term, we intend to continue to make investments in the infrastructure and technologies required to maintain our product innovations in semiconductor and lighting technologies and newly acquired businesses, such as CRI.

Marketing, general and administrative expenses in the aggregate increased and as a percentage of revenue decreased for the three months ended September 30, 2011, and in the aggregate and as a percentage of revenue increased for the nine months ended September 30, 2011, as compared to the same periods in the prior year. Historically, we have been involved in significant litigation stemming from the unlicensed use of our inventions. Our litigation expenses have been high and difficult to predict and we anticipate future litigation expenses will continue to be significant, volatile and difficult to predict. If we are successful in the litigation and/or related licensing, our revenue could be substantially higher in the future; if we are unsuccessful, our revenue may not grow. Furthermore, our success in litigation matters pending before courts and regulatory bodies that relate to our intellectual property rights have impacted and will likely continue to impact our ability and the terms upon which we are able to negotiate new or renegotiate existing licenses for our technology. We will continue to pursue litigation against those companies that have infringed our patented technologies, which in turn will continue to increase marketing, general and administrative expenses as litigation expenses will continue to increase until such litigation is resolved.

As we continue to pursue litigation and invest in research and development projects combined with lower revenue from our licensees in the future, our cash from operations will be negatively affected.

Results of Operations



The following table sets forth, for the periods indicated, the percentage of
total revenue represented by certain items reflected in our unaudited condensed
consolidated statements of operations:



                                     Three Months Ended          Nine Months Ended
                                        September 30,              September 30,
                                     2011          2010         2011          2010
Revenue:
Royalties                               96.0 %        98.2 %       94.5 %        98.9 %
Contract revenue                         4.0 %         1.8 %        5.5 %         1.1 %
Total revenue                          100.0 %       100.0 %      100.0 %       100.0 %
Operating costs and expenses:
Cost of revenue*                         7.4 %         4.3 %        7.3 %         2.2 %
Research and development*               32.3 %        72.5 %       34.9 %        29.1 %
Marketing, general and
administrative*                         48.8 %        88.0 %       52.1 %        38.2 %
Costs of restatement and
related legal activities                 0.8 %         3.9 %        1.2 %         1.5 %
Gain from settlement                       - %       (32.5 )%      (2.7 )%      (50.1 )%
Total operating costs and
expenses                                89.3 %       136.2 %       92.8 %        20.9 %
Operating income (loss)                 10.7 %       (36.2 )%       7.2 %        79.1 %
Interest income and other
income (expense), net                   (0.8 )%        1.0 %       (0.9 )%        0.5 %
Interest expense                        (5.4 )%      (15.6 )%      (6.9 )%       (6.3 )%
Interest and other income
(expense), net                          (6.2 )%      (14.6 )%      (7.8 )%       (5.8 )%
Income (loss) before income
taxes                                    4.5 %       (50.8 )%      (0.6 )%       73.3 %
Provision for income taxes               4.0 %        14.0 %        5.7 %        22.6 %
Net income (loss)                        0.5 %       (64.8 )%      (6.3 )%       50.7 %



* Includes stock-based compensation:
Cost of revenue                           0.1 %  0.1 % 0.2 % 0.1 %
Research and development                  2.8 %  7.8 % 3.4 % 3.3 %
Marketing, general and administrative     4.3 % 15.7 % 5.8 % 6.6 %


Table of Contents

                              Three Months                             Nine Months
                           Ended September 30,      Change in      Ended September 30,      Change in
(Dollars in millions)      2011           2010      Percentage      2011          2010      Percentage
Total Revenue
Royalties               $      96.2    $     31.2        208.6 % $     216.4    $   229.9         (5.9 )%
Contract revenue                4.1           0.5        617.6 %        12.6          2.6        392.3 %
Total revenue           $     100.3    $     31.7        215.9 % $     229.0    $   232.5         (1.5 )%

Royalty Revenue

Patent Licenses

Our patent royalties increased approximately $65.4 million to $88.6 million for the three months ended September 30, 2011 from $23.2 million for the same period in 2010. The increase was primarily due to revenue recognized from the patent license and settlement agreements with Freescale, complete allocation of Samsung's quarterly license payment to revenue since the second quarter of 2011, revenue recognized from agreements signed with Elpida, NVIDIA and Renesas in the second half of 2010, as well as revenue recognized from a license agreement for the use of CRI's patented innovations.

Our patent royalties decreased approximately $13.2 million to $195.0 million for the nine months ended September 30, 2011 from $208.2 million for the same period in 2010. The decrease was primarily due to the recognition during the first . . .

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