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RMBS > SEC Filings for RMBS > Form 10-Q on 29-Oct-2012All Recent SEC Filings

Show all filings for RAMBUS INC

Form 10-Q for RAMBUS INC


29-Oct-2012

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," "projecting" 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, RDRAM™, XDR™, FlexIO™ and FlexPhase™ 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
Gigabits per second                      Gb/s
Graphics Double Data Rate                GDDR
Input/Output                             I/O
Light Emitting Diodes                    LED
Liquid Crystal Display                   LCD
Peripheral Component Interconnect        PCI
Rambus Dynamic Random Access Memory      RDRAM™
Single Data Rate                         SDR

Synchronous Dynamic Random Access Memory SDRAM eXtreme Data Rate XDR™


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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
Cooper Lighting, LLC                             Cooper Lighting
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
Lighting and Display Technology                  LDT
LSI Corporation                                  LSI
MediaTek Inc.                                    MediaTek
Memory and Interfaces Division                   MID
Micron Technologies, Inc.                        Micron
Mobile Technology Division                       MTD
Nanya Technology Corporation                     Nanya
New Business Group                               NBG
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
Semiconductor Business Group                     SBG
Sony Computer Electronics                        Sony
Spansion, Inc.                                   Spansion
ST Microelectronics N.V.                         ST Microelectronics
Texas Instruments Inc.                           Texas Instruments
Toshiba Corporation                              Toshiba


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Business Overview
We are a premier intellectual property and technology licensing company focusing on the creation, design, development and licensing of patented innovations, technologies and architectures that are foundational to nearly all digital electronics products and systems. Our mission is to continuously enrich the end-user experience of electronic systems through groundbreaking innovations and technologies designed to improve the performance, power efficiency, time-to-market and cost-effectiveness of the products, components and systems offered by market-leading companies in semiconductors, computing, tablets, handheld devices, mobile applications, gaming and graphics, high definition televisions and displays, general lighting, cryptography and data security. Our inventors and engineering teams focus on creating innovations designed to address the most challenging demands of each target market and industry. We believe we have established an unparalleled licensing platform and business model that will continue to foster the development of new foundational technologies. By continuing to build upon this platform, our goal is to create additional licensing opportunities, and thereby perpetuate strong company operating performance and long-term stockholder value.
On August 22, 2012, we announced a restructuring program to reduce overall corporate expenses which is expected to improve future profitability while refining some of our research and development efforts. As a result of the restructuring program, we recorded a pre-tax charge of $6.6 million during the third quarter of 2012 related primarily to the reduction in workforce, which included approximately $1.8 million in early termination payments to certain employees related to their previous retention bonus arrangements. The restructuring program is expected to provide overall net cash savings of $30 million to $35 million annually as compared to the run rate in the second quarter of 2012.
Additionally, in the third quarter of 2012, we announced the creation of a new internal organizational structure with three business units: (1) Memory and Interfaces Division which focuses on the design, development and licensing of technology that is related to memory and interfaces; (2) Cryptography Research, Inc. which focuses on the design, development and licensing of technologies for chip and system security and anti-counterfeiting; and (3) Lighting and Display Technologies which focuses on the design, development and licensing of technologies for lighting and displays. The engineering design teams and other strategic initiatives have been consolidated under Dr. Martin Scott, who has assumed the role of chief technology officer. We are still in the process of evaluating if any changes will be required to our current chief operating decision maker ("CODM"), which is comprised of the executive management team, as well as the financial information that will be regularly reviewed for resource allocation and performance assessment. We expect to finalize these changes in the fourth quarter of 2012. For the third quarter of 2012, our CODM reviewed segment information on the same basis as the previous quarter and only SBG is considered a reportable segment as it met the quantitative thresholds for disclosure as a reportable segment. As such, segment information is not separately discussed below. 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. Additionally, we recorded a non-cash charge for the impairment of goodwill and long-lived assets, which includes intangible assets and property, plant and equipment, within our LDT group of approximately $35.5 million in the third quarter of 2012. We conducted this impairment review under the accounting rules as a result of the change in business strategy with less focus on the higher margin display technology licensing and an increased focus on our general lighting technologies. Under generally accepted accounting principles, when indicators of potential impairment are identified, companies are required to conduct a review of the carrying amounts of goodwill and other long-lived assets to determine if impairment exists.
The key elements of our current 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, 2012, our semiconductor, lighting, display, security and other technologies are covered by 1,763 U.S. and foreign patents. Additionally, we have 1,265 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 business 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 improved performance, lower risk, greater cost-effectiveness and other benefits in their products and services.


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Our patented inventions and technology solutions are offered to our customers through either a patent license or a solutions license. Our revenues are primarily derived from patent licenses, through which we provide our customers a license to use some specified portion of our broad portfolio of patented inventions. The patent license provides our customers with a defined right to use our patented innovations in the customer's own digital electronics products, systems or services, as applicable. The patent licenses may also define the specific field of use where our customers may use or employ our inventions in their products. Patent license agreements are structured with fixed, variable or a hybrid of fixed and variable royalty payments over certain defined periods. We also offer our customers solutions licenses to support the implementation and adoption of our technology in their products or services. Our solutions license offerings include a range of solutions developed by Rambus that we provide to our customers under license for incorporation into their products and systems. We offer a range of services as part of our solutions licenses which can include know-how and technology transfer, product design and development, system integration, and other services. These solutions license agreements may have both a fixed price (non-recurring) component and ongoing royalties. Further, under solutions 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.
Royalties represent a substantial majority of our total revenue. We derive the majority of our royalty revenue by licensing our broad portfolio of patents to our customers. These licenses may cover part or all of our patent portfolio across our breadth of technologies. Leading consumer product, semiconductor and system companies such as AMD, Broadcom, Elpida, Freescale, Fujitsu, GE, Intel, Panasonic, Renesas, Samsung and Toshiba have licensed our patents for use in their own products.
We also derive additional revenue by licensing a range of technology solutions to customers for use in their products and systems. Our customers include leading companies such as Cooper Lighting, Elpida, GE, IBM, Panasonic, Samsung, Sony and Toshiba. Due to the often complex nature of implementing our technologies, we provide engineering services under certain of these licenses to help our customers successfully integrate our technology solutions into their products. Customers may also receive, in addition to their solutions license agreements, patent licenses as necessary to implement the technology in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts.
The remainder of our revenue is contract services revenue which includes license fees and engineering services fees. 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 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.

Executive Summary
On June 20, 2012, our Board of Directors appointed Dr. Ronald D. Black as our new president and chief executive officer.
During the third quarter of 2012, we signed a license agreement with Fujitsu. This agreement covers the use of Rambus patented innovations implemented in a broad range of integrated circuit ("IC") products offered by Fujitsu Semiconductor. Additionally, during the third quarter of 2012, the Secure Content Storage Association ("SCSA") selected our CRI group to provide security leadership and expertise to the SCSA efforts. The goal of the SCSA is to provide consumers with new ways to build digital home libraries. The SCSA initiative will give consumers an easier and faster way to organize, store and move their high-definition digital movies and TV shows across multiple devices. Our security expertise will be deployed across this platform to provide the necessary security.
We also initiated a restructuring effort to reduce overall corporate expenses which is expected to improve future profitability while refining some of our research and development efforts. As a result of the restructuring program, we recorded a pre-tax charge of $6.6 million during the third quarter of 2012 related primarily to the reduction in workforce. See Note 16, "Restructuring Charges," of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further discussion. In addition, we recorded a non-cash charge for the impairment of goodwill and long-lived assets within our LDT group of $35.5 million as a result of the change in our business strategy with less focus on the higher margin display technology licensing and an increased focus on our general lighting technologies. See Note 12, "Goodwill and Long-lived Assets," of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further discussion.
Research and development continues to play a key role in our efforts to maintain product innovations. Our engineering expenses in the aggregate for the three months ended September 30, 2012 decreased $1.5 million as compared to the same


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period in 2011 primarily due to a decrease of $2.9 million in the accrual of retention bonuses related to acquisitions as the first payment related to the CRI retention bonus was paid in the second quarter of 2012 and decreased bonus expense of $1.8 million attributable mainly to the reversal of accruals relating to our 2012 corporate incentive plan, partially offset by increased headcount related costs of $2.4 million from additional employees to support our research and development efforts. Our engineering expenses in the aggregate for the nine months ended September 30, 2012 increased $32.9 million as compared to the same period in 2011 primarily due to increased headcount related costs of $10.2 million from additional employees to support our research and development efforts, increased amortization expense related to intangible assets acquired since early 2011 of $9.6 million, increased accrual of retention bonuses related to acquisitions of $8.1 million and increased consulting expenses of $4.5 million.
Marketing, general and administrative expenses in the aggregate decreased $24.7 million for the three months ended September 30, 2012 as compared to the same periods in 2011 primarily due to decreased litigation expenses of $21.0 million and decreased bonus expense of $3.0 million attributable mainly to the reversal of accruals relating to our 2012 corporate incentive plan. Marketing, general and administrative expenses in the aggregate decreased $28.1 million for the nine months ended September 30, 2012 as compared to the same period in 2011 primarily due to decreased litigation expenses of $33.1 million and decreased bonus expense of $3.9 million attributable mainly to the reversal of accruals relating to our 2012 corporate incentive plan, partially offset by increased headcount related costs of $4.0 million from the increase in employees to support our business and increased accrual of the retention bonuses related to acquisitions of $1.8 million.

Trends
There are a number of trends that may or will have a material impact on us in the future, including but not limited to, the evolution of memory technology, adoption of LEDs in general lighting, the use and adoption of our inventions or technologies and global economic conditions with the resulting impact on sales of consumer electronic systems.
We have a high degree of revenue concentration, with our top five customers representing approximately 68% and 69% of our revenue for the three and nine months ended September 30, 2012, respectively, as compared to 78% and 68% for the three and nine months ended September 30, 2011, respectively. 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, 2012, revenue from Samsung accounted for 10% or more of our total revenue. For the nine months ended September 30, 2012, revenue from NVIDIA and Samsung each accounted for 10% or more of our total 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. We expect to continue to experience significant revenue concentration for the foreseeable future.
The particular customers which account for revenue concentration have varied from period to period as a result of the addition of new contracts, expiration of existing contracts, renewals of existing contracts, industry consolidation and the volumes and prices at which the customers have recently sold to their customers. These variations are expected to continue in the foreseeable future. The semiconductor industry is intensely competitive and highly cyclical, limiting our visibility with respect to future sales. 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. In February 2012, Elpida, one of our top 10 customers by revenue for the past two years, commenced bankruptcy proceedings in Japan as a result of debt loads, competition and declining prices for memory chips. Additionally, our royalty revenue from certain customers in the DRAM market, such as Samsung and Elpida, are variable and are based on our licensees' revenue two quarters in arrears. As the DRAM market declined in the second half of 2011, our revenue for the nine months ended September 30, 2012 was negatively impacted. However, we have begun to see an increase in demand in DRAM industry in the beginning of 2012 which we expect will have a positive impact to our revenue in the remainder of 2012. The royalties we receive from our semiconductor customers are partly a function of the adoption of our technologies by system companies. Many system companies purchase semiconductors containing our technologies from our customers and do not have a direct contractual relationship with us. Our customers 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 intensely competitive and highly cyclical. Since LED backlighting solutions are increasingly


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pervasive in LCDs for computers, smartphones, tablets, game systems, high definition televisions and any user interface incorporating an active display, the trend towards higher resolution displays across these products requires more LEDs per system. The increased usage of LEDs is thereby creating a need for increased power efficiency since the LED backlight is the primary source of power consumption in many consumer electronics products including smartphones. The highly fragmented general lighting industry is undergoing a fundamental shift from incandescent technology to cold cathode fluorescent lights 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's patents in LED edge lit lightguide technology also 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 we have established a technology center in Brecksville, Ohio.
Global demand for effective security technologies continues to increase. In particular, highly integrated devices such as smart phones and tablets are increasingly used for applications requiring security such as mobile payments, content protection, corporate information and user data. Our CRI group is primarily focused on positioning its DPA countermeasures and CryptoFirewall technology solutions to capitalize on these trends and growing adoption among technology partners and customers.
Our revenue from companies headquartered outside of the United States accounted for approximately 75% and 74% of our total revenue for the three and nine months ended September 30, 2012, respectively, as compared to 58% and 69% of our total revenue for the three and nine months ended September 30, 2011, respectively. We expect that revenue derived from international customers will continue to represent a significant portion of our total revenue in the future. To date, all of the revenue from international customers 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 products sold by our foreign customers were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for licensed products could fall, which in turn would reduce our royalties. We do not use financial instruments to hedge foreign exchange rate risk.
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 decreased and as a percentage of revenue increased for the three months ended September 30, 2012 and in the aggregate and as a percentage of revenue increased for the nine months ended September 30, 2012, as compared to the same periods in the prior year. In the near term, we expect engineering costs to be higher as we intend to continue to make investments in the infrastructure and technologies required to maintain our product innovation in semiconductor, lighting, security and other technologies. Marketing, general and administrative expenses in the aggregate and as a percentage of revenue decreased for the three and nine months ended September 30, 2012, as compared to the same periods in the prior year. Historically, we have been involved in litigation stemming from the unlicensed use of our inventions. Our litigation expenses have been high in the past and difficult to predict and future litigation expenses could 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 or may decrease. 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 expect to continue to pursue litigation against those companies that have infringed our patented technologies, which in turn will cause litigation expenses to remain significant until such litigation is resolved. Additionally, in the near term, we expect our non-litigation marketing, general and administrative costs to be lower due to our restructuring plan undertaken during the third quarter of 2012. Our continued pursuit of litigation and investment in research and development projects, combined with any lower revenue from our customers in the future, will negatively affect our cash from operations.

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:

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