SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community

TMCNet:  RAMBUS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[July 25, 2014]

RAMBUS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) 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 negotiations, litigation, investigations, claims, disputes or settlements; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Generally, the words "anticipates," "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: Differential Power Analysis DPA Double Data Rate DDR Dynamic Random Access Memory DRAM Light Emitting Diodes LED Rambus Dynamic Random Access Memory RDRAM™ Single Data Rate SDR Synchronous Dynamic Random Access Memory SDRAM eXtreme Data Rate XDR™ 25-------------------------------------------------------------------------------- Table of Contents 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 Intel Corporation Intel International Business Machines Corporation IBM Joint Electronic Device Engineering Councils JEDEC Lighting and Display Technology LDT LSI Corporation (now a division of Avago Technologies Limited) LSI Memory and Interfaces Division MID Micron Technologies, Inc. Micron Mobile Technology Division MTD Nanya Technology Corporation Nanya Qualcomm Incorporated Qualcomm Panasonic Corporation Panasonic Renesas Electronics Renesas Samsung Electronics Co., Ltd. Samsung SK hynix, Inc. SK hynix Sony Computer Electronics Sony ST Microelectronics N.V. STMicroelectronics Toshiba Corporation Toshiba 26-------------------------------------------------------------------------------- Table of Contents Business Overview We are an innovative technology solutions company that brings invention to market. Our customers leverage our customizable platforms, services and tools to improve, differentiate and accelerate the development of products and services.

Our extensive technology portfolio addresses the evolving power, performance and security requirements of the mobile, cloud computing and connected device markets. We drive innovations in memory, chip interfaces and architectures, end-to-end security, and advanced LED lighting, while Rambus Labs looks to disruptions and opportunities in tomorrow's high-growth markets. We generate revenue by licensing our inventions and solutions and providing services to market-leading companies.

While we have historically focused our efforts on the development of technologies for electronics memory and chip interfaces, we have been expanding our portfolio of inventions and solutions to address additional markets in lighting, chip and system security, as well as new areas within the semiconductor industry, such as computational sensing and imaging. We intend to continue our growth into new technology fields, consistent with our mission to create great value through our innovations and to make those technologies available through both our licensing and non-licensing business models. Key to our efforts, both in our current businesses and in any new area of diversification, will be hiring and retaining world-class inventors, scientists and engineers to lead the development of inventions and technology solutions for these fields of focus, and the management and business support personnel necessary to execute our plans and strategies.

We have four operational units: (1) Memory and Interfaces Division, or MID, which focuses on the design, development and licensing of technology that is related to memory and interfaces; (2) Cryptography Research, Inc., or CRI, which focuses on the design, development and licensing of technologies for chip and system security and anti-counterfeiting; (3) Lighting and Display Technologies, or LDT, which focuses on the design, development and licensing of technologies for lighting; and (4) Chief Technology Office, or CTO, which focuses on the design, development and productization of emerging technologies. As of June 30, 2014, MID, CRI and CTO were considered reportable segments as they met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining operating segment were shown under "Other." For additional information concerning segment reporting, see Note 5, "Segments and Major Customers," of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.

Our strategy is to evolve from providing primarily patent licenses to providing additional technology, products and services while creating and leveraging strategic synergies to increase revenue. We believe that the successful execution of this strategy requires an exceptional business model that relies on the skills and talent of our employees. Accordingly, we seek to hire and retain world-class scientific and engineering expertise in all of our fields of technological focus, as well as the executive management and operating personnel required to successfully execute our business strategy. In order to attract the quality of employees required for this business model, we have created an environment and culture that encourages, fosters and supports research, development and innovation in breakthrough technologies with significant opportunities for broad industry adoption. We believe we have created a compelling company for inventors and innovators who are able to work within a business model and platform that focuses on technology development to drive strong future growth.

As of June 30, 2014, our semiconductor, lighting, security and other technologies are covered by 1,747 U.S. and foreign patents. Additionally, we have 756 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 our patented innovations provide our customers with the ability to achieve improved performance, lower risk, greater cost-effectiveness and other benefits in their products and services.

Our inventions and technology solutions are offered to our customers through either a patent license or a solutions license. Today, a majority of our revenues are derived from patent licenses, through which we provide our customers a license to use a portion of our broad portfolio of patented inventions. The license provides our customers with a defined right to use our innovations in the customer's own digital electronics products, systems or services, as applicable. The licenses may also define the specific field of use where our customers may use or employ our inventions in their products. License agreements are structured with fixed, variable or a hybrid of fixed and variable royalty payments over certain defined periods ranging for up to ten years.

Leading consumer product, semiconductor and system companies such as AMD, Broadcom, Freescale, Fujitsu, GE, Intel, LSI, Micron, Nanya, Panasonic, Qualcomm, Renesas, Samsung, SK hynix, STMicroelectronics and Toshiba have licensed our patents for use in their own products. The majority of our intellectual property in MID was developed in-house and we have expanded our business strategy of monetizing our MID intellectual property to include the sale of select intellectual property. As any sales executed under this expanded strategy represent a component of our ongoing major or central operations and activities, we will record the related proceeds as revenue.

27-------------------------------------------------------------------------------- Table of Contents We also offer our customers solutions licenses to support the implementation and adoption of our technology in their products or services. Our customers include leading companies such as Cooper Lighting, GE, IBM, Panasonic, Qualcomm, Samsung, Sony and Toshiba. Our solutions license offerings include a range of technologies for incorporation into our customers' products and systems. We also 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.

The remainder of our revenue is product sales and 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 During the second quarter of 2014, we signed a comprehensive patent license agreement with Qualcomm Global Trading Pte. Ltd., a wholly-owned subsidiary of Qualcomm. The agreement provides Qualcomm and its subsidiaries with access to innovative patented memory, interface and security technologies from Rambus.

Additionally, the Company unveiled the CryptoManager™ platform, a feature management solution developed by CRI, with Qualcomm as lead customer. The CryptoManager platform consists of both a Security Engine and an Infrastructure suite that can dramatically improve efficiency and security during the manufacturing process. As lead customer, Qualcomm is integrating the CryptoManager Security Engine into select integrated circuit systems on a chip ("SoCs") and adopting the Infrastructure suite as part of its overall manufacturing process.

Research and development continues to play a key role in our efforts to maintain product innovations. Our engineering expenses for the three months ended June 30, 2014 remained relatively flat as compared to the same period in 2013 primarily due to an increase in cost of sales due to sales of light guides of $2.4 million and increased stock-based compensation expenses of $0.9 million, offset by decreased accrual of retention bonuses of $1.7 million, decreased bonus accrual of $0.8 million and decreased amortization expense of $0.2 million. Our engineering expenses for the six months ended June 30, 2014 decreased $2.3 million as compared to the same period in 2013 primarily due to decreased accrual of retention bonuses of $3.9 million as a result of the payouts of retention bonuses, decreased allocated facilities and information technology costs of $1.1 million, decreased bonus accrual of $1.0 million, decreased amortization expense of $0.5 million and decreased prototyping costs of $0.4 million, offset by an increase in cost of sales due to sales of light guides of $4.8 million.

Marketing, general and administrative expenses for the three months ended June 30, 2014 increased $4.5 million as compared to the same period in 2013 primarily due to a one-time reversal of accrued SK hynix related litigation costs of $8.5 million in the same period of 2013 and increased stock-based compensation expenses of $0.3 million, offset by decreased consulting costs of $1.2 million, decreased bonus accrual of $0.7 million and decreased accrual of retention bonuses of $0.6 million. Marketing, general and administrative costs for the six months ended June 30, 2014 decreased $1.8 million as compared to the same period in 2013 primarily due to decreased consulting costs of $2.1 million, decreased stock-based compensation expenses of $1.2 million, decreased accrual of retention bonuses of $1.0 million, decreased facilities costs of $1.0 million, decreased headcount related costs of $0.9 million and decreased bonus accrual of $0.9 million, offset by a one-time reversal of accrued SK hynix related litigation costs of $8.5 million in the same period of 2013 and increased sales and marketing costs of $0.5 million.

Trends There are a number of trends that may 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 62% and 60% of our revenue for the three and six months ended June 30, 2014, respectively, as compared to 68% and 66% for the three and six months ended June 30, 2013, respectively. As a result of renewing with Samsung in 2013 and settling with SK hynix and Micron in 2013, Samsung, SK hynix and Micron are expected to account for a significant portion of our ongoing licensing revenue. For the three and six months ended June 30, 2014, revenue from Micron, Samsung and SK hynix each accounted for 10% or more of our total revenue. For the three and six months ended June 30, 2013, revenue from Samsung accounted for 28-------------------------------------------------------------------------------- Table of Contents 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 customers, 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 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 highly fragmented general lighting industry is undergoing a fundamental shift from incandescent technology to cold cathode fluorescent lights and LED driven technology due to 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 light guide technology can be applied in the design of next generation LED lighting products.

During 2013, we changed our business strategy to increase our focus on general lighting technologies instead of lower margin bulb products. With this shift to focus on the general lighting market, the strategy of the LDT group is to focus on providing the market with novel, patented light guide technologies and products to customers who are leading the transition to solid-state LED-based lamps and fixtures.

Another shift in our business strategy regarding our core display patents led us in 2013 to sell a set of patent assets to Acacia where Acacia can proceed independently with a licensing program. We have a proceeds-sharing program in place with Acacia upon their licensing of these patent assets. We retain the rights to use certain application techniques and may selectively engage with customers to license our intellectual property and technology for use and applications as permitted under our agreement, including without limitation, display panel and designs.

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 64% and 63% of our total revenue for the three and six months ended June 30, 2014, respectively, as compared to 74% and 67% for the three and six months ended June 30, 2013, 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 has been denominated in U.S. dollars. However, to the extent that such customers' sales to their customers are not denominated in U.S. dollars, any revenue 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 revenue. We do not use financial instruments to hedge foreign exchange rate risk.

For additional information concerning international revenue, see Note 5, "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 June 30, 2014 as compared to the same period in the prior year. Engineering costs in the aggregate and as a percentage of revenue decreased for the six months ended June 30, 2014 as compared to the same period 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.

29-------------------------------------------------------------------------------- Table of Contents Marketing, general and administrative expenses in the aggregate increased and as a percentage of revenue decreased for the three months ended June 30, 2014 as compared to the same period in the prior year. Marketing, general and administrative expenses in the aggregate and as a percentage of revenue decreased for the six months ended June 30, 2014 as compared to the same period in the prior year. In the past, our litigation expenses have been high and difficult to predict due to litigation stemming from the use of our inventions.

Because we have successfully negotiated settlements and license agreements with SK hynix, Micron and Nanya, we have settled all outstanding litigation and should no longer have material litigation expenses related to these matters. In the near term, we expect a decrease in our marketing, general and administrative costs as compared to prior years due to our past restructuring plans.

Our continued investment in research and development projects, involvement in any future litigation or other legal proceedings and 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: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Revenue: Royalties 91.1 % 98.4 % 92.6 % 98.8 % Contract and other revenue 8.9 % 1.6 % 7.4 % 1.2 % Total revenue 100.0 % 100.0 % 100.0 % 100.0 % Operating costs and expenses: Cost of revenue* 13.9 % 12.7 % 13.4 % 11.1 % Research and development* 36.2 % 53.1 % 35.2 % 51.0 % Marketing, general and administrative* 24.3 % 24.4 % 24.2 % 31.4 % Gain from sale of intellectual property - % (0.1 )% (0.1 )% (1.1 )% Restructuring charges - % - % 0.0 % 1.8 % Gain from settlement (0.7 )% - % (0.7 )% - % Total operating costs and expenses 73.7 % 90.1 % 72.0 % 94.2 % Operating income (loss) 26.3 % 9.9 % 28.0 % 5.8 % Interest income and other income (expense), net 0.1 % (2.4 )% 0.1 % (1.2 )% Interest expense (11.4 )% (12.8 )% (12.1 )% (11.8 )% Interest and other income (expense), net (11.3 )% (15.2 )% (12.0 )% (13.0 )% Income (loss) before income taxes 15.0 % (5.3 )% 16.0 % (7.2 )% Provision for income taxes 8.4 % 8.2 % 7.7 % 7.4 % Net income (loss) 6.6 % (13.5 )% 8.3 % (14.6 )% _________________________________________ * Includes stock-based compensation: Cost of revenue 0.0 % 0.0 % 0.0 % 0.0 % Research and development 3.4 % 2.9 % 2.5 % 2.8 % Marketing, general and administrative 2.9 % 3.3 % 2.5 % 4.0 % 30-------------------------------------------------------------------------------- Table of Contents Three Months Six Months Ended June 30, Change in Ended June 30, Change in (Dollars in millions) 2014 2013 Percentage 2014 2013 Percentage Total Revenue Royalties $ 69.7 $ 57.0 22.3 % $ 143.4 $ 123.2 16.3 % Contract and other revenue 6.8 0.9 NM* 11.4 1.6 NM* Total revenue $ 76.5 $ 57.9 32.1 % $ 154.8 $ 124.8 24.1 % __________________________________ * NM - percentage is not meaningful Royalty Revenue Patent Licenses Our patent royalties increased approximately $13.4 million to $67.7 million for the three months ended June 30, 2014 from $54.3 million for the same period in 2013. The increase was primarily due to royalty revenue recognized from the agreements signed with Micron, Nanya, Qualcomm and SK hynix, offset by lower royalty revenue from Samsung. Of the $67.7 million patent royalties for the three months ended June 30, 2014, $21.5 million is related to royalty revenue from settlement of past infringements with SK hynix and Micron.

Our patent royalties increased approximately $22.0 million to $138.1 million for the six months ended June 30, 2014 from $116.1 million for the same period in 2013. The increase was primarily due to royalty revenue recognized from the agreements signed with Micron, Nanya, Qualcomm and SK hynix, offset by lower royalty revenue from Samsung and recognition of a one-time royalty revenue during the first quarter of 2013 from LSI. Of the $138.1 million patent royalties for the six months ended June 30, 2014, $43.0 million is related to royalty revenue from settlement of past infringements with SK hynix and Micron.

We are continuously in negotiations for licenses with prospective customers. We expect patent royalties will continue to vary from period to period based on our success in adding new customers, as well as the level of variation in our customers' reported shipment volumes, sales price and mix, offset in part by the proportion of customer payments that are fixed or hybrid in nature.

Solutions Licenses Royalties from solutions licenses decreased approximately $0.7 million to $2.0 million for the three months ended June 30, 2014 from $2.7 million for the same period in 2013. The decrease was primarily due to lower royalties reported from XDRTM DRAM associated with decreased shipments of the Sony PlayStation®3 product.

Royalties from solutions licenses decreased approximately $1.9 million to $5.2 million for the six months ended June 30, 2014 from $7.1 million for the same period in 2013. The decrease was primarily due to lower royalties reported from XDRTM DRAM associated with decreased shipments of the Sony PlayStation®3 product.

In the future, we expect solutions royalties will continue to vary from period to period based on our customers' shipment volumes, sales prices, and product mix.

Royalty Revenue by Reportable Segments Royalty revenue from the MID reportable segment, which includes patent and solutions license royalties, increased approximately $7.3 million to $56.7 million for the three months ended June 30, 2014 from $49.4 million for the same period in 2013. The increase was primarily due to royalty revenue recognized from the agreements signed with Micron, Nanya, Qualcomm and SK hynix offset by lower royalty revenue from Samsung. Royalty revenue from the MID reportable segment increased approximately $8.9 million to $118.0 million for the six months ended June 30, 2014 from $109.1 million for the same period in 2013. The increase was primarily due to royalty revenue recognized from the agreements signed with Micron, Nanya, Qualcomm and SK hynix offset by lower royalty revenue from Samsung and recognition of one-time royalty revenue during the first quarter of 2013 from LSI.

Royalty revenue from the CRI reportable segment increased approximately $4.9 million to $12.5 million for the three months ended June 30, 2014 from $7.6 million for the same period in 2013. The increase was primarily due to royalty revenue recognized from the license agreements signed with Qualcomm during 2014 and Samsung during 2013. Royalty revenue from the CRI reportable segment increased approximately $10.8 million to $24.9 million for the six months ended June 30, 2014 from $14.1 million for the same period in 2013. The increase was primarily due to royalty revenue recognized from the license agreements signed with Qualcomm during 2014 and Samsung during 2013.

31-------------------------------------------------------------------------------- Table of Contents Royalty revenue from the Other reportable segment was immaterial for both the three and six months ended June 30, 2014 and 2013, and remained relatively flat period over period.

Contract and Other Revenue Contract and other revenue consist of revenue from technology development, sale of LED edge-lit products as well as sale of selected intellectual property developed by our MID business unit. Contract and other revenue increased approximately $5.9 million to $6.8 million for the three months ended June 30, 2014 from $0.9 million for the same period in 2013. The increase was primarily due to increased lighting technology development projects, sales of light guides and sale of selected intellectual property developed by our MID business unit.

Contract and other revenue increased approximately $9.8 million to $11.4 million for the six months ended June 30, 2014 from $1.6 million for the same period in 2013. The increase was primarily due to the same reasons discussed above.

We believe that contract and other revenue will increase over time as we continue to roll out new LDT products to the market. Revenue from technology development contracts will continue to fluctuate over time based on our ongoing contractual requirements, the amount of work performed, the timing of completing engineering deliverables, and the changes to work required, as well as new technology development contracts booked in the future.

Contract and Other Revenue by Reportable Segments Contract and other revenue from the MID reportable segment increased approximately $1.8 million to $1.9 million for the three months ended June 30, 2014 from $0.1 million for the same period in 2013, primarily due to sale of selected intellectual property developed by our MID business unit. Contract and other revenue from the MID reportable segment increased approximately $1.8 million to $1.9 million for the six months ended June 30, 2014 from $0.1 million for the same period in 2013, primarily due to sale of selected intellectual property developed by our MID business unit.

Contract and other revenue from the CRI reportable segment decreased approximately $0.1 million to $0.3 million for the three months ended June 30, 2014 from $0.4 million for the same period in 2013, primarily due to decreased number of new evaluation and test equipment contracts in the second quarter of 2014. Contract and other revenue from the CRI reportable segment increased approximately $0.1 million to $0.8 million for the six months ended June 30, 2014 from $0.7 million for the same period in 2013, primarily due to increased number of new evaluation and test equipment contracts in the first half of 2014.

Contract and other revenue from the Other reportable segment increased approximately $4.1 million to $4.6 million for the three months ended June 30, 2014 from $0.5 million for the same period in 2013. The increase was primarily due to increased lighting technology development projects and sales of light guides. Contract and other revenue from the Other reportable segment increased approximately $8.0 million to $8.8 million for the six months ended June 30, 2014 from $0.8 million for the same period in 2013. The increase was primarily due to the same reasons discussed above.

Engineering costs: Three Months Ended Six Months Ended June 30, Change in June 30, Change in (Dollars in millions) 2014 2013 Percentage 2014 2013 Percentage Engineering costs Cost of revenue $ 4.9 $ 1.0 NM* $ 9.2 $ 1.1 NM* Amortization of intangible assets 5.7 6.4 (10.2 )% 11.4 12.8 (10.3 )% Stock-based compensation 0.0 0.0 - % 0.0 0.0 - % Total cost of revenue 10.6 7.4 44.4 % 20.6 13.9 48.6 % Research and development 25.1 29.1 (14.0 )% 50.7 60.1 (15.7 )% Stock-based compensation 2.6 1.7 57.5 % 3.9 3.5 11.0 % Total research and development 27.7 30.8 (10.1 )% 54.6 63.6 (14.2 )% Total engineering costs $ 38.3 $ 38.2 0.4 % $ 75.2 $ 77.5 (3.0 )% __________________________________ * NM - percentage is not meaningful Total engineering costs remained relatively flat for the three months ended June 30, 2014 as compared to the same period in 2013 primarily due to an increase in cost of sales due to sales of light guides of $2.4 million and increased stock-based 32-------------------------------------------------------------------------------- Table of Contents compensation expenses of $0.9 million, offset by decreased accrual of retention bonuses of $1.7 million, decreased bonus accrual of $0.8 million and decreased amortization expense of $0.2 million.

Total engineering costs decreased $2.3 million for the six months ended June 30, 2014 as compared to the same period in 2013 primarily due to decreased accrual of retention bonuses of $3.9 million as a result of the payouts of retention bonuses, decreased facilities and information technology costs of $1.1 million, decreased bonus accrual of $1.0 million, decreased amortization expense of $0.5 million and decreased prototyping costs of $0.4 million, offset by an increase in cost of sales due to sales of light guides of $4.8 million.

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 costs: Three Months Ended Six Months Ended June 30, Change in June 30, Change in (Dollars in millions) 2014 2013 Percentage 2014 2013 Percentage Marketing, general and administrative costs Marketing, general and administrative costs $ 16.4 $ 12.2 34.1 % $ 33.6 $ 34.2 (1.8 )% Stock-based compensation 2.2 1.9 16.6 % 3.8 5.0 (23.6 )% Total marketing, general and administrative costs $ 18.6 $ 14.1 31.7 % $ 37.4 $ 39.2 (4.6 )% __________________________________ Total marketing, general and administrative costs increased $4.5 million for the three months ended June 30, 2014 primarily due to a one-time reversal of accrued SK hynix related litigation costs of $8.5 million in the same period of 2013 and increased stock-based compensation expenses of $0.3 million, offset by decreased consulting costs of $1.2 million, decreased bonus accrual of $0.7 million and decreased accrual of retention bonuses of $0.6 million.

Total marketing, general and administrative costs decreased $1.8 million for the six months ended June 30, 2014 primarily due to decreased consulting costs of $2.1 million, decreased stock-based compensation expenses of $1.2 million, decreased accrual of retention bonuses of $1.0 million, decreased facilities costs of $1.0 million, decreased headcount related costs of $0.9 million and decreased bonus accrual of $0.9 million, offset by a one-time reversal of accrued SK hynix related litigation costs of $8.5 million in the same period of 2013 and increased sales and marketing costs of $0.5 million.

In the future, marketing, general and administrative costs will vary from period to period based on the trade shows, advertising, legal, acquisition and other marketing and administrative activities undertaken, and the change in sales, marketing and administrative headcount in any given period. In the near term, we expect our marketing, general and administrative costs to remain relatively flat.

Gain from sale of intellectual property: Three Months Ended Six Months Ended June 30, Change in June 30, Change in (Dollars in millions) 2014 2013 Percentage 2014 2013 Percentage Gain from sale of intellectual property $ - $ 0.1 N/A* $ 0.2 $ 1.4 (87.8 )% __________________________________ * N/A - not applicable During the first half of 2014, we sold portfolios of our patent assets covering wireless and other technologies.

During the first half of 2013, we sold portfolios of our patent assets covering lighting technologies. As part of the transactions, we received an initial upfront payment and expect to receive subsequent payments if and when our partner is successful in licensing that portfolio.

33-------------------------------------------------------------------------------- Table of Contents Gain from settlement: Three Months Ended Six Months Ended June 30, Change in June 30, Change in (Dollars in millions) 2014 2013 Percentage 2014 2013 Percentage Gain from settlement $ 0.5 $ - N/A* $ 1.0 $ - N/A* __________________________________ * N/A - not applicable The settlements with SK hynix and Micron are multiple element arrangements for accounting purposes. For a multiple element arrangement, we are required to determine the fair value of the elements. We considered several factors in determining the accounting fair value of the elements of the settlement with SK hynix and the settlement with Micron which included a third party valuation using an income approach (the "SK hynix Fair Value" and "Micron Fair Value," respectively). The total gain from settlement related to the settlements with SK hynix and Micron was $1.9 million and $3.3 million, respectively. During the three and six months ended June 30, 2014, we recognized $0.5 million and $1.0 million, respectively, as gain from settlement, which represents the portion of the SK hynix Fair Value and Micron Fair Value of the cash consideration allocated to the resolution of the antitrust litigation settlements. Refer to Note 15, "Agreements with SK hynix and Micron," of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further discussion.

Restructuring charges: Three Months Ended Six Months Ended June 30, Change in June 30, Change in (Dollars in millions) 2014 2013 Percentage 2014 2013 Percentage Restructuring charges $ - $ - N/A* $ 0.0 $ 2.2 (98.2 )% __________________________________ * N/A - not applicable During 2013, we initiated a restructuring program related primarily to our LDT group as a result of the change in our business strategy to reduce our focus on the lower margin bulb products. Additionally, we curtailed our immersive media platform spending. We recorded an immaterial charge related to this plan during the first half of 2014. The restructuring plan has been completed as of June 30, 2014.

Refer to Note 12, "Restructuring Charges," of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further discussion.

Interest and other income (expense), net: Three Months Six Months Ended June 30, Change in Ended June 30, Change in (Dollars in millions) 2014 2013 Percentage 2014 2013 Percentage Interest income and other income (expense), net $ 0.1 $ (1.4 ) NM* $ 0.1 $ (1.4 ) NM* Interest expense (8.8 ) (7.4 ) 18.1 % (18.7 ) (14.7 ) 26.9 % Interest and other income (expense), net $ (8.7 ) $ (8.8 ) (2.0 )% $ (18.6 ) $ (16.1 ) 14.9 % __________________________________ * NM - percentage is not meaningful Interest income and other income (expense), net, consists primarily of interest income generated from investments in high quality fixed income securities.

Additionally, for the three months ended June 30, 2013, during our review of the fair value of our $2.0 million investment in a non-marketable equity security of a private company, based on the information provided by the private company, we determined that there was a decrease in the security's fair value. The fair value of the non-marketable equity security was determined based on an income approach, using level 3 fair value inputs, as it was deemed to be the most 34-------------------------------------------------------------------------------- Table of Contents indicative of the security's fair value. Accordingly, we recorded an impairment charge of $1.4 million related to our investment in the non-marketable equity security for the three and six months ended June 30, 2013.

Interest expense consists of interest expense associated with our imputed facility lease obligations on the Sunnyvale and Ohio facilities and non-cash interest expense related to the amortization of the debt discount and issuance costs on the 5% convertible senior notes due 2014 (the "2014 Notes") and 1.125% convertible senior notes due 2018 (the "2018 Notes") as well as the coupon interest related to the notes. Interest expense increased for the three and six months ended June 30, 2014 as compared to the same period in 2013 primarily due to the issuance of the 2018 Notes in August 2013. We expect our non-cash interest expense to decrease in the third quarter of 2014 and then increase steadily as the 2018 Notes reach maturity.

Provision for income taxes: Three Months Ended Six Months Ended June 30, Change in June 30, Change in (Dollars in millions) 2014 2013 Percentage 2014 2013 Percentage Provision for income taxes $ 6.4 $ 4.7 34.8 % $ 11.9 $ 9.3 28.2 % Effective tax rate 55.9 % (153.0 )% 48.0 % (102.9 )% Our effective tax rates for the three and six months ended June 30, 2014 were different from the U.S. statutory tax rate applied to our pretax income primarily due to a full valuation allowance on our U.S. deferred tax assets, foreign withholding and foreign income taxes, and state income taxes. The effective tax rates increased from the three and six months ended June 30, 2013 to the three and six months ended June 30, 2014 due to the change of net loss position in 2013 to net income position in 2014.

During the three and six months ended June 30, 2014, we paid withholding taxes of $4.8 million and $9.8 million, respectively. We recorded a provision for income taxes of $6.4 million and $11.9 million for the three and six months ended June 30, 2014, respectively, which is primarily comprised of withholding taxes, other foreign taxes and state income taxes.

Our effective tax rates for the three and six months ended June 30, 2013 were different from the U.S. statutory tax rate applied to our pretax loss due to a full valuation allowance on our U.S. net deferred tax assets, losses in jurisdictions where no tax benefits are recognized, and foreign withholding and income taxes. During the quarter ended June 30, 2013, we calculated our interim tax provision to record taxes incurred by the U.S. entity on a discrete basis because we were projecting losses in which a tax benefit cannot be recognized.

We periodically evaluate the realizability of our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on our ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. We weighed both positive and negative evidence and determined that there is a continued need for a valuation allowance as we are in a cumulative loss position over the previous three years, which is considered significant negative evidence. Although the weight of negative evidence related to cumulative losses has decreased as we have settled outstanding litigation, we believe that this objectively measured negative evidence outweighs the subjectively determined positive evidence of future profitability and, as such, we have not changed our judgment regarding the need for a full valuation allowance on our deferred tax assets in the United States as of June 30, 2014.

However, continued improvement in our operating results, conditioned on our MID, LDT or CRI reporting units successfully commercializing new business arrangements, signing new or renewing existing license agreements and managing costs, could lead to reversal of almost all of our valuation allowance. Until such time, consumption of tax attributes to offset profits will reduce the overall level of deferred tax assets subject to valuation allowance. Should we determine that we would be able to realize our remaining deferred tax assets in the foreseeable future, an adjustment to our remaining deferred tax assets would cause a material increase to income in the period such determination is made.

Liquidity and Capital Resources As of June 30, December 31, 2014 2013 (In millions) Cash and cash equivalents $ 99.6 $ 338.7 Marketable securities 146.8 49.0Total cash, cash equivalents, and marketable securities $ 246.4 $ 387.7 35-------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2014 2013 (In millions) Net cash provided by operating activities $ 26.5 $ 5.2 Net cash used in investing activities $ (98.7 ) $ (1.8 ) Net cash provided by (used in) financing activities $ (166.8 ) $ 2.9 Liquidity We currently anticipate that existing cash, cash equivalents and marketable securities balances and cash flows from operations will be adequate to meet our cash needs for at least the next 12 months. Additionally, substantially all of our cash and cash equivalents are in the United States. Our cash needs for the six months ended June 30, 2014 were funded primarily from cash collected from our customers and, with respect to the repayment of the 2014 Notes, in part from our prior issuance of the 2018 Notes.

We do not anticipate any liquidity constraints as a result of either the current credit environment or investment fair value fluctuations. Additionally, we have the intent and ability to hold our debt investments that have unrealized losses in accumulated other comprehensive loss for a sufficient period of time to allow for recovery of the principal amounts invested. Additionally, we have no significant exposure to European sovereign debt. We continually monitor the credit risk in our portfolio and mitigate our credit risk exposures in accordance with our policies.

Operating Activities Cash provided by operating activities of $26.5 million for the six months ended June 30, 2014 was primarily attributable to the cash generated from customer licensing. Changes in operating assets and liabilities for the six months ended June 30, 2014 primarily included a decrease in accrued salaries and benefits and other liabilities primarily due to the payment of acquisition related retention bonuses and an increase in accounts receivable.

Cash provided by operating activities of $5.2 million for the six months ended June 30, 2013 was primarily attributable to the cash generated from customer licensing and changes in operating assets and liabilities. Changes in operating assets and liabilities for the six months ended June 30, 2013 primarily included a decrease in accrued salaries and benefits and other liabilities primarily due to the payment of retention bonuses and a decrease in accrued litigation expenses primarily due to a one-time reversal of accrued SK hynix related litigation costs.

Investing Activities Cash used in investing activities of $98.7 million for the six months ended June 30, 2014 primarily consisted of cash paid for purchases of available-for-sale marketable securities of $166.1 million, offset by proceeds from the maturities and sales of available-for-sale marketable securities of $51.4 million and $17.7 million, respectively. In addition, we paid $4.3 million to acquire property, plant and equipment. We also received $2.5 million from the sale of intellectual property.

Cash used in investing activities of $1.8 million for the six months ended June 30, 2013 primarily consisted of proceeds from the maturities of available-for-sale marketable securities of $64.3 million, offset by cash paid for purchases of available-for-sale marketable securities of $60.5 million. In addition, we paid $5.3 million to acquire property, plant and equipment and $2.5 million for intangible assets. We also received $2.3 million from the sale of intellectual property.

Financing Activities Cash used in financing activities was $166.8 million for the six months ended June 30, 2014. We repaid $172.5 million in face value of 2014 Notes, upon maturity. We also received proceeds of $5.9 million from the issuance of common stock under equity incentive plans and paid $0.2 million due to payments under installment payment arrangements for fixed assets and principal payments against the lease financing obligation.

Cash provided by financing activities of $2.9 million for the six months ended June 30, 2013 was primarily due to proceeds of $3.1 million from issuance of common stock under equity incentive plans.

36-------------------------------------------------------------------------------- Table of Contents Contractual Obligations As of June 30, 2014, our material contractual obligations were (in thousands): Total Remainder of 2014 2015 2016 2017 2018 Thereafter Contractual obligations (1) Imputed financing obligation (2) $ 37,357 $ 2,970 $ 6,011 $ 6,156 $ 6,302 $ 6,447 $ 9,471 Leases and other contractual obligations 7,300 2,449 2,250 1,243 1,018 340 - Software licenses (3) 11,021 3,657 5,616 1,748 - - - Acquisition retention bonuses (4) 1,550 1,480 70 - - - - Convertible notes 138,000 - - - - 138,000 - Interest payments related to convertible notes 6,987 776 1,553 1,553 1,553 1,552 - Total $ 202,215 $ 11,332 $ 15,500 $ 10,700 $ 8,873 $ 146,339 $ 9,471 _________________________________________ (1) The above table does not reflect possible payments in connection with uncertain tax benefits of approximately $19.8 million including $17.9 million recorded as a reduction of long-term deferred tax assets and $1.9 million in long-term income taxes payable as of June 30, 2014. As noted in Note 13, "Income Taxes," of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q, although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, we cannot reasonably estimate the outcome at this time.

(2) With respect to the imputed financing obligation, the main components of the difference between the amount reflected in the contractual obligations table and the amount reflected on the condensed consolidated balance sheets are the interest on the imputed financing obligation and the estimated common area expenses over the future periods. The amount includes the amended Ohio lease and the amended Sunnyvale lease.

(3) We have commitments with various software vendors for non-cancellable agreements generally having terms longer than one year.

(4) In connection with acquisitions, we are obligated to pay retention bonuses to certain employees and contractors, subject to certain eligibility and acceleration provisions including the condition of employment. The last payment of CRI retention bonuses was paid in cash during the second quarter of 2014 except for $1.5 million payable to a designated charitable organization as a result of forfeitures by employees.

Share Repurchase Program During the six months ended June 30, 2014, we did not repurchase any shares of our common stock. As of June 30, 2014, we had repurchased a cumulative total of approximately 26.3 million shares of our common stock with an aggregate price of approximately $428.9 million since the commencement of the program in 2001. As of June 30, 2014, there remained an outstanding authorization to repurchase approximately 5.2 million shares of our outstanding common stock.

We record stock repurchases as a reduction to stockholders' equity. We record a portion of the purchase price of the repurchased shares as an increase to accumulated deficit when the price of the shares repurchased exceeds the average original proceeds per share received from the issuance of common stock.

37-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, expense accrual, investments, income taxes, litigation and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting estimates include those regarding (1) revenue recognition, (2) goodwill and intangible assets, (3) income taxes and (4) stock-based compensation. For a discussion of our critical accounting estimates, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2013.

Recent Accounting Pronouncements See Note 2, "Recent Accounting Pronouncements," of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for discussion of recent accounting pronouncements including the respective expected dates of adoption.

[ Back To Technology News's Homepage ]

OTHER NEWS PROVIDERS







Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved | Privacy Policy