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WIKI ANALYSIS
Rambus (NASDAQ: RMBS) creates technology that speeds data transfers between microchips. Its clients are semiconductor manufacturers who use this technology to make their chips and then pay royalties to Rambus - in fiscal 2007, 86% of the company's revenue came from licensing patents.[1][2] The chips made using Rambus' technology are key components in consumer electronics, including Sony's Playstation 3 and HD televisions.[3][1][4]
The company posted net income losses of $13.8 million and $27.7 million in fiscal years 2006 and 2007, respectively.[5] These losses are the result of modest revenue decline coupled with dramatically increased spending on R&D and marketing, as well as new costs associated with Rambus' ongoing legal troubles.[5][6]
Rambus is fighting a legal battle with the Federal Trade Commission[7][6] over patent disputes with members of the Joint Electron Device Engineering Council. Several microchip makers, including Hynix Semiconductor (HXSCL), Micron Technology (MU), Nanya Technology Corporation, and Samsung Electronics, contend that Rambus knowingly withheld patent information, forcing them to accept chip designs for which they would have to pay royalties. In fiscal years 2005, 2006, and 2007, Rambus has spent $38 million, $39 million, and $40 million in litigation expenses to defend this and other lawsuits (24%, 20%, and 22% of total revenues, respectively).
Company Overview
Rambus' revenues come from royalties paid for the licensing of the company's patents and products.[2]
- Rambus licenses patent protected Rambus inventions to customers including Advanced Micro Devices (AMD), Fujitsu Limited (FJTSY), Intel (INTC), and Toshiba (TOSBF) for use in the development of their own products.
- Rambus also licenses its own chip-interface products for integration into customers' semiconductors.[3] Notable products include the XDR memory architecture (XDR, XDR2, and RDRAM), which is part of the hardware behind Sony Electronics' Playstation 3 and DLP's front panel projectors.[3]
- In patent licensing, royalties are paid to Rambus based on customer earnings on products developed under the Rambus license.
- In product licensing, Rambus earns a one-time fixed price paid for the use of the technology, and sometimes a percentage of earnings as well.[3]
In fiscal 2007, 85.8% of Rambus' revenue came from royalties paid by companies employing one of these methods. [2] The remainder of revenue comes from contract agreements.[2]
Business and Financial Metrics
Rambus' income has fallen dramatically since 2005, when the company earned $28.9 million.[5] [8] In fiscal 2006 net income fell 148% for a loss of $13.8 million,[5][8] while in fiscal 2007 revenues fell 7.9% to $180 million and income dropped even further (100%) as the company posted a loss of $27.7 million.[5][8] The sharp decreases in net income since 2005 can be attributed to increased R&D and marketing spending as well as "costs of restatement and related legal activities" relating to an improperly dated stock option investigation.[5][9] An increase in stock-based compensation (classified under "marketing") from $8.5 million in 2005 to $17.5 million and $22.7 million in 2006 and 2007, respectively, is primarily responsible for the dramatic increase in marketing spending over the last three years.[9][5][10]
Comparison of Financial Metrics With and Without Costs of Restatement and Related Legal Activities
| Year | Total Revenues | Total Costs and Expenses | Costs of Restatment and Related Legal Activities | Total Costs Less Costs for Restatement and Legal Activities | Net Income | Net Income Removing Costs for Restatement and Legal Activities |
| 2005 | $157 M | $153 M | $0 M | $153 M | $29 M | $29 M |
| 2006 | $195 M | $235 M | $31 M | $204 M | -$14 M | $17 M |
| 2007 | $180 M | $250 M | $19 M | $231 M | -$28 M | -$9 M |
Business Segments
Royalty Revenue (86% of Revenue)
In fiscal 2007, royalty revenues accounted for 85.8% of total revenue, compared with 86.5% in 2006 and 82.9% in 2005.[2] In total, royalties brought in $154 million dollars in fiscal 2007.[2] Rambus' royalty revenue comes from two primary streams:
- Patent Licensing The majority of Rambus' revenues come from the licensing of patent protected inventions for the development of new technologies by semiconductor and system companies including Intel (INTC) , Toshiba (TOSBF) , and Advanced Micro Devices (AMD) .[1][2] Among these technologies are Fully Synchronous DRAM, Dual Edge Clocking, Variable Burst Length, FlexPhase, and Channel Equalization.[1]
- Product Licensing Rambus also licenses chip-interface products to customers for use in their semiconductor and system products.[1][2] Most notable among licensed products is the XDR Memory Architecture, which serves as the primary memory hardware in Sony's Play Station 3 and DLP's High Definition Televisions.[1]
Contract Revenue (14% of Revenue)
Making up the remainder of Rambus' revenue stream, contract revenues consist of fixed license fees, fixed engineering fees, and service fees associated with the integration of Rambus' chip interface products into its customer's products.[11]
Key Trends and Forces
Rambus Must Spend Heavily on Research and Development, Limiting Profit Margin
For fiscal 2007, Rambus spent $82.9 million on research and development (while earning revenues of $108 million). Of total employees, 67% are engineers who devote most or all of their time to R&D, specifically, the development of new chip interfaces and new versions of existing chip interfaces to allow chip data transfer at higher speeds.[12] As previously mentioned, Rambus gets 85.8% of its revenues from royalties paid by the company's licensing partners,[2] virtually all of whom have the right to cancel those licenses at any time, making ongoing research and development of new products for licensing essential to the company's success.[13] The company spent $83 million on R&D in FY2007, over 46% of its revenues.[5]
Rambus' Short Term Revenue is Heavily Dependent Upon Sales of HDTVs and the Playstation 3
Rambus' XDR DRAM (extreme data rate dynamic random access memory) is the primary memory hardware in the Sony Playstation 3, as well as DLP's new generation of front projectors and several brands of HDTV.[4][6]. In Fiscal Year 2008, Sony reported 26.3% sales growth within its game segment as demand for the Playstation 3 continued to increase.[14] The more Playstation 3 units that are sold in 2008, the more revenues Rambus will earn in royalties on the year.[6]
Rambus Remains Embroiled in Lengthy, Costly, Legal Battles
In August of 2000, Hynix Semiconductor (HXSCL) and various subsidiaries filed suit against Rambus claiming violation of antitrust laws and deceptive practices in connection with Rambus' participation in the Joint Electron Device Engineering Council, the trade association that represents the electronics industry in the United States.[15][16][6][17] Rambus denied these claims and filed counterclaims against Hynix for patent infringement.[15] In the most recent phase of the protracted case, the court ordered a coordinated trial of common JEDEC-related claims, extending the lawsuit to include Micron Technology (MU), Nanya, and Samsung.[18] The chip-makers contend that Rambus knowingly withheld patent information, forcing them to accept chip designs for which they would have to pay royalties.[6] This coordinated trial began on January 29th, 2008 and remains open.[6]
Additionally, in 2006 several Rambus shareholders filed actions against Rambus seeking damages in connection with improperly dated stock options.[19] The company spent $31 million and $19 million (16% and 11% of revenues) on legal and audit fees to address these issues in 2006 and 2007, respectively.[5][2]
Competitors
Rambus operates in the semiconductor industry, a sector that is intensively competitive and particularly victim to rapid technological change and short product life cycles.[12] Three of Rambus' primary competitors include:
- Hynix Semiconductor (HXSCL) A semiconductor company based in South Korea with whom Rambus continues to fight a long and costly legal battle over alleged violation of antitrust laws and deceptive practices in connection with Rambus' participation in the Joint Electron Device Engineering Council.[20][17][15][6] The company primarily engages in developing and manufacturing memory products similar to those developed by Rambus.[20]
- Qimonda AG (QI) Another developer and supplier of memory products, Qimonda (a German company) specializes in DRAM products for infrastructure, graphics, mobile and consumer applications, as well as standard DRAM products for personal computers.[21] Notably, while a direct competitor, Qimonda also licenses several Rambus products for the development of their memory products.[1]
- Samsung Based in Korea, Samsung is a producer of consumer electronics, communication products, semiconductor products and home appliances.[22] Of primary significance to Rambus, Samsung's semi-conductor division is a major producer of memory chips.[22] Samsung also was originally named as one of the plaintiffs in the case relating to the Joint Electron Device Engineering Council, though the company was excused from the coordinated trial on condition that the court will press Samsung's claims against Rambus within six months of completion of the coordinated trial.[15]
Comparison of Key Financial Metrics Between Several Domestic Semiconductor Companies
| Company | Revenue (most recent filing) | Total Operating Costs (most recent filing) | Net Income (most recent filing) | Net Profit Margin (most recent filing) |
| Rambus, Inc. | $180 M | $250 M | -$28 M | -15.37% |
| Intel | $38.3 B | $30.2 B | $6.98 B | 18.20% |
| Texas Instruments | $13.8 B | $10.3 B | $2.64 B | 19.09% |
| Cypress Semiconductor | $592 M | $556 M | $23 M | 24.97% |
References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 Rambus, Inc. Form 10-K For Fiscal Year 2007, Page 5
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 Rambus, Inc. Form 10-K For Fiscal Year 2007, Page 32
- ↑ 3.0 3.1 3.2 3.3 Rambus, Inc. Form 10-K For Fiscal Year 2007, Page 4
- ↑ 4.0 4.1 Rambus, Inc. Form 10-K For Fiscal Year 2007, Page 14
- ↑ 5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 Rambus, Inc. Form 10-K For Fiscal Year 2007, Page 54
- ↑ 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 The Value Line's Custom Report for Rambus, Inc. – 7/2008
- ↑ Rambus, Inc. Form 10-K For Fiscal Year 2007, Page 12
- ↑ 8.0 8.1 8.2 Google Finance's Annual Income Sheet for Rambus, Inc.
- ↑ 9.0 9.1 Rambus, Inc. Form 10-K For Fiscal Year 2007, Page 31
- ↑ Rambus, Inc. Form 10-K For Fiscal Year 2007, Page 35
- ↑ Ramubs, Inc. Form 10-K For Fiscal Year 2007, Page 58
- ↑ 12.0 12.1 Rambus, Inc. Form 10-K For Fiscal Year 2007, Page 7
- ↑ Rambus, Inc. Form 10-K For Fiscal Year 2007, Page 15
- ↑ Sony Corporations Form 20-F For Fiscal Year 2008, Page 31
- ↑ 15.0 15.1 15.2 15.3 Rambus, Inc. Form 10-K For Fiscal Year 2007, Page 86
- ↑ Wikipedia Article on the JEDEC
- ↑ 17.0 17.1 Ramubs, Inc. Form 10-K For Fiscal Year 2007, Page 11
- ↑ Rambus, Inc. Form 10-K For Fiscal Year 2007, Page 87
- ↑ Rambus, Inc. Form 10-K For Fiscal 2007, Page 24.
- ↑ 20.0 20.1 Google Finance's Coverage of Hynix
- ↑ Google Finance's Coverage of Qimonda
- ↑ 22.0 22.1 Google Finance's Coverage of Samsung
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