Rambus Inc.
RAMBUS INC (Form: 10-Q, Received: 04/24/2015 13:48:58)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
(Mark One)
ý       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-22339
_______________________________
RAMBUS INC.
(Exact name of registrant as specified in its charter)
_______________________________
Delaware
 
94-3112828
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1050 Enterprise Way, Suite 700
 Sunnyvale, California
 
 
 
94089
(Address of principal executive offices)
 
 
 
(ZIP Code)

Registrant’s telephone number, including area code: (408) 462-8000
_______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
 
 
Non-accelerated filer  o (Do not check if a smaller reporting company)
 
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  ý
The number of shares outstanding of the registrant’s Common Stock, par value $.001 per share, was 115,473,870 as of March 31, 2015 .


Table of Contents

RAMBUS INC.
TABLE OF CONTENTS
 
 
PAGE
Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014
Condensed Consolidated Statements of Comprehensive  Income for the three months ended March 31, 2015 and 2014
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014

2

Table of Contents

NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements. These forward-looking statements include, without limitation, predictions regarding the following aspects of our future:
Success in the markets of our products and services or our customers’ products;
Sources of competition;
Research and development costs and improvements in technology;
Sources, amounts and concentration of revenue, including royalties;
Success in signing and renewing license agreements;
Terms of our licenses and amounts owed under license agreements;
Technology product development;
Dispositions, acquisitions, mergers or strategic transactions and our related integration efforts;
Impairment of goodwill and long-lived assets;
Pricing policies of our customers;
Changes in our strategy and business model, including the expansion of our portfolio of inventions and solutions to address additional markets in lighting, chip and system security;
Deterioration of financial health of commercial counterparties and their ability to meet their obligations to us;
Effects of security breaches or failures in our or our customers’ products and services on our business;
Engineering, sales and general and administration expenses;
Contract revenue;
Operating results;
International licenses and operations;
Effects of changes in the economy and credit market on our industry and business;
Ability to identify, attract, motivate and retain qualified personnel;
Effects of government regulations on our industry and business;
Manufacturing and supply partners and/or sale and distribution channels;
Growth in our business;
Methods, estimates and judgments in accounting policies;
Adoption of new accounting pronouncements;
Effective tax rates;
Realization of deferred tax assets/release of deferred tax valuation allowance;
Trading price of our common stock;
Internal control environment;
The level and terms of our outstanding debt and the repayment or financing of such debt ;
Litigation expenses;
Protection of intellectual property;
Any changes in laws, agency actions and judicial rulings that may impact the ability to enforce intellectual property rights;
Indemnification and technical support obligations;
Equity repurchase plans;
Issuances of our securities, which could involve restrictive covenants or be dilutive to our existing stockholders;
Outcome and effect of potential future intellectual property litigation and other significant litigation; and
Likelihood of paying dividends.

3

Table of Contents

You can identify these and other forward-looking statements by the use of words such as “may,” “future,” “shall,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” “projecting” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.
Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 1A, “Risk Factors.” All forward-looking statements included in this document are based on our assessment of information available to us at this time. We assume no obligation to update any forward-looking statements.


4

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
RAMBUS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31,
2015
 
December 31,
2014
 
(In thousands, except shares
and par value)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
171,567

 
$
154,126

Marketable securities
146,194

 
145,983

Accounts receivable
6,541

 
6,001

Prepaids and other current assets
10,141

 
8,541

Deferred taxes
1,123

 
187

Total current assets
335,566

 
314,838

Intangible assets, net
83,049

 
89,371

Goodwill
116,899

 
116,899

Property, plant and equipment, net
61,577

 
64,023

Deferred taxes, long-term
447

 
536

Other assets
2,333

 
2,612

Total assets
$
599,871

 
$
588,279

LIABILITIES &   STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
5,697

 
$
6,962

Accrued salaries and benefits
10,477

 
14,840

Deferred revenue
5,405

 
4,133

Other current liabilities
6,450

 
8,723

Total current liabilities
28,029

 
34,658

Convertible notes, long-term
116,508

 
115,089

Long-term imputed financing obligation
38,974

 
39,063

Long-term income taxes payable
2,790

 
2,769

Other long-term liabilities
7,628

 
5,078

Total liabilities
193,929

 
196,657

Commitments and contingencies (Notes 9 and 13)


 


Stockholders’ equity:
 

 
 

Convertible preferred stock, $.001 par value:
 

 
 

Authorized: 5,000,000 shares
 

 
 

Issued and outstanding: no shares at March 31, 2015 and December 31, 2014

 

Common stock, $.001 par value:
 

 
 

Authorized: 500,000,000 shares
 

 
 

Issued and outstanding: 115,473,870 shares at March 31, 2015 and 115,161,675 shares at December 31, 2014
115

 
115

Additional paid-in capital
1,158,200

 
1,153,435

Accumulated deficit
(752,024
)
 
(761,526
)
Accumulated other comprehensive loss
(349
)
 
(402
)
Total stockholders’ equity
405,942

 
391,622

Total liabilities and stockholders’ equity
$
599,871

 
$
588,279

See Notes to Unaudited Condensed Consolidated Financial Statements

5

Table of Contents

RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)  

 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(In thousands, except per share amounts)
Revenue:
 

 
 

Royalties
$
66,963

 
$
73,637

Contract and other revenue
5,951

 
4,651

Total revenue
72,914

 
78,288

Operating costs and expenses:
 

 
 

Cost of revenue*
10,756

 
10,022

Research and development*
28,534

 
26,898

Sales, general and administrative*
18,502

 
18,820

Gain from sale of intellectual property
(2,260
)
 
(170
)
Restructuring charges

 
39

Gain from settlement
(510
)
 
(510
)
Total operating costs and expenses
55,022

 
55,099

Operating income
17,892

 
23,189

Interest income and other income (expense), net
132

 
13

Interest expense
(3,083
)
 
(9,926
)
Interest and other income (expense), net
(2,951
)
 
(9,913
)
Income before income taxes
14,941

 
13,276

Provision for income taxes
5,439

 
5,472

Net income
$
9,502

 
$
7,804

Net income per share:
 

 
 

Basic
$
0.08

 
$
0.07

Diluted
$
0.08

 
$
0.07

Weighted average shares used in per share calculation:
 

 
 

Basic
115,336

 
113,590

Diluted
117,442

 
116,629

_________________________________________
*    Includes stock-based compensation:
Cost of revenue
$
12

 
$
7

Research and development
$
1,767

 
$
1,311

Sales, general and administrative
$
1,987

 
$
1,581


See Notes to Unaudited Condensed Consolidated Financial Statements

6

Table of Contents

RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended
 
 
March 31,
(In thousands)
 
2015
 
2014
Net income
 
$
9,502

 
$
7,804

Other comprehensive income:
 
 

 
 

Unrealized gain on marketable securities, net of tax
 
53

 
8

Total comprehensive income
 
$
9,555

 
$
7,812


See Notes to Unaudited Condensed Consolidated Financial Statements

7

Table of Contents

RAMBUS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)  
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
9,502

 
$
7,804

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Stock-based compensation
3,766

 
2,899

Depreciation
3,227

 
3,481

Amortization of intangible assets
6,322

 
6,797

Non-cash interest expense and amortization of convertible debt issuance costs
1,559

 
6,242

Deferred income taxes
644

 
5,967

Gain from sale of intellectual property
(2,267
)
 
(170
)
Change in operating assets and liabilities:
 

 
 

Accounts receivable
(540
)
 
(5,565
)
Prepaid expenses and other assets
(1,436
)
 
(183
)
Accounts payable
(965
)
 
749

Accrued salaries and benefits and other liabilities
(5,959
)
 
(6,623
)
Income taxes payable
(86
)
 
(4,828
)
Deferred revenue
1,272

 
(59
)
Net cash provided by operating activities
15,039

 
16,511

Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(1,095
)
 
(3,145
)
Purchases of marketable securities
(46,779
)
 
(34,050
)
Maturities of marketable securities
40,070

 
26,050

Proceeds from sale of marketable securities
6,600

 

Proceeds from sale of intellectual property
2,280

 
1,250

Net cash provided by (used in) investing activities
1,076

 
(9,895
)
Cash flows from financing activities:
 
 
 
Proceeds received from issuance of common stock under employee stock plans
1,424

 
1,352

Principal payments against lease financing obligation
(98
)
 
(60
)
Payments under installment payment arrangement

 
(28
)
Net cash provided by financing activities
1,326

 
1,264

Net increase in cash and cash equivalents
17,441

 
7,880

Cash and cash equivalents at beginning of period
154,126

 
338,696

Cash and cash equivalents at end of period
$
171,567

 
$
346,576

 
 
 
 
Non-cash investing activities during the period:
 

 
 

Property, plant and equipment received and accrued in accounts payable and other liabilities
$
248

 
$
280


See Notes to Unaudited Condensed Consolidated Financial Statements

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Table of Contents

RAMBUS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Rambus Inc. (“Rambus” or the “Company”) and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements. Investments in entities with less than 20% ownership or in which the Company does not have the ability to significantly influence the operations of the investee are being accounted for using the cost method and are included in other assets.
In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) necessary to state fairly the financial position and results of operations for each interim period presented. Interim results are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information. Certain information and Note disclosures included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto in Form 10-K for the year ended December 31, 2014 .
Operating Segment Definitions
Operating segments are based upon Rambus' internal organization structure, the manner in which its operations are managed, the criteria used by its Chief Operating Decision Maker ("CODM") to evaluate segment performance and availability of separate financial information regularly reviewed for resource allocation and performance assessment.
The Company determined its CODM to be the Chief Executive Officer and determined its operating segments to be: (1) Memory and Interface Division ("MID"), which focuses on the design, development and licensing of technology that is related to memory and interfaces; (2) Cryptography Research Division ("CRD"), which focuses on the design, development and licensing of technologies for chip and system security and anti-counterfeiting; (3) Emerging Solutions Division ("ESD"), which includes the computational sensing and imaging group along with the development efforts in the area of emerging technologies; and (4) Lighting and Display Technologies ("LDT"), which focuses on the design, development and licensing of technologies for lighting.
For the three months ended March 31, 2015 only MID and CRD were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining other operating segment were shown under “Other.”
Reclassifications
Certain prior periods' amounts were reclassified to conform to the current year’s presentation. None of these reclassifications had an impact on reported net income for any of the periods presented.
2. Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs", which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU requires retrospective adoption and is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its financial statements.
In August 2014, the FASB issued ASU No. 2014-15, "Disclosures of Uncertainties About an Entity's Ability to Continue as a Going Concern." The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company does not expect that this guidance will have a material impact on its financial position, results of operations or cash flows.

9


In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718)," which makes amendments to the codification topic 718, "Accounting for Share-Based Payments," when the terms of an award provide that a performance target could be achieved after the requisite service period. The new accounting standards update becomes effective for the Company on January 1, 2016. The Company is currently evaluating the impact that this guidance will have on its financial position, results of operations or cash flows.
In May 2014, the FASB and International Accounting Standards Board issued their converged accounting standards update on revenue recognition. The core principle of the new guidance is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new guidance also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. The new accounting standards update becomes effective for the Company on January 1, 2017. The Company is currently evaluating the impact that this guidance will have on its financial condition and results of operations.
3. Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing the earnings by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, employee stock purchases, restricted stock and restricted stock units and shares issuable upon the conversion of convertible notes. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instrument was exercised and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a net loss is reported.
The following table sets forth the computation of basic and diluted net income per share:
 
Three Months Ended March 31,
 
2015
 
2014
Net income per share:
(In thousands, except per share amounts)
Numerator:
 

 
 

Net income
$
9,502

 
$
7,804

Denominator:
 
 
 
Weighted-average shares outstanding - basic
115,336

 
113,590

Effect of potential dilutive common shares
2,106

 
3,039

Weighted-average shares outstanding - diluted
117,442

 
116,629

Basic net income per share
$
0.08

 
$
0.07

Diluted net income per share
$
0.08

 
$
0.07

For the three months ended March 31, 2015 and 2014 , options to purchase approximately 3.8 million and 6.9 million shares, respectively, were excluded from the calculation because they were anti-dilutive after considering proceeds from exercise, taxes and related unrecognized stock-based compensation expense.

10


4. Intangible Assets and Goodwill
Goodwill
The following tables present goodwill information for each of the reportable segments for the three months ended March 31, 2015 :
Reportable Segment:
 
As of December 31, 2014
 
Additions to Goodwill
 
Impairment Charge of Goodwill
 
As of March 31, 2015
 
 
(In thousands)
MID
 
$
19,905

 
$

 
$

 
$
19,905

CRD
 
96,994

 

 

 
96,994

Total
 
$
116,899

 
$

 
$

 
$
116,899


 
 
As of
 
 
March 31, 2015
Reportable Segment:
 
Gross Carrying Amount
 
Accumulated Impairment Losses
 
Net Carrying Amount
 
 
(In thousands)
MID
 
$
19,905

 
$

 
$
19,905

CRD
 
96,994

 

 
96,994

Other
 
21,770

 
(21,770
)
 

Total
 
$
138,669

 
$
(21,770
)
 
$
116,899

Intangible Assets
The components of the Company’s intangible assets as of March 31, 2015 and December 31, 2014 were as follows:
 
 
 
As of March 31, 2015
 
Useful Life
 
Gross Carrying
  Amount
 
Accumulated
  Amortization
 
Net Carrying
  Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
185,321

 
$
(110,130
)
 
$
75,191

Customer contracts and contractual relationships
1 to 10 years
 
31,093

 
(23,235
)
 
7,858

Non-compete agreements
3 years
 
300

 
(300
)
 

Total intangible assets
 
 
$
216,714


$
(133,665
)
 
$
83,049

 
 
 
As of December 31, 2014
 
Useful Life
 
Gross Carrying
  Amount
 
Accumulated
  Amortization
 
Net Carrying
  Amount
 
 
 
(In thousands)
Existing technology
3 to 10 years
 
$
185,321

 
$
(104,426
)
 
$
80,895

Customer contracts and contractual relationships
1 to 10 years
 
31,093

 
(22,617
)
 
8,476

Non-compete agreements
3 years
 
300

 
(300
)
 

Total intangible assets
 
 
$
216,714

 
$
(127,343
)
 
$
89,371


During the three months ended March 31, 2015 , the Company did not purchase any intangible assets.
The favorable contracts (included in customer contracts and contractual relationships) are acquired patent licensing agreements where the Company has no performance obligations. Cash received from these acquired favorable contracts reduces the favorable contract intangible asset. For the three months ended March 31, 2015 and 2014 , the Company received zero and $0.9 million related to the favorable contracts, respectively. As of March 31, 2015 and December 31, 2014 , the net balance of the favorable contract intangible assets was $0.1 million and $0.1 million , respectively.

11


Amortization expense for intangible assets for the three months ended March 31, 2015 and 2014 was $6.3 million and $6.8 million , respectively. The estimated future amortization expense of intangible assets as of March 31, 2015 was as follows (amounts in thousands):
Years Ending December 31:
Amount
2015 (remaining 9 months)
$
18,776

2016
24,318

2017
23,709

2018
10,827

2019
1,789

Thereafter
3,630

 
$
83,049


It is reasonably possible that the businesses could perform significantly below the Company's expectations or a deterioration of market and economic conditions could occur. This would adversely impact the Company's ability to meet its projected results, which could cause the goodwill in any of its reporting units or long-lived assets in any of its asset groups to become impaired. Significant differences between these estimates and actual cash flows could materially affect the Company's future financial results. If the reporting units are not successful in commercializing new business arrangements, if the businesses are unsuccessful in signing new license agreements or renewing their existing license agreements, or if the Company is unsuccessful in managing its costs, the revenue and income for these reporting units could adversely and materially deviate from their historical trends and could cause goodwill or long-lived assets to become impaired. If the Company determines that its goodwill or long-lived assets are impaired, it would be required to record a non-cash charge that could have a material adverse effect on its results of operations and financial position.

5.   Segments and Major Customers
For the three months ended March 31, 2015 , MID and CRD were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining operating segments were shown under “Other.” Additionally, some employees moved departments in the fourth quarter of 2014 causing a change in the prior period reportable segment financial results. The presentation of the 2014 segment data has been updated accordingly to conform with the updated segment presentation.
The Company evaluates the performance of its segments based on segment operating income (loss), which is defined as revenue minus segment operating expenses. Segment operating expenses are comprised of direct operating expenses.
Segment operating expenses do not include sales, general and administrative expenses and the allocation of certain expenses managed at the corporate level, such as stock-based compensation, amortization, and certain bonus and acquisition costs. The “Reconciling Items” category includes these unallocated sales, general and administrative expenses as well as corporate level expenses.

12


The tables below present reported segment operating income (loss) for the three months ended March 31, 2015 and 2014 , respectively.
 
For the Three Months Ended March 31, 2015
 
MID
 
CRD
 
Other
 
Total
 
(In thousands)
Revenues
$
54,733

 
$
12,826

 
$
5,355

 
$
72,914

Segment operating expenses
11,520

 
7,339

 
7,259

 
26,118

Segment operating income (loss)
$
43,213

 
$
5,487

 
$
(1,904
)
 
$
46,796

Reconciling items
 

 
 
 
 

 
(28,904
)
Operating income
 

 
 
 
 

 
$
17,892

Interest and other income (expense), net
 

 
 
 
 

 
(2,951
)
Income before income taxes
 

 
 
 
 

 
$
14,941

 
For the Three Months Ended March 31, 2014
 
MID
 
CRD
 
Other
 
Total
 
(In thousands)
Revenues
$
61,156

 
$
12,903

 
$
4,229

 
$
78,288

Segment operating expenses
9,281

 
6,531

 
8,653

 
24,465

Segment operating income (loss)
$
51,875

 
$
6,372

 
$
(4,424
)
 
$
53,823

Reconciling items
 

 
 
 
 

 
(30,634
)
Operating income
 

 
 
 
 

 
$
23,189

Interest and other income (expense), net
 

 
 
 
 

 
(9,913
)
Income before income taxes
 

 
 
 
 

 
$
13,276

The Company’s CODM does not review information regarding assets on an operating segment basis. Additionally, the Company does not record intersegment revenue or expense.

13


Accounts receivable from the Company's major customers representing 10% or more of total accounts receivable at March 31, 2015 and December 31, 2014 , respectively, was as follows:
 
 
As of
Customer 
 
March 31, 2015
 
December 31, 2014
Customer 1 (MID reportable segment)
 
—%
 
33%
Customer 2 (Other segment)
 
67%
 
50%

Revenue from the Company’s major customers representing 10% or more of total revenue for the three months ended March 31, 2015 and 2014 , respectively, was as follows:
 
 
Three Months Ended
 
 
March 31,
Customer 
 
2015
 
2014
Customer A (MID and CRD reportable segments)
 
21
%
 
19
%
Customer B (MID reportable segment)
 
16
%
 
15
%
Customer C (MID reportable segment)
 
13
%
 
12
%

Revenue from customers in the geographic regions based on the location of contracting parties was as follows:
 
 
Three Months Ended
 
 
March 31,
(In thousands)
 
2015
 
2014
South Korea
 
$
26,821

 
$
26,853

USA
 
27,707

 
28,674

Japan
 
8,491

 
9,255

Europe
 
5,175

 
8,563

Canada
 
196

 
1,824

Asia-Other
 
4,524

 
3,119

Total
 
$
72,914

 
$
78,288


6. Marketable Securities
Rambus invests its excess cash and cash equivalents primarily in U.S. government sponsored obligations, commercial paper, corporate notes and bonds, money market funds and municipal notes and bonds that mature within three years.  As of March 31, 2015 and December 31, 2014 , all of the Company’s cash equivalents and marketable securities had a remaining maturity of less than one year .

14


All cash equivalents and marketable securities are classified as available-for-sale. Total cash, cash equivalents and marketable securities are summarized as follows:
 
 
As of March 31, 2015
(In thousands)
 
Fair Value
 
Amortized
  Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Weighted
  Rate of
  Return
Money market funds
 
$
151,054

 
$
151,054

 
$

 
$

 
0.01
%
Corporate notes, bonds and commercial paper
 
146,194

 
146,254

 
8

 
(68
)
 
0.34
%
Total cash equivalents and marketable securities
 
297,248

 
297,308

 
8

 
(68
)
 
 

Cash
 
20,513

 
20,513

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
317,761

 
$
317,821

 
$
8

 
$
(68
)
 
 

 
 
As of December 31, 2014
(In thousands)
 
Fair Value
 
Amortized
  Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Weighted
  Rate of
  Return
Money market funds
 
$
124,938

 
$
124,938

 
$

 
$

 
0.01
%
Corporate notes, bonds and commercial paper
 
145,983

 
146,096

 
1

 
(114
)
 
0.25
%
Total cash equivalents and marketable securities
 
270,921

 
271,034

 
1

 
(114
)
 
 

Cash
 
29,188

 
29,188

 

 

 
 

Total cash, cash equivalents and marketable securities
 
$
300,109

 
$
300,222

 
$
1

 
$
(114
)
 
 


Available-for-sale securities are reported at fair value on the balance sheets and classified as follows:
 
As of
 
March 31,
2015
 
December 31,
2014
 
(In thousands)
Cash equivalents
$
151,054

 
$
124,938

Short term marketable securities
146,194

 
145,983

Total cash equivalents and marketable securities
297,248

 
270,921

Cash
20,513

 
29,188

Total cash, cash equivalents and marketable securities
$
317,761

 
$
300,109


The Company continues to invest in highly rated quality, highly liquid debt securities. As of March 31, 2015 , these securities have a remaining maturity of less than one year. The Company holds all of its marketable securities as available-for-sale, marks them to market, and regularly reviews its portfolio to ensure adherence to its investment policy and to monitor individual investments for risk analysis, proper valuation, and unrealized losses that may be other than temporary.

The estimated fair value of cash equivalents and marketable securities classified by the length of time that the securities have been in a continuous unrealized loss position at March 31, 2015 and December 31, 2014 are as follows:
 
Fair Value
 
Gross Unrealized Loss
 
March 31,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
 
(In thousands)
Less than one year
 

 
 

 
 

 
 

Corporate notes, bonds and commercial paper
$
110,382

 
$
139,989

 
$
(68
)
 
$
(114
)

The gross unrealized loss at March 31, 2015 and December 31, 2014 was not material in relation to the Company’s total available-for-sale portfolio. The gross unrealized loss can be primarily attributed to a combination of market conditions as well as the demand for and duration of the corporate notes and bonds. There is no requirement to sell and the Company believes that it can recover the amortized cost of these investments. The Company has found no evidence of impairment due to credit losses in its portfolio. Therefore, these unrealized losses were recorded in other comprehensive income (loss). However, the Company

15


cannot provide any assurance that its portfolio of cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require the Company in the future to record an impairment charge for credit losses which could adversely impact its financial results.
See Note 7, “Fair Value of Financial Instruments,” for discussion regarding the fair value of the Company’s cash equivalents and marketable securities.
7. Fair Value of Financial Instruments
The Company reviews the pricing inputs by obtaining prices from a different source for the same security on a sample of its portfolio. The Company has not adjusted the pricing inputs it has obtained. The following table presents the financial instruments that are carried at fair value and summarizes the valuation of its cash equivalents and marketable securities by the above pricing levels as of March 31, 2015 and December 31, 2014 :
 
As of March 31, 2015
 
Total
 
Quoted
  Market
  Prices in
  Active
  Markets
  (Level 1)
 
Significant
  Other
  Observable
  Inputs
  (Level 2)
 
Significant
  Unobservable
  Inputs
  (Level 3)
 
(In thousands)
Money market funds
$
151,054

 
$
151,054

 
$

 
$

Corporate notes, bonds and commercial paper
146,194

 

 
146,194

 

Total available-for-sale securities
$
297,248

 
$
151,054

 
$
146,194

 
$

 
As of December 31, 2014
 
Total
 
Quoted
  Market
  Prices in
  Active
  Markets
  (Level 1)
 
Significant
  Other
  Observable
  Inputs
  (Level 2)
 
Significant
  Unobservable
  Inputs
  (Level 3)
 
(In thousands)
Money market funds
$
124,938

 
$
124,938

 
$

 
$

Corporate notes, bonds and commercial paper
145,983

 

 
145,983

 

Total available-for-sale securities
$
270,921

 
$
124,938

 
$
145,983

 
$


The Company monitors its investments for other-than-temporary impairment and records appropriate reductions in carrying value when necessary. The Company monitors its investments for other-than-temporary losses by considering current factors, including the economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, reductions in carrying values when necessary and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in the market. Any other-than-temporary loss is reported under “Interest and other income (expense), net” in the condensed consolidated statement of operations.
For the three months ended March 31, 2015 and 2014 , there were no transfers of financial instruments between different categories of fair value.
The following table presents the financial instruments that are not carried at fair value but require fair value disclosure as of March 31, 2015 and December 31, 2014 :
 
 
As of March 31, 2015
 
As of December 31, 2014
(In thousands)
 
Face
  Value
 
Carrying
  Value
 
Fair Value
 
Face
  Value
 
Carrying
  Value
 
Fair Value
1.125% Convertible Senior Notes due 2018 (the "2018 Notes")
 
$
138,000

 
$
116,508

 
$
168,034

 
$
138,000

 
$
115,089

 
$
159,293


The fair value of the convertible notes at each balance sheet date is determined based on recent quoted market prices for these notes which is a level 2 measurement. As discussed in Note 8, "Convertible Notes," as of March 31, 2015 , the 2018 Notes are carried at their face value of $138.0 million , less any unamortized debt discount. The carrying value of other financial

16


instruments, including accounts receivable, accounts payable and other liabilities, approximates fair value due to their short maturities.

8. Convertible Notes
The Company’s convertible notes are shown in the following table:
(In thousands)
 
As of March 31, 2015
 
As of December 31, 2014
1.125% Convertible Senior Notes due 2018
 
$
138,000

 
$
138,000

Unamortized discount
 
(21,492
)
 
(22,911
)
Total convertible notes
 
$
116,508

 
$
115,089

Less current portion
 

 

Total long-term convertible notes
 
$
116,508

 
$
115,089

Interest expense related to the notes for the three months ended March 31, 2015 and 2014 was as follows:
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(In thousands)
2014 Notes coupon interest at a rate of 5%
$

 
$
2,156

2014 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 11.7%

 
4,769

2018 Notes coupon interest at a rate of 1.125%
403

 
388

2018 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 5.5%
1,559

 
1,473

Total interest expense on convertible notes
$
1,962

 
$
8,786



17


9. Commitments and Contingencies
As of March 31, 2015 , the Company’s material contractual obligations were as follows (in thousands):
 
Total
 
Remainder   of 2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
Contractual obligations (1)
 

 
 

 
 

 
 

 
 

 
 

 
 

Imputed financing obligation (2)
$
32,901

 
$
4,525

 
$
6,156

 
$
6,302

 
$
6,447

 
$
6,602

 
$
2,869

Leases and other contractual obligations
7,521

 
3,809

 
2,034

 
1,338

 
340

 

 

Software licenses (3)
7,968

 
6,220

 
1,748

 

 

 

 

Convertible notes
138,000

 

 

 

 
138,000

 

 

Interest payments related to convertible notes
5,434

 
776

 
1,553

 
1,553

 
1,552

 

 

Total
$
191,824

 
$
15,330

 
$
11,491

 
$
9,193

 
$
146,339

 
$
6,602

 
$
2,869

_________________________________________
(1)
The above table does not reflect possible payments in connection with uncertain tax benefits of approximately $21.4 million including $18.4 million recorded as a reduction of long-term deferred tax assets and $3.0 million in long-term income taxes payable as of March 31, 2015 . As noted below in Note 12, “Income Taxes,” although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company 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)
The Company has commitments with various software vendors for non-cancellable agreements generally having terms longer than one year.
Building lease expense was approximately $0.7 million and $0.6 million for the three months ended March 31, 2015 and 2014 , respectively. Deferred rent of $1.0 million and $1.1 million as of March 31, 2015 and December 31, 2014 , respectively, was included primarily in other long-term liabilities.
Indemnification
The Company enters into standard license agreements in the ordinary course of business. Although the Company does not indemnify most of its customers, there are times when an indemnification is a necessary means of doing business. Indemnification covers customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement or any other claim by any third party arising as result of the applicable agreement with the Company. The Company generally attempts to limit the maximum amount of indemnification that the Company could be required to make under these agreements to the amount of fees received by the Company.
10. Equity Incentive Plans and Stock-Based Compensation
As of March 31, 2015 , 8,161,965 shares of the 31,400,000 shares approved under the 2006 Equity Incentive Plan (the “2006 Plan”) remain available for grant which included an increase of 10,000,000 shares approved by stockholders on April 24, 2014. The 2006 Plan was the Company’s only plan for providing stock-based incentive awards to eligible employees, executive officers, non-employee directors and consultants as of March 31, 2015. However, the 1997 Stock Option Plan (the “1997 Plan”) continues to govern awards previously granted under that plan. Additionally, on April 23, 2015, the Company's stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”), which authorizes 4,000,000 shares for future issuance plus the number of shares that remain available for grant under the 2006 Plan as of the effective date of the 2015 Plan. The 2015 Plan became effective and replaced the 2006 Plan on April 23, 2015. No further awards will be made under the 2006 Plan, but the 2006 Plan will continue to govern awards previously granted under it. In addition, any shares subject to stock options or other awards granted under the 2006 Plan that on or after the effective date of the 2015 Plan are forfeited, cancelled, exchanged or surrendered or terminate under the 2006 Plan will become available for grant under the 2015 Plan.

18


A summary of shares available for grant under the Company’s plans is as follows:
 
Shares Available
  for Grant
Shares available as of December 31, 2014
10,724,228

Stock options granted
(362,335
)
Stock options forfeited
518,778

Stock options expired under former plans
(285,000
)
Nonvested equity stock and stock units granted (1) (2)
(2,520,747
)
Nonvested equity stock and stock units forfeited (1)
87,041

Total available for grant as of March 31, 2015
8,161,965

_________________________________________
(1)
For purposes of determining the number of shares available for grant under the 2006 Plan against the maximum number of shares authorized, each share of restricted stock granted reduces the number of shares available for grant by 1.5 shares and each share of restricted stock forfeited increases shares available for grant by 1.5 shares.
(2)
Amount includes 238,980 shares that have been reserved for potential future issuance related to certain performance unit awards discussed under the section titled "Nonvested Equity Stock and Stock Units" below.
General Stock Option Information
The following table summarizes stock option activity under the 1997 Plan and 2006 Plan for the three months ended March 31, 2015 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of March 31, 2015 .
 
Options Outstanding
 
 
 
 
 
Number of
  Shares
 
Weighted
  Average
  Exercise Price
  Per Share
 
Weighted
  Average
  Remaining
  Contractual
  Term (years)
 
Aggregate
  Intrinsic
  Value
 
(In thousands, except per share amounts)
Outstanding as of December 31, 2014
11,441,646

 
$
10.73

 
 
 
 

Options granted
362,335

 
$
11.27

 
 
 
 

Options exercised
(217,241
)
 
$
6.90

 
 
 
 

Options forfeited
(518,778
)
 
$
16.37

 
 
 
 

Outstanding as of March 31, 2015
11,067,962

 
$
10.55

 
5.95
 
$
45,831

Vested or expected to vest at March 31, 2015
10,524,492

 
$
10.64

 
5.81
 
$
43,741

Options exercisable at March 31, 2015
6,207,537

 
$
12.84

 
4.30
 
$
21,336


No stock options that contain a market condition were granted during the three months ended March 31, 2015 . As of both March 31, 2015 and December 31, 2014 , there were 1,315,000 stock options outstanding that require the Company to achieve minimum market conditions in order for the options to become exercisable. The fair values of the options granted with a market condition were calculated, on their respective grant dates, using a binomial valuation model, which estimates the potential outcome of reaching the market condition based on simulated future stock prices.
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at March 31, 2015 , based on the $12.58 closing stock price of Rambus’ common stock on March 31, 2015 on the NASDAQ Global Select Market, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of March 31, 2015 was 8,384,579 and 3,673,017 , respectively.
Employee Stock Purchase Plan
No purchases were made under the 2006 Employee Stock Purchase Plan (“2006 ESPP”) during the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015 , 923,044 shares under the 2006 ESPP remain available for issuance. On April 23, 2015, the Company's stockholders approved the 2015 Employee Stock Purchase Plan (“2015 ESPP”)

19


which reserves an additional 2,000,000 shares of the Company's common stock for purchase. The 2006 ESPP will remain in effect until the Company’s next offering period scheduled to begin on November 2, 2015 at which time the 2015 ESPP will become effective.
Stock-Based Compensation
For the three months ended March 31, 2015 and 2014 , the Company maintained stock plans covering a broad range of potential equity grants including stock options, nonvested equity stock and equity stock units and performance based instruments. In addition, the Company sponsors the 2006 ESPP and 2015 ESPP, whereby eligible employees are entitled to purchase common stock semi-annually, by means of limited payroll deductions, at a 15% discount from the fair market value of the common stock as of specific dates.
Stock Options
During the three months ended March 31, 2015 , the Company granted 362,335 stock options with an estimated total grant-date fair value of $1.7 million . During the three months ended March 31, 2015 , the Company recorded stock-based compensation expense related to stock options of $2.2 million .
During the  three  months ended  March 31, 2014 , the Company granted  1,797,462  stock options with an estimated total grant-date fair value of  $7.0 million . During the three  months ended March 31, 2014 , the Company recorded stock-based compensation expense related to stock options of  $2.2 million .
As of March 31, 2015 , there was $12.1 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of 1.9 years. The total fair value of shares vested as of March 31, 2015 was $51.8 million .
The total intrinsic value of options exercised was $1.0 million for the three months ended March 31, 2015 . The total intrinsic value of options exercised was  $0.6 million  for the  three  months ended  March 31, 2014 . Intrinsic value is the total value of exercised shares based on the price of the Company’s common stock at the time of exercise less the cash received from the employees to exercise the options.
During the three months ended March 31, 2015 , net proceeds from employee stock option exercises totaled approximately $1.5 million .
Employee Stock Purchase Plan
For the three months ended March 31, 2015 , the Company recorded compensation expense related to the 2006 ESPP of $0.4 million . For the three months ended March 31, 2014 , the Company recorded an immaterial amount of compensation expense related to the 2006 ESPP. As of March 31, 2015 , there was $0.3 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under the 2006 ESPP. That cost is expected to be recognized over one month.
There were no tax benefits realized as a result of employee stock option exercises, stock purchase plan purchases, and vesting of equity stock and stock units for the three months ended March 31, 2015 and 2014 calculated in accordance with accounting for share-based payments.
Valuation Assumptions
The fair value of stock awards is estimated as of the grant date using the Black-Scholes-Merton (“BSM”) option-pricing model assuming a dividend yield of 0% and the additional weighted-average assumptions as listed in the table below.

20


The following table presents the weighted-average assumptions used to estimate the fair value of stock options granted that contain only service conditions in the periods presented.
 
Stock Option Plans
 
Three Months Ended
 
March 31,
 
2015
 
2014
Stock Option Plans
 

 
 

Expected stock price volatility
41
%
 
44
%
Risk free interest rate
1.2
%
 
2.1
%
Expected term (in years)
6.0

 
6.1

Weighted-average fair value of stock options granted to employees
$
4.59

 
$
3.92

No shares were issued under the 2006 ESPP during the three months ended March 31, 2015 and 2014.
Nonvested Equity Stock and Stock Units
The Company grants nonvested equity stock units to officers, employees and directors. During the three months ended March 31, 2015 , the Company granted nonvested equity stock units totaling 1,521,178 shares under the 2006 Plan. During the three months ended March 31, 2014 , the Company granted nonvested equity stock units totaling 205,808 shares under the 2006 Plan. These awards have a service condition, generally a service period of four years , except in the case of grants to directors, for which the service period is one year . For the three months ended March 31, 2015 , the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $17.1 million . For the three months ended March 31, 2014 , the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately $1.8 million . During the first quarter of 2015, the Company granted performance unit awards to certain Company executive officers with vesting subject to the achievement of certain performance conditions. The ultimate number of performance units that can be earned can range from 0% to 150% of target depending on performance relative to target over the applicable period. The shares earned will vest on the third anniversary of the date of grant. The Company's shares available for grant has been reduced to reflect the shares that could be earned at 150% of target. During the three months ended March 31, 2015 , the Company recorded $0.2 million of stock-based compensation expense related to these performance unit awards.
For the three months ended March 31, 2015 , the Company recorded stock-based compensation expense of approximately $1.2 million related to all outstanding nonvested equity stock grants. For the three months ended March 31, 2014 , the Company recorded stock-based compensation expense of approximately $0.7 million related to all outstanding nonvested equity stock grants. Unrecognized stock-based compensation related to all nonvested equity stock grants, net of estimated forfeitures, was approximately $14.6 million at March 31, 2015 . This amount is expected to be recognized over a weighted average period of 3.3 years .
The following table reflects the activity related to nonvested equity stock and stock units for the three months ended March 31, 2015 :
Nonvested Equity Stock and Stock Units
 
Shares
 
Weighted-
  Average
  Grant-Date
  Fair Value
Nonvested at December 31, 2014
 
673,864

 
$
9.23

Granted
 
1,521,178

 
$
11.27

Vested
 
(138,810
)
 
$
8.55

Forfeited
 
(58,027
)
 
$
10.35

Nonvested at March 31, 2015
 
1,998,205

 
$
10.80


11.   Stockholders’ Equity
Share Repurchase Program
During the three months ended March 31, 2015 , the Company did not repurchase any shares of its common stock under its share repurchase program.

21


On January 21, 2015, the Company's Board approved a new share repurchase program authorizing the repurchase of up to an aggregate of 20.0 million shares. Share repurchases under the plan may be made through the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules, and regulations. There is no expiration date applicable to the plan. This new stock repurchase program replaced the previous program approved by the Board in February 2010 and canceled the remaining shares outstanding as part of the previous authorization. No repurchases have been made under the new plan.
The Company records stock repurchases as a reduction to stockholders’ equity. The Company records 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.
12. Income Taxes
The Company recorded a provision for income taxes of $5.4 million and $5.5 million for the three months ended March 31, 2015 and 2014 , respectively. The provision for income taxes for the three months ended March 31, 2015 and 2014 is primarily comprised of withholding taxes, state taxes and other foreign taxes based upon income earned during the period.
During the three months ended March 31, 2015 , the Company paid withholding taxes of $4.8 million . During the three months ended March 31, 2014 , the Company paid withholding taxes of $5.1 million .
As of March 31, 2015 , the Company’s condensed consolidated balance sheets included net deferred tax assets, before valuation allowance, of approximately $189.1 million , which consists of net operating loss carryovers, tax credit carryovers, amortization, employee stock-based compensation expenses and certain liabilities, partially reduced by deferred tax liabilities associated with the convertible notes. As of March 31, 2015 , a full valuation allowance has been recorded against the U.S. deferred tax assets.
Management periodically evaluates the realizability of the Company's net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on the Company's ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. The Company weighed both positive and negative evidence and determined that there is a continued need for a full valuation allowance on its deferred tax assets in the United States as of March 31, 2015. The Company emerged from a cumulative loss position over the previous three years during the first quarter of 2015. However, given economic uncertainties and the uncertainty of commercializing new business arrangements and new product acceptances, the Company currently believes there is not sufficient positive evidence of future profitability to change its judgment regarding the need for a full valuation allowance on its deferred tax assets in the United States. The continued improvement in the Company's operating results, conditioned on successfully commercializing new business arrangements, signing new or renewing existing license agreements and managing costs would provide additional positive evidence in determining the need for the valuation allowance and could lead to reversal of substantially all of the Company's valuation allowance on its deferred tax assets in the United States. Until such time, consumption of tax attributes to offset profits will reduce the overall level of deferred tax assets subject to valuation allowance. Should the Company determine that it would be able to realize its remaining deferred tax assets in the foreseeable future, an adjustment to its remaining deferred tax assets would cause a material increase to income in the period such determination is made.
The Company maintains liabilities for uncertain tax positions within its long-term income taxes payable accounts and as a reduction to existing deferred tax assets to the extent tax attributes are available to offset such liabilities. These liabilities involve judgment and estimation and are monitored by management based on the best information available including changes in tax regulations, the outcome of relevant court cases and other information.
As of March 31, 2015 , the Company had approximately $21.4 million of unrecognized tax benefits, including $18.4 million recorded as a reduction of long-term deferred tax assets and $3.0 million in long-term income taxes payable. If recognized, approximately $3.0 million would be recorded as an income tax benefit. No benefit would be recorded for the remaining unrecognized tax benefits as the recognition would require a corresponding increase in the valuation allowance. As of December 31, 2014 , the Company had $19.9 million of unrecognized tax benefits, including $17.8 million recorded as a reduction of long-term deferred tax assets and $2.1 million recorded in long-term income taxes payable.
Although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. At March 31, 2015 and December 31, 2014 , an immaterial amount of interest and penalties is included in long-term income taxes payable.

22


Rambus files income tax returns for the U.S., California, India and various other state and foreign jurisdictions. The U.S. federal returns are subject to examination from 2012 and forward. The California returns are subject to examination from 2009 and forward. In addition, any research and development credit carryforward or net operating loss carryforward generated in prior years and utilized in these or future years may also be subject to examination. The India returns are subject to examination from fiscal year ended March 2006 and forward. The Company is currently under examination by California for the 2010 and 2011 tax years. The Company’s India subsidiary is under examination by the Indian tax administration for years 2008 through 2010. These examinations may result in proposed adjustments to the income taxes as filed during these periods. Management regularly assesses the likelihood of outcomes resulting from income tax examinations to determine the adequacy of their provision for income taxes and believes their provision for unrecognized tax benefits is adequate.
Additionally, the Company's future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where the Company has higher statutory rates or lower than anticipated in countries where it has lower statutory rates, by changes in valuation of its deferred tax assets and liabilities or by changes in tax laws or interpretations of those laws.

13. Litigation and Asserted Claims
Rambus is not currently a party to any material pending legal proceeding; however, from time to time, Rambus may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial position or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies.

14. Agreements with SK hynix and Micron
SK hynix
On June 11, 2013, Rambus, SK hynix and certain related entities of SK hynix entered into a settlement agreement, pursuant to which the parties have agreed to release all claims against each other with respect to all outstanding litigation between them. Pursuant to the settlement agreement, Rambus and SK hynix entered into a semiconductor patent license agreement on June 11, 2013, under which SK hynix licenses from Rambus non-exclusive rights to certain Rambus patents and has agreed to pay Rambus cash amounts over the next five years . Under the license agreement, Rambus has granted to SK hynix (i) a paid-up perpetual patent license for certain identified SK hynix DRAM products and (ii) a five -year term patent license to all other DRAM and other semiconductor products.
The agreements with SK hynix are considered a multiple element arrangement for accounting purposes. For a multiple element arrangement under the applicable accounting rules, the Company is required to identify specific elements of the arrangement and then determine when those elements should be recognized. The Company identified three elements in the arrangement: antitrust litigation settlement, settlement of past infringement, and license agreement. The Company considered several factors in determining the accounting fair value of the elements of the SK hynix agreements which included a third party valuation using an income approach (collectively the “SK hynix Fair Value”). The inputs and assumptions used in this accounting valuation were from a market participant perspective and included projected customer revenue, royalty rates, estimated discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model requires a significant amount of management judgment and discretion, and is based upon a number of factors, including the selection of industry comparables, market growth rates and other relevant factors. Changes in any number of these assumptions may have a substantial impact on the SK hynix Fair Value as assigned to each element. These inputs and assumptions represent management’s best estimates at the time of the transaction.
During the first quarter of 2015, the Company received cash consideration of $12.0 million from SK hynix. The amount was allocated between royalty revenue ( $11.8 million ) and gain from settlement ( $0.2 million ) based on the elements’ SK hynix Fair Value.
The remaining $156.0 million is expected to be paid in successive quarterly payments of $12.0 million , concluding in the second quarter of 2018.

23


The cumulative cash receipts through March 31, 2015 and the remaining future cash receipts from the agreements with SK hynix are expected to be recognized as follows assuming no adjustments to the payments under the terms of the agreements:
 
Cumulative Received
to-date as of March 31,
 
Estimated to Be Received in
 
Total Estimated
Cash Receipts
 
2015
 
Remainder
of 2015
 
2016
 
2017
 
2018
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Royalty revenue
$
82.7

 
$
35.5

 
$
47.9

 
$
48.0

 
$
24.0

 
$
238.1

Gain from settlement
1.3

 
0.5

 
0.1

 

 

 
1.9

Total
$
84.0

 
$
36.0

 
$
48.0

 
$
48.0

 
$
24.0

 
$
240.0

Micron
On December 9, 2013, Rambus, Micron and certain related entities of Micron entered into a settlement agreement, pursuant to which the parties have agreed that they will release all claims against each other with respect to all outstanding litigation between them and certain other potential claims. Pursuant to the settlement agreement, Rambus and Micron entered into a semiconductor patent license agreement on December 9, 2013. Under the license agreement, Rambus has granted to Micron and its subsidiaries and certain affiliated entities (i) a paid-up perpetual patent license for certain identified Micron DRAM products and (ii) a seven -year term patent license to other memory and semiconductor products.
The agreements with Micron are considered a multiple element arrangement for accounting purposes. For a multiple element arrangement under the applicable accounting rules, the Company is required to identify specific elements of the arrangement and then determine when those elements should be recognized. The Company identified three elements in the arrangement: antitrust litigation settlement, settlement of past infringement, and license agreement. The Company considered several factors in determining the accounting fair value of the elements of the Micron agreements which included a third party valuation using an income approach (collectively the “Micron Fair Value”). The inputs and assumptions used in this accounting valuation were from a market participant perspective and included projected customer revenue, royalty rates, estimated discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model requires a significant amount of management judgment and discretion, and is based upon a number of factors, including the selection of industry comparables, market growth rates and other relevant factors. Changes in any number of these assumptions may have a substantial impact on the Micron Fair Value as assigned to each element. These inputs and assumptions represent management’s best estimates at the time of the transaction.
During the first quarter of 2015, the Company received cash consideration of $10.0 million from Micron. The amount was allocated between royalty revenue ( $9.7 million ) and gain from settlement ( $0.3 million ) based on the elements’ Micron Fair Value.
The remaining $224.5 million is expected to be paid in successive quarterly payments of $10.0 million , concluding in the fourth quarter of 2020.
The cumulative cash receipts through March 31, 2015 and the remaining future cash receipts from the agreements with Micron are expected to be recognized as follows assuming no adjustments to the payments under the terms of the agreements:
 
Cumulative Received
to-date as of March 31,
 
Estimated to Be Received in
 
Total Estimated
Cash Receipts
 
2015
 
Remainder of 2015
 
2016
 
2017
 
2018
 
2019
 
2020
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Royalty revenue
$
53.7

 
$
29.0

 
$
39.5

 
$
40.0

 
$
40.0

 
$
40.0

 
$
34.5

 
$
276.7

Gain from settlement
1.8

 
1.0

 
0.5

 

 

 

 

 
3.3

Total
$
55.5

 
$
30.0

 
$
40.0

 
$
40.0

 
$
40.0

 
$
40.0

 
$
34.5

 
$
280.0


24


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 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
Dynamic Random Access Memory
DRAM
Light Emitting Diodes
LED
Rambus Dynamic Random Access Memory
RDRAM
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 Division
CRD
Elpida Memory, Inc.
Elpida
Emerging Solutions Division
ESD
Freescale Semiconductor Inc.
Freescale
Fujitsu Limited
Fujitsu
General Electric Company
GE
Intel Corporation
Intel
International Business Machines Corporation
IBM
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
NVIDIA Corporation
NVIDIA
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 also looking 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 expanded 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.
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 Division, or CRD, which focuses on the design, development and licensing of technologies for chip and system security and anti-counterfeiting; (3) Emerging Solutions Division, or ESD, which includes our computational sensing and imaging group along with our development efforts in the area of emerging technologies; and (4) Lighting and Display Technologies, or LDT, which focuses on the design, development and licensing of technologies for lighting. As of March 31, 2015, MID and CRD were considered reportable segments as they met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining operating segments 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 inventions and technology solutions are primarily offered to our customers through either a patent license or a technology license. Royalties from patent licenses accounted for 89% and 90% of our consolidated revenue for the three months ended March 31, 2015 and 2014, respectively. Royalties from technology licenses accounted for 3% and 4% of our consolidated revenue for the three months ended March 31, 2015 and 2014, respectively. Today, a majority of our revenues are derived from patent licenses, through which we provide our customers a license to use a certain 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 periods of up to ten years. Leading consumer product, semiconductor and system companies such as AMD, Broadcom, Cisco, 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.
We also offer our customers technology 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 technology 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 technology licenses which can include know-how and technology transfer, product design and development, system integration, and other services. These technology license agreements may have both a fixed price (non-recurring) component and ongoing royalties. Further, under technology licenses, our customers typically receive licenses to our patents necessary to implement these solutions in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts with us.
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, sales, 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.
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. One of our goals is to supplement our patent licensing

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business with additional licensing opportunities for our technologies, products and services to be incorporated into our customers’ products and/or systems. Our technology licenses are designed to support the implementation and adoption of our technology into our customers’ products or services. As part of these offerings, we can provide a range of services that can include access to technical experts, advanced system design and analysis, hardware and software to enhance design and validation, system IP and specifications, and process-specific hard and soft macros, along with other services. These technology license agreements may have both a fixed price (non-recurring) component and ongoing royalties. Further, under technology licenses, our customers typically receive licenses to our patents necessary to implement these solutions in their products with specific rights and restrictions to the applicable patents elaborated in their individual contracts with us.
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 March 31, 2015, our semiconductor, lighting, security and other technologies are covered by 1,764 U.S. and foreign patents. Additionally, we have 662 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.
Executive Summary
During the first quarter of 2015, we s igned patent and technology license agreements with IBM. Additionally, industry publication Tom’s Hardware granted our Lensless Smart Sensor technology with the Best IoT Innovation Award at Mobile World Congress 2015.

Engineering expenses continue to play a key role in our efforts to maintain product innovations. Our engineering expenses for the three months ended March 31, 2015 increased $2.4 million as compared to the same period in 2014 primarily due to increased headcount related expenses of $1.2 million, increased expenses related to software design tools of $1.0 million, increased cost of sales associated with sales of light guides of $0.7 million, increased bonus accrual expense of $0.5 million and increased stock-based compensation expense of $0.4 million offset by decreased accrual of retention bonuses of $1.2 million.

Sales, general and administrative expenses for the three months ended March 31, 2015 remained relatively flat as compared to the same period in 2014 primarily due to decreased consulting costs of $0.9 million, decreased legal patent prosecution costs of $0.4 million and decreased depreciation expense of $0.4 million, offset by increased headcount related expenses of $0.9 million and increased stock-based compensation expense of $0.4 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 66% and 64% of our revenue for the three months ended March 31, 2015 and 2014, 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 months ended March 31, 2015, revenue from Micron, Samsung and SK hynix each accounted for 10% or more of our total revenue. For the three months ended March 31, 2014, revenue from Micron, Samsung and SK hynix 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

28

Table of Contents

volumes and prices at which the customers have recently sold to their customers. These variations are expected to continue in the foreseeable future.
Our licensing cycle is lengthy, costly and unpredictable with any degree of certainty. We may incur costs in any particular period before any associated revenue stream begins, if at all. Our lengthy license negotiation cycles could make our future revenue difficult to predict because we may not be successful in entering into licenses with our customers in the amounts projected, or on our anticipated timelines. In addition, while some of our license agreements provide for fixed, quarterly royalty payments, many of our license agreements provide for volume-based royalties, and may also be subject to caps on royalties in a given period. The sales volume and prices of our customers' products in any given period can be difficult to predict. As a result, our actual results may differ substantially from analyst estimates or our forecasts in any given quarter or over the next year.

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 where the purchaser of the patents can proceed independently with a licensing program. We have a net proceeds-sharing program in place with the purchaser of the patents 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 CRD 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 62%, and 63% of our total revenue for the three months ended March 31, 2015 and 2014, 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 and as a percentage of revenue increased for the three months ended March 31, 2015 as compared to the same period in the prior year. In the near term, we expect engineering costs in the aggregate 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.

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Sales, general and administrative expenses in the aggregate decreased and as a percentage of revenue increased for the three months ended March 31, 2015 as compared to the same period in the prior year. In the past, our litigation expenses have been high and difficult to predict. Because we have successfully negotiated settlements and license agreements with SK hynix, Micron and Nanya during the course of 2013 and 2014, we have settled all outstanding litigation and should no longer have material litigation expenses related to these specific matters. In the near term, we expect our sales, general and administrative costs in the aggregate to remain relatively flat. To the extent litigation is again necessary, our expectations on the amount and timing of any future general and administrative costs is uncertain.
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.
As a part of our overall business strategy, from time to time, we evaluate businesses and technologies for potential acquisition that are aligned with our core business and designed to supplement our growth. In the first quarter of 2015, we did not identify any acquisition opportunities that met our criteria from a strategic and valuation perspective.

We continue to evaluate our acquisition options, but to provide us with more flexibility in returning capital back to our stockholders, on January 21, 2015, our Board authorized a new share repurchase program authorizing the repurchase of up to an aggregate of 20.0 million shares, which we may opportunistically execute from time to time.

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
 
March 31,
 
2015
 
2014
Revenue:
 

 
 

Royalties
91.8
 %
 
94.1
 %
Contract and other revenue
8.2
 %
 
5.9
 %
Total revenue
100.0
 %
 
100.0
 %
Operating costs and expenses:
 

 
 

Cost of revenue*
14.8
 %
 
12.8
 %
Research and development*
39.1
 %
 
34.4
 %
Sales, general and administrative*
25.4
 %
 
24.1
 %
Gain from sale of intellectual property
(3.1
)%
 
(0.2
)%
Gain from settlement
(0.7
)%
 
(0.7
)%
Total operating costs and expenses
75.5
 %
 
70.4
 %
Operating income
24.5
 %
 
29.6
 %
Interest income and other income (expense), net
0.2
 %
 
0.0
 %
Interest expense
(4.2
)%
 
(12.7
)%
Interest and other income (expense), net
(4.0
)%
 
(12.7
)%
Income before income taxes
20.5
 %
 
17.0
 %
Provision for income taxes
7.5
 %
 
7.0
 %
Net income
13.0
 %
 
10.0
 %
_________________________________________
*      Includes stock-based compensation:
Cost of revenue
0.0
%
 
0.0
%
Research and development
2.4
%
 
1.7
%
Sales, general and administrative
2.7
%
 
2.0
%

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Table of Contents

 
 
Three Months
 
 
 
 
Ended March 31,
 
Change in
(Dollars in millions)
 
2015
 
2014
 
Percentage
Total Revenue
 
 

 
 

 
 

Royalties
 
$
67.0

 
$
73.6

 
(9.1
)%
Contract and other revenue
 
5.9

 
4.7

 
28.0
 %
Total revenue
 
$
72.9

 
$
78.3

 
(6.9
)%

Royalty Revenue

Patent Licenses

Our patent royalties decreased approximately $5.4 million to $65.0 million for the three months ended March 31, 2015 from $70.4 million for the same period in 2014. The decrease was primarily due to lower royalty revenue from Nanya, NVIDIA and STMicroelectronics, offset by higher royalty revenue recognized from the agreements signed with IBM and Qualcomm. Of the $65.0 million patent royalties for the three months ended March 31, 2015, $21.5 million is related to royalty revenue from settlement of past legal proceedings 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, renewing or extending existing agreements, 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.
Technology Licenses
Royalties from technology licenses decreased approximately $1.2 million to $2.0 million for the three months ended March 31, 2015 from $3.2 million for the same period in 2014. The decrease was primarily due to lower royalties reported from decreased shipments of the Sony PlayStation ® 3 product, DDR2 technology products and Serial Link products.
We expect future technology licensing royalties from the Sony PlayStation ® 3 product to continue to decrease. In the future, we expect technology 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 technology license royalties, decreased approximately $7.0 million to $54.2 million for the three months ended March 31, 2015 from $61.2 million for the same period in 2014. The decrease was primarily due to lower royalty revenue from Nanya, NVIDIA and STMicroelectronics offset by higher royalty revenue from agreements signed with IBM and Qualcomm.
Royalty revenue from the CRD reportable segment remained relatively flat at $12.4 million for the three months ended March 31, 2015 compared to the same period in 2014.
Royalty revenue from the Other segment was immaterial for both the three months ended March 31, 2015 and 2014, and increased period over period.
Contract and Other Revenue
Contract and other revenue consists of revenue from technology development and sale of LED edge-lit products. Contract and other revenue increased approximately $1.2 million to $5.9 million for the three months ended March 31, 2015 from $4.7 million for the same period in 2014. The increase was primarily due to increased lighting technology development projects and sales of light guides as well as various other development projects.
We believe that contract and other revenue will fluctuate over time based on our ongoing technology development 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 to $0.5 million for the three months ended March 31, 2015 as compared to the same period in 2014, primarily due to new development projects.

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Contract and other revenue from the CRD reportable segment decreased approximately $0.1 million to $0.4 million for the three months ended March 31, 2015 from $0.5 million for the same period in 2014, primarily due to lower revenue from evaluation and test equipment contracts.
Contract and other revenue from the Other segment increased approximately $0.8 million to $5.0 million for the three months ended March 31, 2015 from $4.2 million for the same period in 2014. The increase was primarily due to increased lighting technology development projects and sales of light guides.
Engineering costs:
 
 
Three Months Ended
 
 
 
 
March 31,
 
Change in
(Dollars in millions)
 
2015
 
2014
 
Percentage
Engineering costs
 
 

 
 

 
 

Cost of revenue
 
$
5.1

 
$
4.3

 
17.8
%
Amortization of intangible assets
 
5.7

 
5.7

 
%
Stock-based compensation
 
0.0

 
0.0

 
%
Total cost of revenue
 
10.8

 
10.0

 
7.3
%
Research and development
 
26.7

 
25.6

 
4.6
%
Stock-based compensation
 
1.8

 
1.3

 
34.8
%
Total research and development
 
28.5

 
26.9

 
6.1
%
Total engineering costs
 
$
39.3

 
$
36.9

 
6.4
%
Total engineering costs increased $2.4 million for the three months ended March 31, 2015 as compared to the same period in 2014 primarily due to increased headcount related expenses of $1.2 million, increased expenses related to software design tools of $1.0 million, increased cost of sales associated with sales of light guides of $0.7 million, increased bonus accrual expense of $0.5 million and increased stock-based compensation expense of $0.4 million offset by decreased accrual of retention bonuses of $1.2 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.
Sales, general and administrative costs:
 
 
Three Months Ended
 
 
 
 
March 31,
 
Change in
(Dollars in millions)
 
2015
 
2014
 
Percentage
Sales, general and administrative costs
 
 

 
 

 
 

Sales, general and administrative costs
 
$
16.5

 
$
17.2

 
(4.2
)%
Stock-based compensation
 
2.0

 
1.6

 
25.7
 %
Total sales, general and administrative costs
 
$
18.5

 
$
18.8

 
(1.7
)%
Total sales, general and administrative costs remained relatively flat for the three months ended March 31, 2015 as compared to the same period in 2014 primarily due to decreased consulting costs of $0.9 million, decreased legal patent prosecution costs of $0.4 million and decreased depreciation expense of $0.4 million, offset by increased headcount related expenses of $0.9 million and increased stock-based compensation expense of $0.4 million.
In the future, sales, general and administrative costs will vary from period to period based on the trade shows, advertising, legal, acquisition and other sales, 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 sales, general and administrative costs to remain relatively flat.

32

Table of Contents

Gain from sale of intellectual property:
 
 
Three Months Ended
 
 
 
 
March 31
 
Change in
(Dollars in millions)
 
2015
 
2014
 
Percentage
Gain from sale of intellectual property
 
$
2.3

 
$
0.2

 
NM*
__________________________________
*
NM — percentage is not meaningful
During 2013, we sold portfolios of our patent assets covering lighting technologies. As part of these transactions, we received an initial upfront payment and expect to receive subsequent payments if and when the purchaser of the patents is successful in licensing that portfolio. During the first quarter of 2015, we received $2.3 million from the purchaser of the patents related to this transaction which was recorded as gain from sale of intellectual property.

During first quarter of 2014, we sold portfolios of our patent assets covering wireless and other technologies.
Gain from settlement:
 
 
Three Months Ended
 
 
 
 
March 31,
 
Change in
(Dollars in millions)
 
2015
 
2014
 
Percentage
Gain from settlement
 
$
0.5

 
$
0.5

 
%

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 each of the three months ended March 31, 2015 and 2014, we recognized $0.5 million 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 14, “Agreements with SK hynix and Micron,” of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further discussion.

Interest and other income (expense), net:
 
 
Three Months
 
 
 
 
Ended March 31,
 
Change in
(Dollars in millions)
 
2015
 
2014
 
Percentage
Interest income and other income (expense), net
 
$
0.1

 
$
0.0

 
NM*

Interest expense
 
(3.1
)
 
(9.9
)
 
(68.9
)%
Interest and other income (expense), net
 
$
(3.0
)
 
$