Rambus Inc (RMBS) 2003 Q2 法說會逐字稿

Good afternoon, my name is Molly and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Rambus second quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2 on your telephone keypad. Thank you.

Mr. Eulau, you may begin your conference.

Thank you and good afternoon, everyone. Welcome to the quarterly conference call from Rambus, Inc. This call will cover the financial results for our second quarter in 2003. You may recall that we recently changed our fiscal year to coincide with the calendar year end.

My name is Bob Eulau and I am Rambus' Chief Financial Officer. Dave Mooring, our President is joining me today. Geoff Tate, our CEO, is on vacation and will be unable to join us.

I'll start with a summary and analysis of the financial results for the quarter and an update on litigation and then turn it over to Dave for a discussion on the business progress made in the last quarter. We will then open the lines for Q&A, and both Dave and I will be available for questions.

The press release has also been filed with the S.E.C. on form 8-K. If you have not received it, it's available on our website at www.rambus.com. A replay of this conference call will be available next week at 800-642-1687. You will need the ID number 162-15-89.

In addition, we are simultaneously web casting this call, and it can be accessed on our website, beginning at 5:00 p.m. Pacific Daylight Time.

Before we begin, I need to state that our discussion will contain forward-looking statements regarding our financial prospects, including revenues, costs and expenses, net interest and other income and tax rates, pending litigation, development plans, anticipated product shipment date, relations with licensees and other third parties, various other matters and that actual results may differ.

Among the reasons which could cause actual results to differ materially is the possibility of inadequate shipments of RDRAM memory devices and controllers for the Sony Playstation 2 and the pc main memory market. The market responds to these products and any deterioration in the DRAM market and any declining prices, any delay in the development bus products by licensees, any development or delay in the shipment of new licensed products, the greater-than-expected response of the market to technology, the lack of progress on price and cost reduction by RDRAM suppliers, inadequate progress on signing new contracts for RDRAM, XDR, SDRAM or TDR memory devices and controllers. Inadequate progress on signing new contracts for RaSer and Redwood. Current licensees not fulfilling their contract obligations, unexpected delays in competing contract requirements, current licensees terminating their contract, adverse litigation decisions and other factors which are available in our S.E.C. filings and in our 10-K.

We are very pleased with the progress the company has made this quarter. For the quarter our year-over-year revenue growth was excellent at 23%. This was the fifth quarter in a row of sequential revenue growth. Our operating profit was down from last year but up slightly when compared to the last quarter in spite of heavy litigation and as Dave will discuss shortly, we've made very solid progress in several areas of our business.

Now, for a bit more detail on revenue, total revenue for the quarter was $29.2 million, up 23% over the same quarter last year and up 4% sequentially. Total royalties for the quarter were $25.4 million, up 15% from the same period last year and up 3% relative to last quarter. Please remember that this quarter's royalties reflect shipments that occurred in the first quarter of [INAUDIBLE].

Overall, RDRAM interface royalties were down 13% from last year and down 25% from last quarter. Most of this decline was driven by a drop in the unit volume of RDRAM memory devices. We believe this reflects the decline in shipments in part by [INAUDIBLE] using Intel's 850. SDRAM and DDR royalties were up 19% for memory controllers and devices combined. This sequential increase was driven by very strong shipments in DDR memory devices to help with scenario planning, revenues specifically coming from SDRAM and DDR, memory and memory controller royalties comprised about 40% of our revenue.

Contract revenue in the second quarter of 2003 was $3.7 million, which is up 148% over the same period last year and up 15% from last quarter. This increase in contract revenue reflects the revenue that we are recognizing for the XDR memory interface and Redwood contract. I should mention that XDR is the name for the memory interface, previously named Yellowstone.

We're obviously very pleased with by the steady adoption of our latest technologies. We received about $5.9 million in cash for contract payments this quarter, and most of the revenue recognition for this cash has been [INAUDIBLE].

Spending for the June quarter was $23.9 million, up $300,000, or 1% from the previous quarter. This was up $7.8 million, or 47% the same quarter a year ago. The change in spending from last quarter was primarily an increase in investment in research and development, partially offset by a decrease in litigation costs.

The cost of litigation was down about $700,000 from last quarter at $6.4 million and up $4 million when compared to the same quarter last year. The litigation costs were high, primarily due to FTC [INAUDIBLE].

The hearing with the FTC started on April 30th and is ongoing. But the FTC's side of the case is taking significantly longer than their original estimate. I'll provide more detail on this and other litigation in a couple of minutes.

Operating expenses, including cost of litigation, were up 6% when compared to last quarter. They were up 28% when compared with the same quarter last year with this increase largely attributable to our planned ramp-up for XDR memory interface and Redwood.

From a profitability standpoint, this was another solid quarter. Net income for the second quarter, $4.5 million, or 15% of revenue compared to $5.1 million in the previous quarter and $5.9 million in the same period last year. This continued profitability led to strong cash flow for the quarter.

Our cash, cash equivalents, marketable securities, and significant investments in the second quarter were $191million versus $183 million last quarter, and $189 million as of [INAUDIBLE].

We did not repurchase any stock this quarter but the share repurchase program is an ongoing long-term program. We have remaining authorization from the Board to repurchase up to an additional 7 million shares over an undefined period of time. Volume of purchases will vary by quarter based on the opportunity.

At the end of this quarter, we had average basic shares outstanding of 97 million and diluted shares outstanding of 105 million.

Now, I will give you some guidance on what to expect in the third quarter of 2003. This guidance obviously has a lot of uncertainty associated with it. This guidance reflects our best guess at this point in time, and our actual results could differ materially from what I'm about to review. We estimate revenue to be roughly flat, between $28 million and $30 million.

In nonlitigation operating expenses, we estimate that spending will be between $17 million and $19 million. The increase in spending is primarily driven by increased investments in our XDR memory interface and Redwood product area.

Litigation spending is always difficult to predict, as we do not control the time lines and requests from the court, nor do we control the actions that our adversaries may take which cause us to incur our defense. For example, evidence that is produced in hearings can also cause us to [INAUDIBLE].

Based on what we know today, we believe the litigation spending in Q3 will come in a broad range of somewhere between $5.5 million and $8.5 million for the third quarter. Where we are in this range is very dependent on when in August the FTC hearing concludes and activity level for private litigation. We are estimating net interest and other income to be between 1 and $1.2 million, and finally, we are still estimating a tax rate of 32% [INAUDIBLE].

On the subject of our litigation, I will review the major items in our litigation time line. Let me start with an update in the U.S. As we reported last quarter, at the beginning of this year, we received a very favorable decision on Infineon appeal from a 3 judge panel of the United States Group of Appeals with the Federal Circuit.

Since then there has been a denial of Infineon's request for reconsideration by the 3 judge panel and a denial by the entire Federal Circuit of Infineon's request for an en banc review of the panel. Infineon has sought further review by the United States Supreme Court and has sought and obtained from the Federal Circuit a stay of the issuance of mandate, which has heard retrial by that court on our patent case. We expect that the stay will remain in place until the Supreme Court decides whether or not to hear the case.

Infineon filed its petition for [INAUDIBLE] on July 3rd. Our reply is due August 6. We expect to know sometime in October whether the Court will hear the case. If and when ultimately issued by the Federal Circuit the mandate will start the process of a retrial of our infringement claims against Infineon in the Virginia Court, together with any claims and expenses Infineon has around to survive the ongoing process. Currently this trial in Virginia has not been set, but preparation for it could affect our fourth quarter.

One interim fixed royalty agreement with a DRAM manufacturer remains in place where there is litigation progress. In the private litigation against Kinex, discovery is ongoing with a trial date currently set for November 2004. A markman hearing is currently set for December of 2003.

In the private litigation against Micron, there is nothing currently on the Court's calendar, and the Court is suggesting that the parties agree to make the case temporarily inactive. We are currently evaluating this alternative. We are inclined to accept if it does not materially affect the ultimate Micron trial date.

The other major action in the U.S. is with the Federal Trade Commission. The hearing focuses on the same JEDEC basic standard setting allegations as the trial in the Infineon case. It began on April 30th, and complaint counsel rested its case in chief on June 30th, significantly later than earlier predictions. Rambus began its defense on July 9th.

We anticipate that the F. T. C. hearing will conclude by sometime in August. A post-trial briefing will follow and recommended finding decisions from a administrative law judge are anticipated to come in the fall. After that it is expected that the full commission could take up to a year or more to render its decision on those findings that the judge recommends.

Other litigation matters relating to the JEDEC standards setting allegations against Rambus have been winding down significantly following the Federal Circuit. In the class action lawsuit, reportedly filed on behalf of consumers by Holiday Matinee alleging that DRAM pricing is high as a result of Rambus royalties, a judge granted a third demurrer, which basically means that the allegations were legally insufficient to judge throughout the complaint.

After that ruling, the plaintiffs gained dismissal of their own complaint with prejudice which opens the way for them to seek appellate review of the complaint.

In a shareholder suit in Northern California, the Court granted plaintiff's motion with prejudice on May 23rd. More recently, as announced last week, Delaware Chancery Court's derivative suit against Rambus has been dismissed without prejudice at the request of the plaintiffs.

Europe, the Mannheim Court, has currently scheduled the next hearings in the Infineon and Micron cases in Germany for September 26, 2003. However, this date is not certain. Mannheim Court has indicated that it is considering moving infringement proceedings until after the appeal in the Infineon portion of the case. It is anticipated to take place at the European patent office sometime early next year.

Currently, the currently scheduled hearings for September in Mannheim would address and possibly decide infringement issues on this patent. We are still waiting for the expert report in the Hinex matter, while the infringement hearing in September, if they go forward, would only involve Infineon and Micron.

All of the foregoing litigation items relate to Rambus' efforts to protect its intellectual property, answer related claims concerning our 1991through 1995 participation in the JEDEC standards setting process.

I now want to change gears a bit and briefly address another area where the company has potential litigation activity, perhaps in the next quarter. We are now evaluating what antitrust or other remedies Rambus may pursue based on evidence indicating that there were concerted efforts in mid- to late nineties to deter innovation in the DRAM market and to deter Rambus DRAM product.

We are not at this point prepared to detail this area further except to say that such claim, if we decide to pursue them, would cover a number of years where we believe our DRAM would have been much more prevalent and consumers would have had better choices had no illegal conduct occurred. If we elect to bring such claims, we can expect our litigation expenses to be towards the high end of the range of the projections I just gave you.

That covers the key financial and legal issues for the second quarter of 2003. So now I'll turn it over to Dave for some comments on our business.

Thank you, Bob, and good afternoon, everyone.

Rambus continues to execute to our plan of being the preferred provider of chip to chip interface solutions. We do this by partnering with our customers to solve their critical I/O problems and thereby enabling industry-leading products. As part of this we have made progress in both of our product divisions, our memory interface business and our logic interface business.

First I'll start with a recap of our logic interfaces. Our RaSer serial links are gaining momentum in the area of PCIA express interconnect. We announced in June that we are sampling test chips of our PCI Express PHY. This test chip utilizes TSMC's 0.13 micron process technology and is a key tool for them to apply the solutions to their designs.

We also announced that we've signed a licensed agreement with E-Silicon where they will provide our 3.2 gigabit per second Raser PHY to their Asic customers. On our higher speed RaSer products, we showcased our RaSer X, running at 10 gigabits per second, coupled with connectors from Teradyne at the Design Com E-show in Boston last month. Our RaSer X solution not only allows signals to travel at these high speeds but also over older backplanes.

This is particularly valuable to those OEMs and suppliers that can't afford to replace equipment and want to add new line cards or blades to existing chassis and backplanes. Interest and evaluation in our RaSer X is high and our key target customers at the 6 1/4, 10, and 12 gigabit per second level.

We've had a lot of activity in our memory interface division this past quarter as well. Last week I was in Japan where we held our Rambus Developers Forum. At this two-day event, we presented technical details on all of our interface products to a crowd of 600.

Also at RDF Japan, we formally unveiled our newest memory interface, XDR memory, which was previously known under the code name Yellowstone. XDR stands for extreme data rate and provides customers with a starting rate of 3.2 gigahertz. This is eight times faster than today's mainstream memory speeds.

We're proud of our accomplishments with XDR over the past few years and it's great to see the technology begin being widely accepted. To that end, we have signed a licensing agreement with Samsung for them to utilize our XDR technology in their next generation of DRAMs. We now have four licensees for our XDR technology: Sony, Toshiba, Elpida, and Samsung. We expect to see the first 512 megabit samples of the new XDR D-RAM in 2004 with control production ramping up in early 2005.

This memory is initially targeted at high-end computing, graphics, consumer, and networking markets but we expect microprocessors and PC main memory to need this level of bandwidth later this decade. The XDR memory interface is ready for designers now; data sheet, technical specifications, and documentation are available today.

We've also met new milestones on the RDRAM this quarter. Both Elpida and Samsung have validated the 1200 megahertz RDRAM and the parts are ready and available for design-ins. SIS is moving forward on their 659 chip set which will utilize these 1200 megahertz RDRAM and we expect the 659 chip set will sample later this year. This four-channel chip set will provide 9.6 gigabytes per second of memory bandwidths which is 50% more bandwidths in DDR 400.

2003 is turning out to be a good year in terms delivering new technologies and seeing new customer adoption of those technologies. We continue to work with our customers to ensure we meet all their needs, solving their challenging interface problems and help them to execute to their road map in bringing these new devices and systems to market.

That's the end of our prepared comments. Now, we'll open up the lines for questions.

At this time I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad now. We will pause for just a moment to compile the Q&A roster.

Yeah. Also, we had some confusion last time. So feel free to ask more than one question, and if you want to, you can also feel free to get back in the queue.

Your first question comes from Mike Crawford.

Good afternoon. Could you clarify the status of IBM's access to XDR DRAM?

Sure. IBM, through a sublicense through Sony, has access to the XDR interface technology for logic products.

Okay.

Does that answer your question, Mike?

Yeah, that does. And then how does the XDR royalty licensing rate compare relative to RDRAM? It's higher.

Okay. Bob can tell you what he wants to tell you.

And then my final question relates to the antitrust issue that Bob mentioned. So you are saying that you might consider filing those claims before the D.O.J. decides whether to move forward on its criminal antitrust complaint against these companies?

That's correct. We are evaluating currently what we're going to do based on the information that our counsel has access to right now.

Okay. Thank you.

Thanks, Mike.

Your next question comes from Jeff Shriner.

Good afternoon, gentlemen. I was just wondering, how many patents does the company now have issued at the end of the quarter?

I don't have that number off the top of my head. I can tell you, we'll have -- I think we'll have around 400 filed and issued by the end of the year, and we probably in the neighborhood of 200 issued right now.

Okay. And then would you say that around 19 to 20 sounds right for RaSer licensees?

We didn't specify a particular number. It's somewhere, I would guess, between 10 and 20.

Between 10 and 20? Okay.

The terms, the number of licenses, you are very close.

Okay. And then how many new engineers did you hire in this quarter? If any?

We definitely hired some new engineers. I would say -- let me just make some comments on the hiring ramp.

We have been ramping our engineering staff quite significantly over the last two quarters, and I think we're nearing the end of that ramp. We'll probably, you know, going forward, hire a handful of more people, but most of the ramp is behind us at this point, and during the course of that ramp, I would say we hired close to 40 people, 35, 40 people.

Oh, okay. Final question, Dave, if you could just give a little color on this. You commented on the SIS 659. It's going to be kind of the sole remaining RDRAM chip set out there right now after the 850 gets phased out.

What impact does the management team see in terms of positively reviving RDRAM from the SIS 659? What positive impact may that have?

Well, the RDRAM is actually quite positive in other market segments besides the PC.

So there are new applications in the communications base, for example, where the systems are just starting to ship but the volume is definitely more in the computer space, and as it relates to the RDRAM in the PC, yeah, we're very hopeful, optimistic, and working hard to make sure the SIS 659 is a great showcase not just for the RDRAM but for Intel CPUs, and our job along with SIS is to make it get back on the cover of the PC Magazines as the best in class performance PC. So we're doing what we can, supporting the program.

All right. Thank you, gentlemen.

Thank you.

Thanks, Jeff.

Your next question comes from Michael Cohen.

Yeah. Hi, Bob.

Hi.

I noticed that your operating income, being that it's very strong this quarter, the interest and other income line was fairly down. And I was wondering if you could give us a little bit of color into what happened in the interest and other income line?

Yeah, I think the biggest explanation is actually what took place last quarter, which is where we had the divestiture of our interest in UROLOGIC and we recognize add one-time gain last quarter.

Would that also be an explanation why the restricted investments were down on the balance sheet?

Actually that's a good question. The restricted investments related to a letter of credit that we had to provide to Infineon as a result of the outcome of the Virginia trial and so once we got the positive outcome on appeal, we were able to get rid of that letter of credit which was restricting on cash.

Got it. And if you went forward with the antitrust, can you give us a little more color into the time line of when your decision-making process would be?

I unfortunately have said about all I can say about that right now. It's -- a lot of thought is going into what the appropriate actions are. We'll keep you posted.

Great. Thanks a lot.

Yeah, thank you.

Your next question comes from Erach Desai.

Hi, Bob, it's Erach Desai.

Hi.

I had a couple here. One, a clarification. The volume seems to be a little low, at least on my headset. For interest and other for the September quarter, what did you guide to that?

Between $1 million and $1.2 million. That's just to clarify for everybody. So that is interest and other income guidance for the third quarter.

All right. And then the question I had was relative to 90 days ago, if I -- I just want a clarification. Are Elpida and Samsung incrementally new licensees for the XDR?

Yeah. To clarify the timing, Elpida was signed right before the end of last quarter, and Samsung was signed right -- excuse me.

Let me be more clear. Elpida was signed right before the end of the March quarter, and Samsung was signed right before the end of June quarter. So we began to recognize some revenue for Elpida in the June quarter and you can imagine we'll begin to recognize some revenue percent from Samsung.

Okay. And then I know you don't like to give line item guidance, but I'm just curious. Is something on contract revenues in excess of $4 million in the cards for the September quarter?

You are right on your first comment.

Okay. [ LAUGHTER ]

And I think I'm safer just to give you overall revenue guidance, and I think we're fairly comfortable in that $28 million to $30 million range.

Okay. Just final balance sheet item, Bob. Prepaid and other current assets were up about 40% sequentially versus your revenues being about 4%. Anything in there that we should be aware of, or was sort of one-time-related?

You know, I think a lot of it was just normal, ordinary, course of business activity. We just had some annual contracts that we had to pay for this past quarter, and we'll now amortize over the course of the next year.

Okay. Thank you.

Sure. Thank you, Erach.

There are no further questions at this time.

Okay. I'll give it another 10 seconds and then we'll say good-bye.

At this time I would like to remind everyone in order to ask a question, please press star and then the number 1 on your telephone keypad now. We do have a follow-up question from Michael Cohen.

Yeah. Hi, Bob.

Hi, Mike.

It looked like the diluted shares have been increasing and your basic shares outstanding have been primarily flat, I guess because you haven't been doing the share buyback.

Go ahead.

I was wondering if you could give us a little color on your decision making criteria of where -- you know, how you look at share buyback in the time frame of when you are likely to do that?

Yeah, unfortunately I can't really talk about our share repurchase strategy. It is something we review every quarter with the Board and as I said in my comments, it is an ongoing, long-term program from our perspective.

Can you remind us how many shares that you currently have approved for purchase outstanding?

Yeah, we have a remaining authorization of 4.7 million shares.

Okay. Thank you.

Sure. And I guess one other thing I'll take since you brought it up is the diluted shares outstanding are increasing largely as a result of the fact that our stock price is up. So there are more shares, more options out there that are diluted.

Right. And then that coupled with not having a buyback program this quarter is really, I guess, the cause for the distinction of the first time having the different reported number for diluted and basic, first time in a long time.

Yeah. Well, I mean, they have always been different.

Last quarter, they were both 5 cents.

Oh, I see.

And this time it's 5 and 1/4.

Oh, I see. Yeah, good point. Thanks.

Okay. Thank you.

Your next question comes from Jeff Shriner.

I just, as a refresher, does RaSer fall into the Intel in terms of what you are allowed to comment in terms of percentage of revenues?

Well, actually, you know, the Intel -- I think you are referring to the Intel cross-license agreement.

Yes, sir.

And that gives Intel rights to use all of our patents as a result of the fee they pay us each quarter, but it does not give them the right to our designs and to our services. So with RaSer we have been able to get some incremental business.

So can you comment in terms of a percentage of revenue for RaSer in the quarter?

That's not a number we've been disclosing and probably I'm not even sure I have it with me. I think I'll pass on that.

Okay. Thank you.

All right. Thank you.

There are no further questions at this time.

Okay. Well, I would like to thank everybody for joining us, and I hope you have a good evening.

Thank you for participating in today's teleconference. You may now disconnect.