Rambus Inc (RMBS) 2004 Q1 法說會逐字稿

Good afternoon. My name is Tina, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Rambus first-quarter earnings results 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 period. (OPERATOR INSTRUCTIONS).

Mr. Eulau, you may begin your conference.

Thank you, operator, and welcome, everyone, to Rambus' conference call covering the financial results of our first quarter of 2004. My name is Bob Eulau, and I am Rambus' Chief Financial Officer. In the first part of the call, Geoff Tate, our Chief Executive Officer, will discuss our business results for the quarter, and then I will provide a summary and analysis of the Company's recent financial results and an update on the litigation. We will then open up the lines for questions and answers. In addition to Geoff and me, John Danforth, our General Counsel, will be available for questions.

The press release for the results discussed here today has been filed with the SEC on Form 8-K. If you have not received it, it is available on our Website at www.Rambus.com, on the Investor Relations page under Financial Releases. A replay of this conference call will be available for the next week at 800-642-1687. You can hear the replay by dialing the toll-free number and then entering ID number 6656527 when you hear the prompt. In addition, we are simultaneously Webcasting this call, and it can be accessed on our Website beginning at 5:00 PM Pacific Daylight Time this evening.

Before we begin, I need to advise you that the discussion today will contain forward-looking statements regarding our financial prospects, pending litigation and demand for our products, among other things. These statements are subject to risks and uncertainties which are more fully described in the press release and other documents that we file with the SEC, including our 8-K's, 10-Q's and 10-K's, and these statements may differ materially from our actual results.

So now, Geoff will make some comments on the business.

Thanks, Bob, and good afternoon, everyone. We are proud of the accomplishments we have made during the past quarter. We feel we are off to a good start as we move into 2004. I will provide an overview of the highlights from Q1 in both our memory and logic interface divisions, starting first with the memory interface.

In February, at the Intel developer forum, we showed publicly for the first time a demonstration of XDR DRAMs running at 3.2 GHz. XDR DRAMs are now sampling from both Samsung and Toshiba, and Elpida is in development. This is the world's fastest memory device (technical difficulty) provides eight times the bandwidth of today's best-in-class (technical difficulty). We are also seeing continued infrastructure support for the XDR memory interface. Texas Instruments was added to the list of chip manufacturers that plan on providing clock generators for systems using our XDR Memory Interface.

On RDRAM, we continue to see RDRAM memory products having success in the marketplace. Sony has announced that they have now shipped 70 million PlayStation 2 systems. And at the recent game developers conference, Sony indicated that the PlayStation 2 is likely to continue shipping (technical difficulty) 2010. This is an incredibly successful product for Sony, and we are proud to have provided the RDRAM memory interface technology and design expertise for the memory subsystems that helped get this product market so successfully. We are seeing additional applications ship with our DRAM including TI, digital light projectors, curvers (ph) from HP and supercomputers from Cray.

On the logic interface side, the industry has seen a lot of interest and activity around the emerging PCI Express interface standard. Rambus has silicon-proven PCI Express interfaces that are available for licensing today in multiple process technologies. To date, we have had a number of customers sign up for the PCI Express license, including Toshiba, S3 Graphics, ALi, ULi, TLX (ph), UMC and XGI. For example, ULi announced this week the world's first PCI Express-enabled South Bridge chip, M1573, which incorporates Rambus' PCI Express interface. Our engineering teams (ph) worked extensively with the ULi engineers to ensure (ph) compatibility and seamless integration during the world's first PCI Express-based South Bridge chip to market.

We are extremely proud of the development work performed by our engineering teams, and look forward to continuing to help all of our customers move lower-speed interconnects to more advanced speeds with PCI Express and other (technical difficulty) interfaces. For example, we are also seeing interest from customers now for even higher-speed serial link interfaces. Toshiba has agreed to incorporate one of our RaSer serial link interface cells, which provides up to (technical difficulty) Gbps data rates into their 90-nanometer technology library. This will enable next-generation storage area network systems and backplane interconnects to achieve (ph) unprecedented bandwidth and network performance at the lowest power.

This development is part of the Velio asset acquisition we made at the end of last year, and is an indication that the Velio asset acquisition is helping us to expand our product portfolio and our RaSer product line.

At DesignCon West, we showed the industries first serial link cell that was developed on TSMC's 90-nanometer process technology. This first-of-its-kind demonstration featured the Rambus 2.5 Gbps RaSer interface and provided in aggregate some 10 Gbps of bandwidth on a quad Zowie (ph) cell. We believe this is a cost-effective and highly integrated solution that is suitable for very high channel chips.

Additionally, at DesignCon East, we demonstrated just last week our fully adaptive 10 Gbps per link RaSer X interface technology, for designers of very high-performance backplane systems who are seeking to improve their data rates without costly system upgrades.

We are increasingly hearing (technical difficulty) companies of all sizes that they do not have the internal resources to (technical difficulty) every I/O of all of their chips and get all of them to market on time. Factors such as the different types of I/O's, the range of process technologies and the increasing complexity of the interfaces, all combined with a lack of analog design talent in the industry means that more and more companies are looking to outsource at least some of their high-speed I/O work. We have been anticipating this trend for some time, and will continue to help our customers solve their challenging I/O design problems (technical difficulty) standard and custom interfaces. Now, we recognize that some companies may wish to develop their own interfaces, and that our individual inventions may benefit their interfaces (technical difficulty) in performance and cost-effectiveness. We're willing to license our inventions (technical difficulty) basis (ph).

For well over a decade, we have designed and developed high-performance, cost-effective interface solutions (technical difficulty) market, and to date, we have more than 300 patents issued worldwide and more than 300 patents pending on our numerous innovations. These innovations and patents and pending patents cover important steps forward in memory interfaces, and we believe as well in serial and parallel interfaces. Today, we believe we have the fastest demonstrated solutions (technical difficulty) memory, serial and parallel interfaces, building on our hundreds (technical difficulty). If you are interested in more information on our innovations and our licensing policies, we have a new section on our Website that details our inventions available for license.

On the marketing side, our teams are finding ways to aggressively showcase our technologies to the design engineering community. We have been hosting regional design seminars that continue to attract current and potential customers. In fact, this week we're hosting a design seminar in Taipei. We have long been an active participant in Intel's developer forums, and last week we participated in IDF Japan, where we showcased our PCI Express partnership (technical difficulty), a local Japanese company. And this week, we are a silver sponsor at IDF Taiwan, where the first working sample of the PCI Express PHY is being demonstrated by UMC and XGI (technical difficulty) our technology. Our teams are busy putting together the schedule for the Rambus developer (technical difficulty) will take place in Tokyo in early July of this your. Last year, we had between 800 and 1,000 engineers attend our Tokyo Rambus developer (technical difficulty) learning about advanced Rambus technologies. We continue to see an increase in the demand for higher bandwidth across a variety of end applications. We're continuously working with our customers to provide solutions that meet the requirements for high-speed and flexible and cost-effective designs (ph).

Now I will turn it over to Bob to review the financials. Bob?

Thanks, Geoff. Our first quarter of financial results were solid again. For the first quarter, our revenue growth was 16 percent over the first quarter of 2003. Our operating income was up 94 percent when compared to first quarter of last year. Our net income was up 64 percent when compared to the first quarter of last year. Net income included a significant sale of an investment in the quarter. Total spending was up 12 percent from last quarter, but was up just 1 percent when compared to the first quarter of 2003.

Our balance sheet benefited from the exercise of employee stock options, which generate the and tax deductions for Rambus. This somewhat overshadowed the strong operating cash flow for the quarter, which was excellent at just under $19 million. I will discuss more on the balance sheet in a few moments.

First, I'll give you some more information on revenue. Total revenue for the quarter was $32.5 million, up 16 percent over the first quarter last year and sequentially up 1 percent. Total royalties for the quarter were $27.5 million, which is up 11 percent from the first quarter last year and down 1 percent relative to last quarter. During the quarter, SDRAM and DDR royalties were up 48 percent when compared to the first quarter last year, and down 2 percent sequentially for memory devices and controllers combined. If you exclude the Intel cross-license agreement, revenue specifically coming from SDRAM and DDR memory and memory controller royalties comprised about 45 percent of our revenue for the first quarter.

Overall, RDRAM interface royalties were down 42 percent from the first quarter last year, but up 2 percent from last quarter. Royalties coming specifically from RDRAM memory and memory controllers are now less than 10 percent of our total revenue. Contract revenues for the first quarter of 2004 were $5.1 million, up 55 percent over the same period last year and up 10 percent from last quarter. This increase in contract revenues reflects the revenues that we are recognizing for the XDR DRAM memory interface and Redwood contracts. We received about $9.7 million in cash for contract payments this quarter. Total costs and expenses for the first quarter were $23.9 million. This was up $2.6 million, or 12 percent from the previous quarter, and up 1 percent from the first quarter a year ago. Cost of litigation was up about 1.9 million or 83 percent from last quarter, at $4.2 million, and down 2.9 million when compared to the first quarter of last year.

Operating expenses, excluding cost of litigation, were up 4 percent when compared to last quarter, and they were up 19 percent when compared with the first quarter of 2003, with the increase largely attributable to our planned ramp-up in engineering for XDR, DRAM, Redwood and RaSer interfaces.

Net income for the first quarter was $8.3 million or 26 percent of revenues, compared to $8.6 million in the previous quarter and 5.1 million in the first quarter last year. Net income included a pre-tax gain of $3.2 million from the sale of 85 percent of our holdings in the stock of Tessera Technologies. This amount is reflected in the other income line.

Operating income was also strong, with an increase of 94 percent over the first quarter of last year, but down from our three-year peak in operating income last quarter. As I mentioned, the exercise of employee stock options for about 3 million shares and strong operating cash flow resulted in very large increases in our cash, cash equivalents and marketable securities during the first quarter. These balances totaled $239 million, or up 26 percent, versus the $188 million last quarter. The exercise of stock options created cash inflows of $28 million during the quarter. Cash generated from operations totaled $19 million for the quarter, and we also generated 4.9 million in cash from the sale of the Tessera stock.

At the end of this quarter, we have average basic shares outstanding of 101 million and dilutive shares outstanding of 111 million. We did not repurchase any shares this quarter, but we continue to view our share repurchase program as an ongoing long-term program. Over the life of the repurchase program, we have repurchased 6.2 million shares, at a total cost of about $54 million.

The other material change in our balance sheet was an increase in deferred tax assets, which was also a result of the option exercises. Within deferred tax assets, we changed assumptions on our ability to use foreign tax credits, but this adjustment was more than offset by our expected ability to use tax deductions for stock options in the future. These assumptions could change in the future because we have no way of accurately projecting future taxable income, but the net effect this quarter was an increase in long-term deferred tax assets of $18 million.

Now, I will give you some guidance on what to expect in the second quarter of 2004. This guidance obviously has a lot of uncertainty associated with it. This guidance reflects our reasonable best guess at this point in time, and our actual results could differ materially from what I am about to review. We estimate revenues will be in the range of between $32 and $35 million, and that our operating costs and expenses will be in the range of $24 and $28 million. Overall, spending is likely to be up, primarily because of litigation spending and some increased operational spending. Litigation spending is always difficult to predict, because we do not control the timeliness and requests from the courts, nor do we control actions that our adversaries may take which may cause us to incur additional expenses in any particular quarter.

Evidence that is produced in hearings can also cause us to change our plans. Based upon this, we estimate that our litigation expenses will be in the range of between $5 and $7 million, but this range is very dependent on our activity and the ongoing litigation.

We're estimating net interest and other income to be between $2 and $3 million next quarter. We expect other income to be high again, due to the acceleration of income associated with the sublease of our former facility in Mountain View. We can also benefit from the sale of our remaining stock of Tessera Technologies. And finally, we're estimating a tax rate of 35 percent for 2004.

On the subject of our litigation, I will review the major items in our litigation timeline. Let me start with an update in the U.S. On February 17th, the Federal Trade Commission's Chief Administrative Law Judge, Stephen J. McGuire, issued a 334-page decision dismissing the Commission's complaint against Rambus. This initial decision included 1,665 findings of fact. Complaint counsel filed a notice of appeal from this initial decision to the full Commission, and Rambus expects that complaint counsel will file its first appeal brief this Friday, April 16th. The briefing is scheduled to be completed in July, with an oral argument to follow at the Commission's discretion.

The Infineon case is now on remand from the January 2003 decision of the Federal Circuit Court of Appeals favorable to Rambus. A retrial of certain claims in the case is currently scheduled to begin in mid-June, and expected to last for two or three weeks. The trial currently includes Rambus' assertion that Infineon's SDRAM and DDR SDRAM products infringe four claims and three of Rambus' patents. Infineon has countered with multiple defenses and counter claims that remain in the case at the present time that, among other things, argue that Rambus violated antitrust laws and engaged in unfair competition under section 17-200 of the California statute. The relief sought by Infineon on its defenses and counter claims includes a requested injunction barring Rambus from enforcing some or all of its relevant patents against Infineon.

The parties differ as to whether and to what extent such defenses and counter claims by Infineon ought to remain in the case. For example, there's a pending motion by Rambus to dismiss the Infineon 17-200 claim. That motion was heard on March 26th. Other pretrial motions to be heard this week were Infineon's motion with respect to the purported waiver by Rambus of certain privileges and Rambus' motion to take discovery on Infineon's spoliation of documents. Due to a scheduling conflict of the court, the hearing date for these motions has now been moved to April 27th.

In the second pending U.S. patent case, the litigation against Hynex, the trial court in California held hearings on March 23rd and 24th to hear the party's proposed claim constructions and their argument seeking summary judgment on whether a subset of Rambus' patent claims are valid and infringed. The judge has not yet issued his decisions. Otherwise, discovery remains ongoing in the Hynex case, with the trial date currently set for November 2004.

In the patent litigation against Micron, there's nothing currently on the court's schedule.

In Europe, on February 12th, the Technical Board of Appeals of the European Patent Office revoked one of Rambus' European patents, which related to an aspect of Rambus' patent technologies called an Access Time Register. To date, the European Patent Office has not issued a written opinion giving the basis for its ruling. This ruling does not apply to Rambus' issued and pending U.S. patents. Rambus is scheduled to begin patent infringement hearings in a Manheim court against Infineon and Micron on June 18th, 2004, although we expect this hearing date to be postponed.

One final area that I would like to discuss is affiliate trading policies and activities. Rambus has an objective to ensure that its directors and officers are motivated to work toward the financial success of the Company and, at the same time, comply with all applicable insider trading laws. We also recognize that directors and officers will choose to diversify their holdings from time to time. These are personal financial decisions for all directors and officers. As noted in our recent proxy filing, as of February 1st, 2004, current officers and directors as a group have a beneficial interest in the Company of 15.2 percent.

Last year, the Board approved a change to our insider trading policy to allow directors and officers to adopt what are commonly known as 10b5-1 trading plans. These plans allow directors and officers to agree in advance on a pattern of recurring sales for a defined period of time. Several officers and directors set up plans in 2003. Two directors, Bill Davidow and Dave Mooring, adopted these plans in February and, within broad constraints, you will see periodic sales of some holdings pursuant to these and the previously adopted plans. In the future, additional officers and directors may choose to adopt similar plans.

So that's the end of our prepared remarks, and now we will open the line up for questions. Operator?

(OPERATOR INSTRUCTIONS). Mike Crawford, B. Riley & Co.

The first question relates to IBM and XDR DRAM and Redwood. So, in the past you have said that IBM has sublicensing agreements with Sony and Toshiba to access this technology. But do those agreements extend to Power 5 (ph) processor or just to the cell processor?

Hi, Mike. I actually don't recall; the agreements are pretty extensive (technical difficulty) cover the work done in STI (ph). And I just don't recall at this time how much (technical difficulty).

And regarding RaSer, when do you expect you may see your first RaSer royalties hitting the income statement?

Hi, Mike. This is Bob. We are still expecting to see our first royalties this year, and hopefully that will be the case.

And then, just to confirm what you said, Bob, what was the last ruling by Judge White in the Hynex case?

Well, actually, John's here, so maybe I'll let John respond to that question.

Hi, Mike. We had oral arguments before Judge White -- I think that may be what you are referring to -- four weeks ago, and those were oral arguments on summary judgment motions. Both sides had moved (technical difficulty) judgments on certain of the patents. There has not yet been a ruling on those motions, although we thought the hearing went well. We can't really predict (technical difficulty) what the rulings (technical difficulty).

And similarly, John, could you just say what the last order issued by Judge Payne has been in Virginia?

Well, Judge Payne has recently vacated, actually, one of his previous rulings. There's a couple of smaller ones that will come up with Judge Payne. The one today was an order postponing a hearing date from this (technical difficulty) and putting it back, I think, to the 27th of April. That's a hearing date for a motion; we want (technical difficulty) of evidence by Infineon and another motion by Infineon about some of our privileged documents.

But the most substantive ruling by Judge Payne recently, I think, probably was a ruling in which he vacated a portion of his (technical difficulty). That's the order where we took a writ to the federal circuit to get it reversed.

So the follow-up to that would be, did the CAFC respond at all to your, I guess, motion to hold your writ of mandamus in abeyance?

Yes. The sequence of events -- let me just lay it all out -- was Judge Payne issued an order finding a waiver of certain of our privileges. We took an immediate writ to the federal circuit. The federal circuit in a few days issued an order (ph) directing Infineon to respond to our writ. The next day Judge Payne issued a further order vacating some or all of the order from which we took the writ. I think he vacated a portion of it. And now there is pending, for those of you who don't follow all of the inside baseball details of this, there is pending an issue in front of the federal circuit as to whether or not the writ that we filed should continue to be on file. Our belief is that it will continue to be on file, but there has not been a ruling on that question.

Michael Cohen, Pacific American Securities.

Hi, Dan (ph). I was wondering if I had heard correct that the hearing date for tomorrow was pushed back to April 27th. And if so, is there still a hearing for tomorrow in the Virginia case?

Hi, it's John. There is no hearing for tomorrow. That hearing date has been pushed back. The judge had a jury trial which I gather was going longer than expected (technical difficulty).

And do you have any guidance in terms of when we could expect an order for summary judgment regarding the Hynex case, kind of a range of possible timelines?

You know, we check our mail every day. But I think it could be a matter of days or weeks.

So there isn't really much guidance, it's just whenever he gets around to it?

That's correct.

And, Geoff, in your letter to shareholders, you had reference to a RaSer product from Intel. And I was wondering if that would be related to PCI Express or if you could expand any details on that?

I don't believe that that particular product is (technical difficulty) Express. Any kinds of (technical difficulty).

Any kinds of interface -- pardon?

We have many kinds of interfaces (technical difficulty) our RaSer product family (technical difficulty).

Right. And you did mention that Intel did have one that was going to be turned into a product, and --

I don't know that I can, at this time, identify which product that is.

I can't remember if we said what the standard was that was being used with. I do believe we did a press release on that probably a year or two ago, though.

Jeff Shriner, MS Capital Management.

Good afternoon, gentlemen. John, this question may go to you or Bob. I was wondering if the Company has been able to resolve any patent issues with regards to DDR2 with current licensees, if we are going to see DDR2 begin a little bit of a ramp-up here with the release of the Grantsdale chipset from Intel.

Let me take that. We do not have anything to announce about DDR2 licensees. As you know, there are no parties (technical difficulty) license for DDR2. And it has been our policy not to discuss ongoing or (technical difficulty) negotiation (ph).

Okay. And, John, I was just wondering -- this is just getting (ph) possible comments from you in regards to any perceived ramifications, or your thoughts, based on the European Commission adopting new roles for the license of patents patents and patent know-how.

This is not really the forum for me to talk about that, but we do follow events in Europe (technical difficulty).

Okay. And then just one question for Bob. Bob, I was wondering if there was any milestone payments recognized in contract revenue this quarter?

Well, you may recall last quarter our accounts receivable balance was quite high. And that was because we hit a number of milestones in December. And if you look at accounts receivable this quarter, you will see it's back down to its more normal level. So we had, I think, I think I said, $9.7 million in cash payments on contracts (technical difficulty).

(OPERATOR INSTRUCTIONS). At this time, there are no further questions. Are there any closing remarks?

We would just like to thank everybody for attending today, and we will be Webcasting our annual stockholders' meeting, which is scheduled for May 4th. And hopefully you will be able to listen in. Thank you.

Thank you. This concludes today's Rambus first-quarter earnings results conference call. You may now disconnect.