Rambus Inc (RMBS) 2004 Q4 法說會逐字稿

Good afternoon. My name is Wes, and I will be your conference facilitator. At this time I would like to welcome everyone to the Rambus fourth-quarter earnings conference call. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the conference over to Mr. Bob Eulau, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and welcome to our conference call. We're pleased to provide you with information on our results for the fourth quarter that we just announced. My name is Bob Eulau, and I am CFO. With me today are Geoff Tate, our Chairman; Harold Hughes, our CEO; and John Danforth, our General Counsel.

In the first part of the call, Geoff will make a few comments on our recent leadership changes, and then Harold will discuss our business and his thoughts on Rambus. Then I will provide a summary and analysis of the Company's recent financial results, and then John will provide an update on litigation. Afterwards, Geoff, Harold, John and I will be available for your questions.

The press release for the results discussed here today has been filed with the SEC on Form 8-K. If you want a copy of the release, please visit 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 3196579 when you hear the prompt. In addition, we're simultaneously web-casting this call, and a replay can be accessed on our website beginning at 5 o'clock Pacific time today.

Before we begin, I need to advise you that the discussion today will contain forward-looking comments regarding our financial prospects, pending litigation, and demand for our product, 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-Ks, 10-Qs, and 10-Ks, and these statements may differ materially from our actual results.

So now let me introduce Geoff Tate, our Chairman and former CEO, who would like to comment on the management changes we announced last week.

Thank you, Bob. First I would like to thank Bill Davidow for his 15 years of service as Chairman of the Board at Rambus. Bill was one of the initiating funders of the Company, and his leadership has been tremendous. At age 70, Bill deserves some more time to play golf, and we thank him for all of his excellent contributions.

For myself, I've got big shoes to step into, succeeding Bill as Chairman of the Company. I'm committed to be the best Chairman I can be. I remain very passionate about the Company, and I'm proud to have been the CEO of Rambus in the last 15 years, but it has been a tiring experience.

I'm fully committed to supporting Harold Hughes as CEO as Rambus. Harold has tremendous energy and enthusiasm and is fresh off the bench. We've been working together now in the official capacity for a week, and it's been a lot of fun. I think we're going to make a great team. Harold has tremendous qualifications for this position. He has been on our Board for nearly two years; he has been very in-depth learning about the Company and the Company's circumstances, so he comes in pretty well prepared for somebody who is new into the position. His 23 years at Intel, the world's largest semiconductor company, is excellent background experience. And he has had numerous executive responsibilities there. So I think Harold will be a tremendous CEO for us, and I'm fully committed to supporting him. Harold?

Thank you, Geoff, and good afternoon to everybody. Let me start by saying that I am truly excited to be Rambus' new CEO and a leader of this talented and committed team.

As you all know, Geoff had been CEO of Rambus since inception of the Company 15 years ago. He built Rambus into one of the world's premiere technology licensing companies with products and services that help customers tackle some of the most challenging semiconductor and system performance requirements. I would add in passing that his hair was significantly darker then, but that is probably not appropriate here.

My objective in taking the reins from Geoff is to continue the strong Rambus legacy of technology leadership and set the Company on course for the next major phase of growth. While I've been in this position for just one week, I nevertheless want to share my perspectives as to why I'm excited about this position and on the value Rambus brings to the market.

As Geoff mentioned, I've been on the Rambus Board for just under two years, and during that time I have realized that our value derives not only from the tremendous portfolio of patented inventions, but from the world-class engineering team that helps customers implement these Rambus inventions into their products. Rambus is justifiably renowned in the industry for its technology leadership in advanced chip and system innovations and design. Our engineers are extremely talented in solving some of the most vexing performance problems the industry faces. As data rates increase, as performance requirements accelerate, and as we push evermore lifelike images to digital displays, the importance of Rambus innovations steadily grow.

With our value proposition of innovation, coupled with world-class engineering implementation, we have built tremendous customer relationships. Our ongoing business with Sony is a great example of such a relationship with the customer that truly values both the technology and the implementation expertise Rambus offers. From our expertise working with them on the PlayStation 2, through our current involvement in the cell processor, Sony turns to Rambus to help them overcome extremely difficult chip interface and system architecture challenges. This demonstrable value of the Rambus technology and technical team is one of the main reasons that the CEO job here is so compelling. We're helping customers bring truly revolutionary products to market.

I want to be very clear about our business model. Very clear. We develop and patent new inventions, licensing these to our customers and working with them to implement these inventions into their products. While we believe there are companies that are using our inventions today without such licensing agreements, it is our intent to convert these companies into customers. Where we are unable to enter a mutually beneficial agreement, however, we will defend our intellectual property rights in the court system. We must do this, not only for ourselves and our shareholders, but also to protect the investment our customers have in licensing our technology.

And Rambus advanced chip interface technologies is really helping customers push new levels of performance across computing, consumer and communications applications. We start at the high end, designing and developing the world's fastest interface solutions. And here we are talking about bandwidth that our customers' engineering teams often think are crazy, but we manage to do it. We then propagate these high-end solutions into high-volume applications as state-of-the-art that rapidly transitions to mainstream. The key is focus. We specialize in speed; moving data faster and speeding time to market.

If we have a minute, let's take a look at the mega-trends playing out in the industry. We see chip design growing evermore complex to deliver performance levels literally unthinkable a few years ago. Further, with the growing importance of consumer applications, product lifecycles continue to compress and time-to-market demands grow commensurately. In response to these trends, the industry has and will continue to move towards greater specialization. We've witnessed the contract fab accounting for a growing proportion of semiconductor production; fabless semiconductor companies rising to the top ranks of the industry. In turn they develop design tools, giving way to the offerings of companies such as Cadence, and designers turning to licensing companies such as Rambus to obtain best-of-class technology solutions for their products. This trend outsourcing allows customers to focus on their core competency, while enjoying the benefits of leading-edge technology and getting our products to market quickly.

Rambus is well positioned to benefit from these trends. We hear it time and time again from our customers that they lack the time or the expertise to develop the interface solutions their applications demand. Rambus has been designing and developing strong IP in this area for 15 years, so customers can rely on our ability not only to design the interface, but also to ensure the system benefits from that interface, from that technology.

Proof is measured in customer success stories. Rambus has a strong, proven track record developing and delivering solutions to our customers' demands. One of the best examples is the great relationship we have with Sony working on the cell processor; a relationship that extends to Toshiba, I might add. Our engineers will be presenting a paper in an upcoming technical conference, ISSCC, where we will discuss our Redwood Parallel Interface, which along with our DDR Memory Interface is a key contribution to the cell processor.

Also in the last quarter, we announced that Toshiba has licensed our DDR2 interface technology for use in future consumer applications. This, along with the Panasonic agreement we announced for both DDR2 and XDR technologies, is significant because in less than six months from the time we entered into the DDR2 market, two of the world's leading consumer electronics companies have turned to Rambus to help enable our DDR2 designs.

Any piece of successful business is the level of partnerships created to help proliferate its offering to the market, or in short channels, channels, channels. One of the key partnerships Rambus has developed is the relationship with Cadence, a relationship which continues to progress, nicely meeting our expectations in helping us get our serial link technology solutions such as PCI Express, Fibre Channel, XAUI, Gigabit Ethernet and others into the hands of more designers. This broad-based strategy combines the right mix of technology know-how and market penetration, allowing a growing consumer community to benefit from our innovations. We currently have over 40 licensees for our serial link technology and plan to continue to expand our reach through the Cadence relationship as more customers come to us to help solve their chip customer level challenges.

To summarize, I'm thrilled to be part of the Rambus executive management team to help lead the Company to the next level of growth. We would again like to thank Geoff for his dedication and commitment to the team for establishing Rambus as one of the premier technology licensing companies in the market today. Our goal is to build on that success and grow Rambus to the next level. With that, I will turn it over to Bob?

Thanks, Harold. So now let me share some of the highlights of our financial results for the fourth quarter and 2004 with you.

Our 2004 revenue increased 23 percent over our 2003 revenue. This was a new record at just under $145 million. During the same period, operating income improved by 45 percent. For the fourth quarter of 2004, revenue was up 19 percent in comparison to the fourth quarter of 2003. Our operating and net income decreased 14 and 24 percent respectively when compared to a strong fourth quarter of 2003.

Cash flow generated from operating activities remains solid at $8.6 million. And total cash generated during the quarter amounted to $17 million. I will discuss the balance sheet further shortly. First I will give you additional information on revenue.

Total revenue for the quarter was $38.6 million, up 19 percent over the fourth quarter of last year and slightly down on a sequential basis. Total royalties for the quarter were $32.6 million, up 17 percent over the fourth quarter of last year and up 7 percent sequentially.

SDRAM and DDR royalties for memory devices and controllers were up 34 percent over the fourth quarter of last year and up 14 percent sequentially. If you exclude the Intel cross-license agreement, the revenue from SDRAM and DDR, memory and memory controller royalties comprised 52 percent of our revenue for the fourth quarter of 2004.

Moving on to contract revenues, contract revenues were $6 million this quarter, up 31 percent over the fourth quarter of last year and down 27 percent from last quarter. The increase in contract revenues in the fourth quarter over the fourth quarter of last year reflects the continued progress we are making on the XDR, Redwood and RaSer contracts.

With regard to costs and expenses, total costs and expenses for the fourth quarter were $29 million. This was up 36 percent from the fourth quarter a year ago, or $7.7 million, and up $900,000 from the previous quarter. Costs of litigation was up $5.2 million compared to the fourth quarter of 2003 and up $800,000 on a sequential basis. That increase reflects, among other things, preparation for the Hynix and Infineon trials, which John will discuss in a moment.

Operating expenses, excluding costs of litigation, were up 13 percent when compared to the fourth quarter of 2003, and approximately flat compared to last quarter. The increase in operating expenses, excluding cost of litigation, was largely attributable to increased investment in the logic interface business, including amortization of intangible assets from the patents themselves that were acquired from Valeo Communications and Cadence.

Net income for the fourth quarter was $6.5 million, or 17 percent of revenue, compared to $8.6 million in the fourth quarter last year and $10.4 million in the previous quarter. Net income in the fourth quarter of 2003 and net income in the previous quarter were favorably impacted by lower tax rates.

This continued profitability led to solid operating cash flow, which was $8.6 million for the quarter. Our cash, cash equivalents, short and long-term marketable securities during the fourth quarter ended at $236 million versus $219 million last quarter and $189 million as of December 2003. Our cash, cash equivalents, short and long-term marketable securities were up $17 million from last quarter.

Now I will give you some thoughts on what to expect in the first quarter of 2005. This guidance obviously has a lot of uncertainty associated with it, but it 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 to be in the range of 38 to $42 million and that our operating costs and expenses will be in the range of 31 to $34 million. We expect to continue hiring in the next quarter, including increased investments in sales and marketing, our Bangalore design center, and additional US engineering. We also expect additional expense as a result of the restricted stock grant that was made to Harold.

Litigation spending is always the most difficult to predict, because we do not controlled timelines and requests from the courts, nor do we control actions that our adversaries make take which cause us to incur additional expense in any particular quarter. This quarter is particularly challenging to predict because of the two trials that are planned. Evidence that is produced in hearing can also cause us to change our plans. Based upon this, we estimate that our litigation expenses will be in the range of between 7 and $9 million for the quarter, but this range is very dependent on the activity of our ongoing litigation.

We're estimating net interest and other income to be between 1.4 and $1.6 million. And finally, the tax rate is likely to be in the range of 36 to 38 percent next quarter.

So now I will turn it over to John to update you on litigation.

Thank you, Bob. I want to update the call on the results in our litigation since the last earnings call. I also want to review the major items in our litigation timeline. Let me start with three governmental proceedings here and in Europe.

First, on an issue that's related to a press release that we just sent out, we did indeed have another setback last week in a first-level review by a EPO -- that's the European Patent Office -- opposition panel. In an oral ruling at a hearing last week, that opposition panel revoked one of our three issued European patents that we have asserted against DDR. A written order is expected. The grounds given at that hearing were based on a European rule that a patentee cannot broaden his or her claims beyond the scope of the initial patent filing. No ruling was made on prior art, nor was there any analysis of or ruling on infringement.

We think that even under this European rule, an EPO doctrine called Impermissible Broadening which does not apply in the United States, the EPO is wrong. We're preparing to take an appeal to a higher level panel within the EPO, which make take about a year to conclude.

Another European patent reading on DDR memory products remains in place, although it also is being challenged in the EPO. We're also continuing to prosecute other European patent applications seeking new claims reading on the same DDR memory products.

Turning to the press release we just issued, I should underscore that this EPO opposition panel ruling does not support a press comment over the weekend that has been attributed to Hynix. Hynix apparently claimed that this decision "effectively clears the Company of infringement charges. " It is in our view outrageous that Hynix would make such a claim or would permit such a misstatement attributed to it to continue uncorrected as it has. Hynix is a huge and sophisticated company that aggressively backed the FTC in its case against us, a case where infringement is essentially assumed, if not directly asserted by the FTC staff. As noted, the European issue that Hynix now trumpets is not about infringement. It also says nothing about the 15 US patents and the 59 US patent claims that have so far cleared Hynix's summary judgment advances in the US and are heading to a March trial here.

Second, changing gears but also from Europe, we have a brief update with respect to the EU's pending investigation of the DRAM cartel. It is our understanding from press reports that price fixing investigations are ongoing in Europe against the DRAM industry. These appear to track to a significant extent the criminal Department of Justice investigations that are ongoing here in United States. We were also informed that the EU has asked Micron, Hynix and Infineon to respond to our antitrust complaint that we filed with the EU last year and that relates to apparent collusion by the DRAM cartel to eliminate our RDRAM design as competition in the market. That apparent collusion is also the subject of our antitrust case now pending in San Francisco Superior Court to which I will turn in a moment.

Third, I have a brief update on the FTC case involving Rambus. As you may know from our earlier reports, the FTC staff has taken an appeal from the Administrative Law Judge's decision last year. That decision was overwhelmingly in our favor and absolved us on multiple independent grounds of all charges by the FTC relating to our 1992 through '95 participation in the JEDEC Standard Setting Group. All substantive briefing and argument was completed on the staff's appeal on December 9, 2004. One motion remains outstanding. The record and initial decision in the FTC are extensive, and so we cannot predict with any certainty when the ruling may issue.

Moving from the government-owned actions to private litigation, the Infineon case is back in Virginia on remand following the January 2003 decision at the Federal Circuit Court of Appeals, which as you will recall was highly favorable to us. A retrial of certain claims and counterclaims in that case is currently scheduled to begin on February 22, 2005. The trial is expected to last for three weeks. The trial currently includes our assertion that Infineon's SDRAM and DDR memory products infringe three claims in two of our US patents. Infineon has countered with multiple defenses and counterclaims, some of which they lost before, and some of them newly asserted on remand. Some of these Infineon counterclaims attempt, among other things, to reopen arguments about our participation at JEDEC between 1991 and 1995.

One disappointment for us in the fourth quarter was that the Federal Circuit rejected our mandamus petition seeking to block these JEDEC issues before the Virginia retrial begins. But there is a very high standard for mandamus relief, so this result was not entirely surprising. These issues remain for us to pursue under the different standards of review that exist in a post-trial appeal.

A major focus of the Virginia retrial proceedings, and one of the areas where we believe the trial court overstepped the limits of its mandate, has been the allegation by Infineon that Rambus destroyed documents to permit Infineon on from using them in litigation. This charge, sometimes called document spoliation, now underlies much of Infineon's newly asserted 17-200 unfair competition claim. It also underlies significant new discovery that Infineon was permitted by the Virginia Trial Court to pursue of us and our lawyers in the fourth quarter. Hence, some of the legal charges you saw in the numbers just reported.

These charges of spoliation also underlie a December motion by Infineon seeking dismissal of our patent claims, or in the alternative a variety of presumptions against us that will make trial very difficult. This past Friday we filed our reply to Infineon's motion to dismiss. Much of our reply is privileged and filed under seal, but among other things we submitted a significant volume of exhibits, some of which are the very same documents that the Virginia Court concluded may have been spoliated.

As for other upcoming pretrial dates in the Virginia case, our opposition to the Infineon spoliation motion -- that is the one filed in December -- ought to be public on our website in redacted form later this month. I urge patience; the redaction process is time-consuming and our outside counsel have lots else on their plate. Infineon's reply will be due January 24th, with a hearing scheduled for February 4th. Trial, as I have said, is set to begin February 22nd.

Moving to a second pending US patent case, which is the litigation against Hynix, it is now set for trial on March 21st in San Jose, California. That March trial will focus on our patent claims and on the issue of alleged spoliation. At trial in the Hynix case are many more of our patents than are at issue in the Infineon case. There are 59 patent claims at issue in San Jose currently versus 3 currently in Virginia. A second trial on the issues related to Hynix's allegations about Rambus' allegedly improper JEDEC participation and/or other allegedly misleading or improper conduct its scheduled for June 13, 2005.

In the Hynix case on November 10, 2004, the San Jose Court issued claim constructions, also called Markman rulings, which were very favorable to Rambus. The court then required that the actual patent claims to be included in the March trial be limited to 10 in number, with the other patent claims reserved for later proceedings if necessary. To select the 10 that we will present to the jury, the San Jose Court gave Rambus a deadline of one week after the Court issued the summary judgment orders. Two weeks ago, the Court issued rulings on five of the parties' seven motions for summary judgment. Six of those seven motions have been filed by Hynix; one by Rambus. Of the six filed by Hynix, five have now been rejected and the rulings have been made public. Of the remaining two motions, one is a motion by Hynix that focuses on one element in nine of our asserted claims -- that's nine out of the 59 -- and that element is called the second external clock. Based on that element, Hynix seeks summary judgment of non-infringement after those nine asserted claims.

The other remaining motion to be decided and issued is our motion, which is an omnibus summary judgment motion seeking a finding of infringement before trial as to 40 of the 59 claims at issue in the case. We anticipate rulings to issue on these two motions very shortly. Absent such rulings there's a risk the March trial date may slip again.

In that same case on October 1st, Hynix moved to dismiss our patent case as a sanctioned for alleged document spoliation. The motion is bottle on (ph) arguments made by the FTC staff in its case and by Infineon in Virginia. It also seeks, as those parties did, an alternative remedy, which is to seek us to compel privileged documents. The San Jose Court deferred ruling of the motion to dismiss and ordered Rambus to produce to the Court for its in camera review the same privileged documents that the Virginia Court ordered us to produce to Infineon. Following that in camera review, on December 16th the San Jose Court tentatively granted Hynix's motion to compel Rambus to produce to Hynix the same documents we produced to Infineon. But unlike the Virginia Court, the San Jose Court said that we would be entitled to a hearing on this point, and that we would be entitled to brief beforehand whether the documents actually gave rise to a prima facie case sufficient to waive the attorney-client privilege.

We submitted our brief on this issue in January 14th, again just last Friday. Hynix's reply brief is due February 11th. The scheduled hearing by the Court is February 25th. And at that point the Court will decide whether and to what extent it will permit discovery in this area.

Our third patent litigation is against Micron. Trial is currently scheduled for February 2006. Discovery is ongoing.

Let me turn to other litigation. On January 3, 2005, the San Francisco Superior Court ruled that our antitrust suit against Siemens, Infineon, Hynix and Micron was properly filed in San Francisco, and therefore denied defendants the motion they had filed for a change of venue. That venue issue had been holding up progress in the antitrust case for several months. Immediately after this issue was resolved we filed a motion for a protective order so as to remove arguments defendants have been using to block discovery. Among other things, we have sought copies of the documents that the defendants previously produced to the Department of Justice as part of that agency's criminal investigation. A case management conference is now set for the antitrust case in San Francisco Superior Court on January 21, 2005.

As our discovery efforts and our complaint make clear, we believe there is significant overlap between the criminal antitrust activity that the Department of Justice is pursuing and our own antitrust case against the DRAM manufacturers. Therefore, we continue to watch with interest any developments in the criminal cases.

One key development in the fourth quarter was that Infineon pled guilty to criminal price fixing on October 10, 2004, admitting that between 1999 and 2002, the same period of time that our DRAM and DDR were competing in the market, it colluded with other DRAM manufacturers to eliminate competition by fixing prices. As a result of its guilty plea, Infineon agreed in October to pay a fine of $160 million, the second highest price-fixing fine in the history of US antitrust enforcement. This was followed on December 15, 2004 by four Infineon executives pleading guilty and agreeing to serve various US jail sentences and to pay fines of $250,000 apiece.

Since then Micron issued a November 12, 2004 press release correcting certain statements attributed to its CEO, indicating that it is cooperating with the Department of Justice and admitting that "the DoJ's investigation revealed evidence of price fixing by Micron employees and its competitors sold to certain computer and server manufacturers." We anticipate further developments with other DRAM companies and the DoJ in the reasonably foreseeable future.

Thank you, that is the end of my litigation report. I would like to hand this meeting back to Bob.

Thanks, John. We are now going to take questions and also respond to some questions that have been sent to us during the quarter from shareholders. We could not address every question, but we will try to answer the most-frequently-asked questions.

I also wanted to make one quick correction. I think when Harold was speaking he talked about our Redwood parallel bus interface and he meant to talk about the XDR memory interface and are used on the cell processor program with Sony and Toshiba. So I just want to clarify that. So we're ready to take questions, operator.

(OPERATOR INSTRUCTIONS) Gary Mobley, B. Riley & Co.

Hoping you guys can give a little more clarification on the contract revenues, both in terms of the composition for the fourth quarter, as well as what the outlook may be, and also how that relates to the sequential drop in deferred revenues.

Let's go back a quarter first. I think I mentioned in our last conference call that we thought we probably had hit a short-term high in contract revenue based on the number of milestones that we hit in the third quarter. So we were not surprised that contract revenue went down this quarter. We were probably hoping to hit another milestones or two, but that is what it is. I suspect we will hit one of those key milestones at least in the next quarter, and you will probably see contract revenue move up again a little bit. But we're not overly concerned about contract revenues. Those programs are all making very good progress on the engineering front.

From a deferred revenue standpoint, we recognize significant deferred revenue because we tend to bring in cash at the front-end of programs. And a number of these programs, or at least the larger programs, are probably past the midpoint in their evolution. So we are seeing deferred revenue come down right now.

Thanks a lot. I will open it back up.

Michael Cohen, Pacific American Securities.

Welcome aboard, Harold. My first question is for John. John, at the analyst conference in New York on November 17th, you publicly expressed a pretty strong confidence that the claims construction ruling would lead to a summary judgment for infringement on at least a few claims in the Hynix case. I was wondering if anything has subsequently changed your view on this probability since that time.

As a lawyer, I have to admire the way you phrased that question.

Thank you.

But I would really prefer not to comment on orders that may be forthcoming. Over what I have already said.

And I am slowly gaining legal savvy just following you guys. The next question I had is I attended the case management conference on December 17th, and then on the latest calendar it appears that there's another conference call that took place on December 28th, which none of us were really previously aware of. I believe this was a public conference call had we been aware of it. I was wondering if you could give us any hints of what took place during that conference call.

I am not able to --

Which case are you talking about?

This is the Hynix case, December 28th in front of Judge White (ph). And this would have been actually over the period when the court was normally out of session.

I apologize. I'm not able to tell you that right now or even confirm that there was a call that actually occurred that day.

It is actually listed on the 695 in the Hynix case.

We will look it up, and if you want we can --

Please look at it and get back to him.

I will let other people ask, and I might come back with some additional follow-ups.

Daniel Amir, WR Hambrecht.

Congratulations, Harold, on starting your new position here. I have I guess a couple of questions; I'm not sure. First of all, a bit on -- I guess you gave a bit of on outlook on your vision on what you're planning to do. But I was just wondering if -- I guess is the strategy of the Company changing in any way or are you taking a different approach, if it's on the litigation side, or on the R&D, on the investment side? Or are we to expect the Company pretty much to be at the same progress as we've seen in the past few years under (indiscernible) update?

At this stage obviously I'm looking at options and really in the process of understanding strategies and reconciling those with what has happened in the past. And that's to say that short-term certainly will continue as before. But I think like any good CEO you want to analyze what got you to your current state and see if there are ways to improve upon it. I hope that answers your question.

Yes, I guess somewhat. Why don't I maybe ask the question differently? I guess as we look at 2005, what type of vision do you see from a product portfolio of what we can see? Will it be out-performing? Or can you talk about maybe the growth rates we are to expect this year compared to 2004 outside any potential stuff on the litigation side?

Let me have Geoff, who has a little continuity here, talk about that.

We can't announce any new products, but I think you'll continue to see a lot of engineering innovation come out in 2005. Things that we announce take years to develop, and we have been continuing to invest in new products. And we've talked about roadmaps for XDR and PCI Express and other areas. I think under Harold you'll continue to see technology leadership from Rambus.

What type of growth rates are we expecting to see here in '05?

We actually have had a practice of not giving annual guidance, and at this point I don't think we're going to be changing that.

Why don't I let somebody else talk? I'll come back later in the queue.

Erach Desai, American Technology Research.

Good afternoon. I'd like to go back to the initial question on the licensing or the contract revenues. And so it's for you, Bob. But I have (multiple speakers) follow-ups. The deal with Sony and Toshiba on XDR several quarters ago, you have been recognizing the license revenues through that contract. I'm wondering, can you at least suggest whether that contract is fully recognized on the licensing side, or it is it past the 50 percent point at this point?

We're getting some feedback here. So the contracts associated with Sony and Toshiba, and the other -- and the XDR/DRAM companies are not fully recognized at this point. Most of them are well on their way. I would say most of them are past the 50 percent point.

That's fair. Related to that then, is there any reason to expect that the royalty structure you have for PlayStation 3 is different than PlayStation 2?

We have not gotten into specifics on any royalties associated with PlayStation 2, and we've not made any comments about future products from Sony and Toshiba. So I don't really know how to answer that question.

Kind of my financial quiz question for you. Okay, I am going to try a different one. You have an existing contract with Intel, and I guess there might be some confusion. I'm just trying to clarify does the current Intel contract include DDR2 controller interfaces? Not DRAMs, but interfaces?

Let me let Geoff answer that question.

The existing Intel license -- and we have numerous, but the one I think you're referring to is our general patent license -- covers all of our patents. And they are permitted to use them in any product in any way. So that would include DDR2 or any kind of memory interface or any kind of high-speed interface.

Thanks for that clarification, Geoff. Finally, perhaps -- might as well hog my time -- for John. John, this 956 patent, the European patent that seems to be the issue here, is there an equivalent US patent? Is it the 8 -- I'm getting confused in my patent understanding. But is it the equivalent of the 898 patent in the US?

You really can't draw that kind of equivalency, and you really -- the point we wanted to make in our opening point on the European process is that they have a rule which is fundamentally different from the rule we see here in the United States. In the United States you can file a broad description and later file later claims which fall under that description. In Europe they're taking the position now that you're limited by the scope of your originally filed claims, which we think is wrong even under European law. But it is certainly not the law in the United States. So both on the issue of trying to draw clear parallels between patents in the two cases, in the two jurisdictions, and also trying to draw parallels between the legal systems, I think you kind of run afoul of what is at stake.

I wanted to correct something, by the way, that I said earlier. I did get some information about the December hearing in front of Judge White in the Hynix case. That was a fairly simple conference call that simply asked for additional time so we could file our papers on January 14th relating to the motion to dismiss and the spoliation issue. And essentially that aligned the timing of the Hynix filing with the timing that it changed in the Infineon case.

If I could then -- just perhaps on the European and the US patent issue, here's the question that I guess I would care about. If there is -- hypothetically if you do not have patents, or all your key patents don't hold up in Europe -- and you're not conceding that, but hypothetical -- does that mean that you are limited to US patents, and therefore products that get shipped into the US per se? I'm trying to understand that from a legal standpoint and I'm not a lawyer.

First of all, as a lawyer I am, I hope you understand, somewhat allergic to answering hypothetical questions. But I will tell you this. We price our patents on an assumption that we will be paid for -- as a matter of convenience, frankly -- that we will be paid for every unit produced, no matter where it's produced or shipped worldwide. That's a very common formula. If you have to look at subsets of that, then you would probably think differently. So net-net we both are not yet at the position you're hypothesizing in terms of --

Might I add that the market for semiconductors is highly fungible. Any process that attempted to restrict a particular geography or to price differently in a geography would just be beaten by that very fungability. So insofar as we would deal with customers, we would have to deal with them on a worldwide basis.

Thank you.

Fayad Abbasi, Prudential.

Bob, just a question regarding your operating expenses as we look into 2005. I know you don't typically provide guidance more than a quarter out, but maybe if you could help us understand how you're looking at your operating expenses? With the expansion of new R&D facilities in Bangalore and some sales increases and other initiatives you have, and at the same time seeing that your DDR and SDR revenue now accounting for over 50 percent of your total revenues, how do we kind of look at -- or how are you kind of looking at your operating expenses go up over the course of the year at the same time as there's some potential for DRAM pricing to come under pressure? And then also, I might have missed this, but could you give us an update on the number of DDR customers that you currently have that have renewed for DDR2?

I think there are several points there. I really do want to restrict our comments to the first quarter, because this is a year in which there is potentially lots of change, both positive and negative. And I don't want to start speculating on what the year may bring.

We're pleased with where we stand. We're making the kinds of investments because we're investing in the long-term future of the Company, and we're investing in the engineering side. And we're excited about the new facility in Bangalore which will clearly help us to manage our cost structure long-term.

In terms of litigation spending, obviously we're expecting it to be on the high end of a range that we've been in for the last however many quarters. So we're clearly in a period of fairly high litigation activity.

But I really don't want to try and make guesses on the full year in terms of what either revenue or spending will look like.

In terms of DDR2 licenses, which I think was one of your questions, obviously I think the question was asked earlier regarding Intel, and clearly they have a right to use our patents in any way they see fit, including DDR2 memory controllers and chipsets. Also, we signed a deal last year with Elpida which gives them the right to use our patents for DDR2 as well. Those are the two contracts that I think are out there right now. And then we've also signed some DDR-Fi (ph) deals that we announced during the course of last year also.

Okay, thanks.

Gary Mobley, B. Riley & Co.

I just had a follow-up question for you, Bob. Could you break out what serial interconnect royalty contributed for the quarter? And was that primarily PCI Express? And if it is PCI Express, was it primarily related to PC sales?

So, we did have royalties again on serial links. This is the second quarter we've had royalties on serial links and I have to say they are still very small. It's important milestone to demonstrate the royalties, but they're really immaterial at this point. We have expectations that they will grow going forward. In terms of where they're coming from, I do not believe they're coming from PCI Express at this point in time. But that's one of the areas that we are counting on for future growth.

Great. Thanks.

Michael Cohen, Pacific American Securities.

John, my next questions refer to the DoJ investigation. We've already seen the sentence and memorandum come down on Infineon. And in that they admitted to price manipulation of DRAM, and then it further defined DRAM to be SDRAM, DDR SDRAM, and RDRAM. I was wondering if you took that wording to be basically an admission of guilt of manipulating RDRAM pricing.

Well, you're asking terrific questions today. The answer to that is yes. Our complaint lays it out pretty clearly that we think the market was manipulated both with respect to the competing DDR prices and with respect to the RDRAM prices, and that there was collusion to among other things keep our prices high and to keep the cost structures for RDRAM manufacturing high and to make misrepresentations to OEMs and the press about those cost structures. So we think that that admission helps us. I'm going to sign you up to start writing an oratory for me one of these days.

It seems like the dates in that sentencing memorandum actually also capture the dates that you're alleging in the antitrust case, meaning it's the full-fledge of manipulation; not just focused on DDR, but the manipulation of RDRAM as well.

Well, you're right. The original speculation about the DoJ was that they might focus on a very short period of time beginning in November 2001 where there's a Micron e-mail that talks about moving prices up and there's about a 3 or 4X increase in DDR prices for some products. That was some speculation. But what we saw instead was an admission that there had been collusion among the DRAM cartel starting in 1999 all the way through 2002. And that's a period of time which lo and behold corresponds to when DDR was competing with what? It was competing with RDRAM, the Rambus product.

Now that we've seen the sentencing memorandum with regard to Infineon, do you have any insight into the order of events in terms of which other party would likely come out with a similar memorandum? Would it likely be Hynix or Samsung?

None that I can share at this time.

I will turn it back if other people have questions.

Mike Crawford, Barrington Partners.

The question relates to royalties with graphics chipset manufacturers like an NVIDIA. Would you license to them RaSer without resolving potential license needs for DDR or GDDR, etc?

We're prepared to do business and get people started using our technology without necessarily resolving every issue that might exist between us. We want to enable our customers to do better in the marketplace, and if that means that we do it in two steps rather than one, so be it.

Thank you.

Erach Desai, American Technology Research.

Bob, two follow-up questions for you. One is you have historically given some RDRAM percentages on the royalty breakout. Could you provide that for the fourth quarter?

I actually don't have that data in front of me. But RDRAM was again less than 10 percent of the total revenue. And again, I don't know exactly, but I would guess it's somewhere closer to 5 percent.

The second is a housekeeping one. Your tax rate appears to be now going up for the full fiscal year '05.

Yes. We have done a lot of tax planning this year and obviously have had some volatility in the tax line. We are expecting a rate of 37 percent next year, and we will see how that plays out. There are a number of changes that are possible there, but at this point you should probably plan on something in the 36 to 38 percent range.

Thank you.

Michael Cohen, Pacific American Securities.

This is my last question for you. The question I have relates to document destruction. We've seen this raised in Infineon One and the FTC. The FTC pretty much exonerated you on the issue. And now we're seeing it brought back in in Infineon Two and also the Hynix case, largely based on this new discovery. And I know you addressed this also in your prepared remarks. We don't have any visibility into what this new discovery is, and I was wondering if there's any color you could possibly give us other then just boxes of information.

I'm going to give you just a slight amount of color. The court in Virginia, based on some rulings that we think were incorrect as a matter of law, and based on an analysis of documents that we have shown now was incorrect as a matter of fact, but that court in Virginia opened up the door to discovery of attorney-client privilege communications between Rambus and its lawyers, both talking to Rambus witnesses and Rambus' lawyers about document retention practices over a course of time.

So that's the discovery that was taken in the fourth quarter. You can imagine that took a fair amount of our time and was expensive. And it's that discovery that has been in put into the briefs by both parties. But we think we've included more of it and we think that it shows what I said, that there was no spoliation.

Thank you.

I want to ask at least a couple of the retail questions that have come in. And the first one is for John. It says, "why the change in policy regarding posting legal developments on the Rambus website?"

I think this came up recently in the context of -- I will tell you; we didn't have all of the summary judgment rulings and we have decided not to put up just a partial group. Our view is this -- our goal is to make sure that litigation-related documents are easily available to the public. But the postings on our website don't necessarily represent a complete set of documents that exist. And we've made it clear kind of on the cover page of our litigation website page that if we have what we think of as a subset of documents or if the documents we have are incomplete, or for a number of other reasons including confidentiality, we won't put them up or we won't put them up immediately. I think we are just clarifying what we think has been our goal all long.

Thanks, John. Harold, we'll ask you the final question here. There are a number of products that include Rambus technology, yet you don't announce these design wins. Why not?

(inaudible) level, and obviously we would never want to be in a position of announcing our customers' products. They're going to have branding questions, marketing questions, channels questions, and they have the right to put those together. We certainly don't want to preempt them in any way. So it's just simply good customer relationships.

Great. Thanks everyone for joining us on the call today. We really appreciate your time, and we look forward to a good 2005. Thanks.

That concludes the Rambus fourth-quarter earnings conference call. You may now disconnect.