Rambus Inc (RMBS) 2005 Q3 法說會逐字稿

Welcome to this Rambus third quarter 2005 conference call. Today's call is being recorded. And at this time for opening remarks and introductions, I would like to turn the call over to Mr. Bob Eulau. 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 third quarter that we just announced. My name's Bob Eulau, and I'm Rambus' Chief Financial Officer. With me today is Harold Hughes, our CEO, and Bob Kramer, our Director of Litigation. In the first part of the call, Harold will discuss our business and third quarter accomplishments. Then I'll provide a summary analysis of the Company's recent financial results and a brief update. And actually -- and then we'll after that move into questions that Harold, Bob and I will respond to.

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 888-203-1112. You can hear the replay by dialing the toll free number and then entering ID number 402-7766 when you hear the prompt. In addition, we're simultaneously webcasting this call, and a replay can be accessed on our website beginning today at 5:00 p.m. Pacific time.

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-Ks, 10-Qs, and 10-Ks and these statements may differ materially from our actual results. So now let me introduce Harold Hughes, our Chief Executive Officer.

Thanks, Bob. Good afternoon everyone. I'm very happy to report that the Rambus team rolled up their sleeves and met the challenges we faced entering the quarter. We made great progress on many fronts including better than expected revenue generation and solid management of our expenses. As we reported earlier today, we delivered above guidance revenues of 36 million and strong earnings of $0.14 a share for the quarter. Bob will provide more information on financials later. Right now I'll cover the quarter's business highlights.

First let's talk about patent licensing. Going into the quarter, I was optimistic about our relicensing efforts, and we exceeded even my expectations. Renesas and Okie both renewed their patent licenses for five year terms. They joined NEC Electronics and Elpida as long-term customers which have now re-signed five-year deals with us. In addition, we signed a one-year agreement with one company to allow both parties additional time to negotiate a five-year deal. We are gratified in the value these companies see in our technology.

Beyond these agreements I have mentioned, we have a couple of more patent renewals to sign. These negotiations are ongoing. In addition, we are currently in patent licensing negotiations with a number of leading electronics companies which, if signed, would represent new customers for Rambus. Meanwhile our engineering and IT management team continues to build on our strong patent portfolio. At the end of the third quarter, we had 414 issued patents and 451 patent applications pending.

Pushing now to our technology businesses, we are seeing continued traction in our XDR memory solutions. In Q3, XDR DRAM was selected by one of the leading digital consumer electronics suppliers to their next generation platform. We expect them to reveal publicly more details in the coming months. Also during the quarter, we announced that Teradici had selected XDR DRAM for its next generation computing product. Recall also that the XDR DRAM, along with our FlexIO processor bus will be employed to unleash the tremendous performance of Sony Computer Electronics upcoming PlayStation 3. What we are witnessing is increased momentum for XDR DRAM as the best solution for delivering state-of-the-art performance in a growing number of computing and consumer electronics applications.

Also during the quarter, we expanded the availability of our PCI Express PHY sales at UMC to span the 180, 150, 130, and 90-nanometer process nodes. This, in addition to our agreements with TSMC, Fujitsu, and other foundry suppliers makes our PCI Express solution the most broadly available in the industry to fab like semiconductor and system OEM customers We now have achieved over 85 serial link licenses with over 50 specific to PCI Express solutions.

Thanks to our IT acquisition from GDA Technologies, we announced during the quarter a fully integrated PCI Express digital controller and PHY solution. We anticipate increased traction for our integrated PCI solution as the standard transitions to Gen 2 and the implementation challenges grow dramatically. We expect customers to turn to Rambus as their high speed interface specialist to lower design risk and reduce their time to market.

Now, let me touch briefly on litigation. Today we begin the first phase of the Hynix trial in the northern district of California before Judge White. He says, with obvious relief in his voice. We expect this unclean hands phase of the trial to take a couple of weeks. While the patent phase of the trial is not scheduled to start until early next year, we are extremely happy to begin this process because, while the trial is just beginning, we believe it will ultimately allow us to argue the merits of our patent early next year. I think the fact that we continue to license our patents to the world leading semiconductor and system companies strongly demonstrates the marketplace's validation of our inventions. Nevertheless, we look forward to resolving favorably some of these issues before the Federal District Court as another important step in reaching agreements that fairly compensate Rambus for our inventions.

Meanwhile, the action we won at the trial level before the FTC is still pending. We anticipate the appeal will be resolved in the next quarter or two, although we have no indication of exact timing. Back in September, we filed an important motion which may affect timing and which, for some unknown reason, took three weeks to be posted on the FTC site. The motion asked the commission to reopen the record, to admit evidence that has recently been obtained by Rambus. We believe this evidence undermines many of the complaint counsel's proposed findings and strongly support's the ALJ's decision in our favor. This is a powerful brief that outlines our current position with respect to this action.

With regard to our pending antitrust case, we believe we are helped by the Samsung guilty plea from last week. Also there is a motion that addresses whether certain DRAM industry documents should continue to be treated as confidential. Indeed. We do not think these documents should remain under seal as we believe they will bring to light critical elements of the conspiracy of which Rambus was a key target. There is a hearing on October 31, that will address the issues among other things.

I'd like to wrap up with a few words about our business model. Our fundamental goal is to develop world leading chip interface technology far ahead in anticipation of the market's needs. We demonstrated this technology leadership with the development of RDRAM way back in the 1990s. XDR was introduced in 2001. XDR 2 DRAM was introduced in July of this year. Many of our patented inventions have been incorporated by the industry in the development of industry standard memory solutions such as SDRAM, DDR, and DDR 2, as well as the graphic versions of these standards. We believe that this is powerful market validation of our inventions.

We strive to license our patents and our technologies broadly across the industry to help our customers produce world class products. Our pioneering work in memory and logic interface design coupled with our interface in signal integrity and system engineering is very much in demand. Customers can increasingly turn to us for help to tackle their most difficult system level problems. In fact, I believe one of the greatest challenges facing Rambus today is our ability to scale our engineering resources fast enough to satisfy the growing demands of our customers. This is a way of an example. At one of our strategic customers we currently have seven ongoing programs and have been asked to participate in two more. This is just an example of the demand for Rambus' technology and how its value will continue to grow over time.

I remain extremely optimistic about our future. Our financial position is strong. Our technology is best in class and our engineers are the best in the business at solving real problems for our customers. Now I'll turn it over to Bob for further details on our financials. Bob?

Thanks, Harold. Let me start with some of the highlights of our financial results for the third quarter of 2005. We started the quarter with significant challenges and delivered outstanding results in that context. We renewed two patent licenses and reached an interim agreement on a third. While we didn't set any new records this quarter, it is hard to overstate how pleased we are with the team for delivering this outcome. Our operating income decreased 63% while net income increased 40% when compared to the strong third quarter of 2004.. Operating income was down primarily due to lower royalty revenue. Net income was the highest it has been since 2000 based on the gains we were able to recognize on the repurchase of $105 million of the zero-coupon convertible bonds. Cash flow generated from operating activities remained positive at $3 million. Total cash and marketable securities were down $83 million from June as we used $84 million to repurchase bonds. I'll discuss the balance sheet and cash again shortly.

First I'll give you additional information on revenue. As Harold mentioned, total revenue was $36 million, which exceeded our own expectations. Total royalties for the quarter were $28 million, down 8% over the third quarter of last year and down $0.19 sequentially. SDRAM and DDR royalties for memory devices, and controllers were down 10% over the third quarter of last year and down 28% sequentially. Most of the decline from a year ago is the result of the loss of royalties from Samsung and the decline from last quarter reflects this and several other factors, including fairly strong results last quarter. If you exclude the Intel cross license agreement, the revenue from SDRAM and DDR, memory and controller royalties comprised 44% of our revenue for the third quarter of 2005.

I'd like to make a couple of comments on the new licenses and license renewals. For a couple of quarters I've indicated that we were in very active discussions with several companies, and the same is true now. If you look at last year's total royalties, which were $120 million, 78% of the dollar value of those contracts is now under contract through 2005. The amounts they pay may fluctuate, but I mention this so that you get a better picture of the risk and opportunity for the rest of the year.

Moving on to contract revenues, contract revenues were $8 million this quarter, down 4% from the third quarter of last year and up 48% from last quarter. The increase from last quarter was primarily a result of new contracts for XDR DRAM and FlexIO interfaces and revenue we were able to recognize on our largest serial link contract. With regard to costs and expenses, total costs and expenses for the third quarter were $32.1 million. This is up 14% from the third quarter a year ago or $4 million and down 7% or $2.3 million from the previous quarter. Cost of litigation was up $2.2 million compared to the third quarter of 2004 and down $1.1 million on a sequential basis. This increase reflects, among other things, the preparation for the Hynix, Micron, Samsung, and antitrust trials.

Operating expenses, excluding the cost of litigation, were up 8% when compared to the third quarter of 2004 and down 5% compared to last quarter. The increase in operating expenses, excluding cost of litigation, over the third quarter of last year was largely attributable to increased investment in the engineering area, including our Banglor design teams and digital cores that were acquired in the second quarter of this year. The decrease in expense in the marketing general and administrative area was largely associated with the restricted stock grant to our CEO that was awarded earlier in the year. Net income for the third quarter was $14.5 million compared to 10.4 million in the third quarter last year and 5.4 million in the previous quarter. The net income reflects a net gain of $10.7 million after taxes and issuance costs on the repurchase of our zero coupon convertible notes during the quarter. We repurchased 105 million in face value of notes and now have 195 million outstanding. Our continued profitability led to operating cash flow that was $3 million for the quarter. Our cash, cash equivalents, short and long-term marketable securities ended the third quarter at $388 million versus 471 million as of June, 2005. Our cash, cash equivalents, short and long-term marketable securities were down 83 million from last quarter primarily due to cash use for the repurchase of notes that I just mentioned.

Now I'll give you some thoughts on what to expect for the fourth quarter of 2005. This guidance has 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'm about to review. We expect the fourth quarter revenue will be between 39 and $43 million. We expect that our operating costs and expenses will be in the range of 33 to $37 million. Litigation spending is always the most difficult to predict because we do not control the time lines and requests from the courts nor do we control the actions that our adversaries may take which may cause us to incur additional expenses in a 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 9 million and $12 million, but this range is very dependent on the activity of our ongoing litigation and the amount of payment for our opponents attorney's fees in three cases. We are estimating net interest and other income to be between 2.5 and $3.5 million. And finally the tax rate is likely to be in the range of 37 to 39% next quarter.

In terms of upcoming events, we're planning to open trading on NASDAQ on November 15, which will be followed by a meeting with financial analysts beginning at 10:15 a.m. Eastern time. Many of you should have already received information on this from us. Now, we're going to take questions and also respond to some questions that have been sent to us during the quarter from stockholders. We could not address every question, but we will try to answer the most frequently asked questions. Operator, if you could open the line for questions, that would be great.

[OPERATOR INSTRUCTIONS] We'll go first to Gary Mobley with A.G. Edwards.

I was hoping you could add a little color on your royalty contribution from PCI Express and perhaps some of the other serial link interfaces.

Well, Gary, this is Bob. We have not publicly talked about specific royalties generated from serial links. I did mention a couple quarters ago we are now generating royalties in that area, and they're not really what I would call material level at this point yet.

Great. Thanks, guys.

Sure.

Our next question is from Daniel Amir with WR Hambrecht.

Thanks a lot. Congratulations on a good quarter.

Thank you very much.

A couple questions here. First, can you comment a bit about whether -- where does Sheba stand here? Is that just one-year customer agreement that you're talking about?

You're cutting out on us, Daniel.

Sorry. Can you hear me better?

Yes.

I just wanted to get a bit more clarification on this one-year customer renewal agreement that you just talked about. Is that related -- can you comment and clarify who that is?

No. We can't do that. I can simply say that this ran out of time. Negotiations are very amicable and I anticipate that we'll resolve it this quarter. Rather than have the contract simply expire, we thought it in everyone's best interest to just do a one-year deal to give us more time to negotiate a five-year deal.

Okay. The second thing is can you talk a bit about your XDR royalties? I think last quarter you talked about, that basically maybe towards the end of the year is kind of where you expect some ramp up. Has that changed a bit in your outlook, kind of what you are seeing in the marketplace with regards to that product?

I can, I'll respond to that. This is Bob. First of all, the first product that's going to go to market is the PlayStation 3, and that's our customer's product, and we're not able to give schedule information on that. So I think Sony's last public plan was to have product in the market in the March timeframe. If that's their plan, we'll be in a position to support that.

And that would be the first product basically?

The first significant product.

Significant product. Okay. Now, another question is, can you comment a bit about where-- I mean where your talks have been going on, if at all, with Intel at the moment considering the contract ends, I guess, the middle of next year. I'm sure it's in your thoughts about what the next steps there are. But can you give any update there?

No. Obviously Intel is a prime target, but we can't comment on where we are.

So is it -- is there anything going on? Or you know--?

Well, there is always something going on.

Okay.

We believe that we have the highest performance DRAM. We'd like to see the market move to it. That is not to imply that that's an easy thing to do for many reasons.

Now, Bob, a question on -- something on the litigation side. Can you just clarify then the next step here with Judge White on the Hynix trial? What is exactly -- what are we supposed to expect here in the next couple of months ahead of the patent trial that's supposed to start some time in January?

Daniel, this is Bob Kramer. We are -- as we've already said, currently before Judge White in the unclean hands hearing. We expect that to go for the next two weeks. After that, it's sort of anybody's guess as to when he will issue a decision. But it's probably going to come out before the patent trial, as you indicated, at the end of January.

Now, you have to have this decision before the patent trial starts. Is that correct?

I'm not sure we absolutely have to, but portions of it, that would be helpful before that trial, yes.

Thanks a lot.

[OPERATOR INSTRUCTIONS] We'll go next to Mike Crawford with Barrington Partners. .

Another technology that you might have IPs related to, is NAND flash. What aspects of NAND flash most resemble technologies where you might have some IP?

Well, it's -- there's an interface -- a memory interface. As the densities of flash goes up, the requirements of that interface go up commensurately. But keep in mind that DRAM is run at significantly half faster speeds than flash, but we believe over time we'll be able to add value in the flash area and to get some licensing opportunities.

Thank you.

Thanks, Mike. So why don't I go ahead and take a couple of the questions that were sent in from stockholders. The first one is for you, Harold. Here's the question. According to the MSN research report on Rambus, 75% of its business comes from four customers. It seems that all of them are being sued by Rambus. Will there be a greater proliferation of the product line throughout the industry? And what will bring that about? How extensive is it expected to be?

Well, I don't believe the analysis is correct. I think a relatively minor percentage of our royalties is coming from customers with which we have litigation. That being Samsung, as you mentioned a little while ago. We are attempting to license broadly our technology with many people with which we don't have legal issues, especially in the controller area. Obviously the extent to which it proliferates in the DRAM area is dependent upon how well the litigation goes.

Thanks, Harold. I think we've got another question. Maybe we should take that.

Yes, we have a follow-up question from Gary Mobley.

I just had a follow-up question relating to your PCI Express logic interfaces. You mentioned on the licensing fees, you were able to recognize revenue from a serial link licensee. I'm just wondering if you can give us a little more color as to what sort of customized work you're doing there for the customer and the duration of that project?

Yes, I can give you a little more color on that. I believe that particular interface is related to a fiber channel. And it's been -- that was a comment I made with respect to contract revenue. So it's one in which we have probably more opportunity on the contract side and we don't expect huge royalties in the future.

Great. Thanks.

Thanks, Gary.

Our next question is from Michael Cohen with Pacific American Securities.

Hi, Bob. I just jumped on the call. I'm at the courthouse in San Jose, so I didn't have the benefit of hearing whether this question was asked earlier. On October 31, on Halloween, you have a proceeding in the antitrust case in Kramer's court and you're also trying to get documents in to the FTC reopening the record there. I was wondering if you can shed any light on these documents that are currently under seal and just kind of a broad stroke of why you want to get them out from under seal?

Michael, hi. It's Bob Kramer. As you pointed out, we do have a hearing in the San Francisco price-fixing case on the 31, and we've also filed a brief in September in the FTC related to these documents. They are under seal, so we obviously can't talk about the substance of those documents. I think, if you look at the filing that we made in the FTC which is up on their website now, we do get some detail as to the nature of those documents, to the extent that we can speak about them, and I guess we've talked a little bit -- Harold mentioned a little bit about them here. We believe that they clear up critical elements of the conspiracy, including that Rambus was a target of these activities.

And a follow-up I would have is, if you're not successful in getting them out from under seal, would the FTC still have the ability to reopen the record and perhaps view them in camera?

I guess it's possible.

Thank you.

Sure.

Thanks, Mike. All right. Well, why don't I ask another one of these questions. This one will be for you, Bob. Can you, please, give a reasonable timeframe for the main cases to be heard/finished with?

Sure. At this point, we anticipate the Hynix case to conclude in early June of 2006. We believe the Micron case in Delaware to follow sometime throughout the rest of 2006. The antitrust case doesn't yet have trial dates set, but at a recent hearing Judge Kramer mentioned that it was possible to have a trial in either Q1 or Q2 of 2006. The Samsung SDR DDR case in California and the DDR 2 case against Hynix, Samsung and Nanya also in northern district of California hasn't been set for trial, but we are proposing trial dates around, I believe, June of 2007. We haven't yet heard from the defendants on this, so that data is, of course, not certain. Of course, all trial dates are subject to change, so we can't say much more than that.

Prior notice.

Here's another question for you, Harold. Has Rambus ever considered a performance-based bonus plan for its top-paid executives versus the current option program?

Well, we have a performance-based bonus plan and have for quite some time. That's done in conjunction with the stock option program. And the compensation committee is always looking at ways to motivate management into alignment as closely as possible with shareholders. I think they're interested in maintaining both. Oftentimes a performance based plan has results, the attainment of which is likely to produce a gain in the stock price, so they have a great deal in common.

Great. Thanks, Harold. So at this point I'd like to thank everyone for their questions today and for your ongoing interest in Rambus. We're looking forward to finishing out 2005 on a strong note. Have a nice evening.

This does conclude today's conference call, and you may disconnect at this time.