Rambus Inc (RMBS) 2005 Q4 法說會逐字稿

Good day everyone and welcome to this Rambus fourth quarter 2005 conference call. Today's call is being recorded. At this time, 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 are 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 Rambus' Chief Financial Officer. With me today is Harold Hughes, our CEO, and John Danforth, our General Counsel.

In the first part of the call, Harold will discuss our business and fourth quarter accomplishments. Then I will provide a summary and analysis of the Company's recent financial results. John will then provide a brief update on litigation. Afterward, Harold, John and I will be available for your questions. The press release for the results discussed here today have 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 446-6070 when you hear the prompt. In addition, we are simultaneously webcasting this call and a replay can be accessed on our website beginning today at 5 PM Pacific time.

Before we begin, I need to advise you that the discussion today will contain forward-looking statements regarded 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 documents that we file with the SEC including our 8-Ks, 10-Qs, and 10-Ks. And these forward-looking statements may differ materially from our actual results.

So now, let me introduce Harold Hughes, our Chief Executive Officer.

Thanks, Bob, and good afternoon everyone. Reflecting back on our accomplishments in 2005, it is clear we made some great strides in furthering our position as one of the world's premier IP licensing companies. We built a foundation in 2005 that we believe readies us for continued growth [and] strategic impact in 2006. I would like to highlight some of the key accomplishments of the past year.

First, we delivered record revenue in Q4 and a record $157 million for revenue in 2005. Bob will drill down further into the business, but this was a singular achievement given some of the challenges we faced when we entered 2005. We are pleased with the way the Rambus team tackled these challenges, producing not only record revenue, but our fourth consecutive revenue growth for -- in as many years.

We also signed some very important patent licensing deals during the year, which is remarkable given how the year started. As you may recall, we began 2005 with another adverse decision in the Virginia court that had previously (technical difficulty) [us] in 2001. Given the circumstances of Virginia proceedings and the track record we had with Infineon there, we were very pleased to come to terms on a deal where Infineon will pay us up to $150 million for access to our patent portfolio.

As we said at the time and have consistently said since, the Infineon agreement is not a template for other licensing deals. Other parties are situated differently. Also, since the Infineon settlement, our position has markedly improved as events have progressed. John will provide more details on the current legal situation in a few moments.

In addition to Infineon, we renewed patent licensing deals with Renaissance and AEC Electronics during 2005 that will run through 2010. With two other large licensees, we signed interim agreements to allow the parties more time to negotiate longer-term deals. We are continuing to work on renewals with a few of our other Japanese customers and we are optimistic we will successfully conclude these negotiations in the current year.

We ended 2005 on a high note, signing a new patent licensing deal with AMD, which announced on January 3 of this year. This license agreement gives AMD access to our patent portfolio through Q4 2010, for which they will pay $75 million, equating to roughly 15 million per year.

This is a significant milestone for our Company, as AMD represents our first patent agreement with U.S.-based semiconductor company since Intel. And unlike the Intel agreement, the AMD is for a limited term and is renewable at the end of five years. We are obviously pleased to have closed this deal and we're happy to let the market's reaction speak for itself. We believe the signing of the AMD patent agreement opens the door for greater collaboration on technology initiatives between our companies.

As two acknowledged technology leaders, we're very much looking forward to such potential collaboration to provide breakthrough solutions to the market. Further, the AMD agreement demonstrates our ability to sign digital chip companies outside of the memory segment, giving some further insight in the potential of our patent portfolio.

Bob is going to provide greater guidance in Q1 in a few moments, but with regard to the full-year 2006, we're planning for another year of record revenue even with the Intel license payments expiring after the second quarter of this year. In developing our 2006 plan, we have been very conservative in terms of DRAM company licenses. We are confident we can sustain current operations and growth rates by continuing to license our patents to companies not in the memory business.

We are in a position to achieve fair compensation for our inventions as we continue to negotiate and, where necessary, litigate with remaining nonlicensed DRAM suppliers. We're in negotiations with these suppliers -- excuse me, with three separate mediations occurring right now. But of course, we're also in very active litigation with Hynix, Samsung, and Micron and we'll have to see whether further litigation events are required to reach closure with these companies at reasonable rates.

Continuing with our legal proceedings in defense of our patent portfolio, we completed and won the unclean hands portion of the Hynix trial, and we're looking forward to beginning the patent phase of that trial currently set to begin March 6. John will give further details, naturally, but we regard the rejection of Hynix's charges of unclean hands and spoliation as a critical [inflection] point for the Company. After five years in the court, we're now able to proceed to a patent trial that will be our first opportunity to test our U.S. patents on their merits.

I would like to spend a minute discussing our business model and how we believe that model will drive our Company's growth in 2006 and beyond. We're one of the world's premier technology licensing companies because we're both a pioneer of the IP licensing model and because our technology leads the world.

The foundation of our business model is our core technology development. This is our advanced research program. Our core -- for core technology -- from core technology we produce both our world-class patent portfolio and our technology products. In 2005, we reached a milestone of achieving our 400th issued patent, and to date we have 440 issued patents and 471 pending patents worldwide. For a Company our size, this is a great accomplishment and a key proof point of the success of our core technology initiatives.

The synergy between our patent licensing and product solutions is one of the key enablers of our overall business model. (technical difficulty) only business model [would] lack the strategic customer engagements that provide the critical feedback you need for your technology development efforts. With a product-only business model, you may have critical customer engagements, but they often lack the insight necessary to provide appropriate future developments and profitability needed to fund long-term and robust technology development.

For us, the sweet spot is where you combine both patents and products, and that is our business model. Our leadership products demonstrate market validations of our patented inventions. Our product technology also allows us to engage with strategic system companies providing that feedback loop. Meanwhile, our patent licensing business delivers great value for our innovations and funds future core technology development.

An example of the high-value critical customer engagements on the product side of our business are initiatives such as the cell processor development with Sony, Toshiba and IBM. Our engagement with Sony on the PlayStation 3 started with a cell processor announcement at Spring ISSCC and followed with the public unveiling of PS 3 in early May, giving us the opportunity to showcase our technology expertise in what is expected to be one of this year's most anticipated product launches.

This was followed by a very successful Rambus developer forum in Japan, where we formally unveiled our XDR 2 DRAM demonstrating our continued push to deliver revolutionary memory technologies to the marketplace. XDR 2 will start out at 8 GHz, which is five times faster than best of class GDDR products. Our XDR 2 memory interface incorporates our micro-threading technology, also announced in 2005. Micro-threading allows for more efficient memory access. This is particularly important in graphics-intensive applications where you want to access small chunks of memory for smaller triangles, and hence higher resolution images.

2005 was truly an exceptional year for Rambus and we accomplished a lot. Significant patent and technology deals, the reengagement of one of our founders, Dr. Mark Horowitz, who is our chief scientist, tremendous growth -- we've achieved tremendous growth in our engineering teams, both in the U.S. and in India design center as well as our worldwide sales and support capability. And we achieved key legal rulings in our favor.

But of all the things we accomplished, we're most proud of what we have done to prepare the Company for growth in 2006 and beyond. As part of this, we have laid out a set of strategic imperatives that will guide us. First, we must remain the uncontested leader in high performance memory interfaces. Without a doubt, this is where our expertise is and this is where we will continue to invest and focus our core technology development.

Secondly, we will broadly license our technology to both systems and semiconductor companies. We have already seen this imperative in action from the STI program to the recent AMD deal. Third, we must continue to have strategic relevance that is massively out of proportion to our size. Let's remember that we are a Company of just over 300 employees, mostly engineers, and it's crucial that we focus on providing value to key strategic customers.

It is with industry leaders that we can continue to demonstrate the greatest value of our technology. And it is these industry leaders who will provide the most valuable feedback to inform our core technology development. We plan to grow and expand our U.S. facilities this year to continue meeting the growing needs of our customer base.

Finally, because of this, we need to support a limited but growing number of key customers. We're focusing on a set of core accounts that represent a majority of the semiconductor and significant electronic systems revenue. We believe this is exactly where we can make the most impact.

In closing, we're extremely excited about the opportunities for Rambus in the future. We're well positioned to continue providing the world's highest performance interface technology with a high performance business model that can generate great model value. Our technology is foundational to virtually all digital electronics.

As all electronic systems take on more and more compute functions, our innovations and high-speed interfaces, innovations (technical difficulty) memory are increasingly critical for their success. With a great 2005 as a foundation, we have charted a course to deliver great value for our customers and our stockholders in 2006 and beyond. Now, I will turn it over to Bob to review the financials. Bob?

Thanks, Harold. Let me share some of the highlights of our financial results for the fourth quarter of 2005 with you. We achieved record revenue for the quarter and for the year. Total revenues for the quarter increased 8% over the fourth quarter of 2004. Our operating income decreased 24% while net income increased 43% when compared to the strong fourth quarter of 2004.

Operating income was down primarily due to increased investment in research and development and sales and marketing. Net income increased primarily due to our ability to recognize a pre-tax gain of $5.4 million on the repurchase of the zero coupon convertible notes that we issued earlier in the year.

Cash flow generated from operating activities remained positive at $11 million. Total cash and marketable securities were down $33 million from September, as we used $29 million to repurchase bonds and $13 million to repurchase approximately 1 million shares of our common stock. I will discuss the balance sheet and cash in further detail shortly.

First, I will give you additional information on revenue. As Harold mentioned, total revenue was a record at $41.6 million. Total royalties for the quarter were 34.7 million, up 6% over the fourth quarter of last year, and up 24% sequentially. Most of the increase was due to the first quarterly royalty payment from Infineon.

I would like to make a couple of comments on the new licenses and license renewals. During the last year, I have indicated that we are in very active discussions with several companies and the same is true now. If you look at royalties for 2005, which totaled $130 million, and include adjustments for AMD, Infineon, and Intel, 75% of the 2005 royalty revenue is already under contract through 2006. The amounts of our licensees -- the amounts our licensees pay may fluctuate, but I mention this so that you can get an idea of the picture we face as we begin 2006.

Moving on to contract revenues, contract revenues were 6.9 million this quarter, up 14% from the fourth quarter of last year and down 14% from last quarter. The decrease from last quarter reflects the timing of deliverables under certain memory and serial link technology development contracts.

With regard to costs and expenses, total costs and expenses for the fourth quarter were $34.3 million. This was up 18% from the fourth quarter a year ago and up -- or $5.3 million and up 7% or $2.2 million from the previous quarter. Cost of litigation was up $800,000 compared to the fourth quarter of 2004 and down $600,000 on a sequential basis. The year-over-year increase in litigation expenses reflects among other things the expenses associated with the Samsung, Hynix, and Micron trials.

Operating expenses excluding cost of litigation were up 21% when compared to the fourth quarter of 2004 and up 12% compared to last quarter. The increase in non-litigation operating expenses over the fourth quarter of last year was largely attributable to increased worldwide investment in the engineering area, including our U.S. and Bangalore design centers.

The increase in expense in the marketing, general and administrative area was due to our investment in sales and marketing and infrastructure to support growth.

Net income for the fourth quarter was $9.4 million compared to $6.5 million in the fourth quarter last year and $14.5 million in the previous quarter. The net income reflects a net gain of approximately $3.2 million after taxes and issuances costs on the repurchase of our zero coupon convertible notes during the quarter. We repurchased $35 million in face value of notes during the fourth quarter and now have $160 million outstanding.

Our continued profitability led to operating cash flow which was $11 million for the quarter. Our cash, cash equivalents, short and long-term marketable securities ended the fourth quarter at $355 million versus $388 million as of September 2005. Our cash, cash equivalents, short and long-term marketable securities were down 33 million from last quarter, primarily due to cash used for the repurchase of notes and stock.

Now, I will give you some thoughts on what to expect in the first quarter of 2006. 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'm about to review.

We expect that Q1 revenue will be between $41 and $43 million. We expect that within that, contract revenue will be in the range of $5 to $6 million. The first quarter will be the one in which we adopt FAS 123R, which requires the expensing of stock options. The guidance I'm giving you today does not include the impact of stock option expensing. If you want to get an approximation of what this expense may be, I suggest you review the footnote to the financial statements that has been provided in previous SEC filings.

Without stock option expense, we expect that our operating costs and expenses will be in the range of $35 to $38 million. Litigation spending is always the most difficult to predict because we do not control timelines 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 on this, we estimate that our litigation expenses will be in the range of $8 to $10 million, but this range is very dependent on what may happen in our ongoing litigation.

We are estimating net interest and other income to be between $3 and $3.5 million. The tax rate is likely to be in the range of 39 to 40% next quarter. We are unfortunately back in a scenario where the U.S. government has not renewed the R&D tax credit for next year, so we cannot count on that at this point in time. Finally, if our share price stays at the current level, we would expect fully diluted shares outstanding to be in the range of 110 million shares.

I would like to close with some comments on insider sales that have occurred recently. You may have noticed that John and I have both had sales in the last couple of weeks. These sales in January are based on 10b5-1 plans that were initially put in place in 2003 and updated in October of 2004. And these sales are made programmatically in accordance with preset price thresholds. These plans are largely in place to assure an orderly diversification of our holdings. We remain very motivated to help the Company realize its true market potential.

So now, John will make some comments on litigation.

Thank you, Bob. Rambus has made significant progress this quarter in protecting its intellectual property from unauthorized use. Although risks remain in any litigation, we're every pleased with where we now stand. I will update you on key results this past quarter and review the major items in our litigation timeline. Let me begin in Japan and Europe.

On December 9, 2005, we received a decision approving the issuance of our sixth patent in Japan. We believe our Japanese patents provide strong patent coverage for some of the same key DRAM features currently at issue in our ongoing U.S. cases.

In Europe, we also make good progress in expanding our patent protection. Last quarter, the European Patent Office approved another Rambus patent based on the initial European Farmwald/Horowitz filing by Rambus, which we did in 1991. This new patent issued on January 4 of this year. The new European patent and the European Patent Office decision supporting it represented significant departure from certain past rulings of the EPO.

The EPO has now upheld a Rambus patent as novel, even in light of prior [art] that in the past EPO had relied upon in revoking certain -- [that is] two -- Rambus patents. The newest EPO panel decision squarely confronted the earlier EPO panel's reasoning regarding this prior art and rejected it. We are very pleased with this result and my congratulations to the lawyers in Europe and on The Rambus staff who accomplished it.

Turning next to regulatory agencies, we have no update as to the EU's pending investigation of the DRAM cartel. It continues to be our understanding from press reports that price-fixing investigations against the DRAM industry are ongoing in Europe. The U.S. Department of Justice has also indicated publicly that its price-fixing investigation against the DRAM cartel is also ongoing still in United States.

We have no news with respect to the FTC case involving Rambus. We do not know when the FTC's decision, that's the decision from the full commission, will issue. But we continue to strongly believe that the Administrative Law Judge got it right by dismissing the FTC complaint against Rambus on multiple independent grounds.

For those of you in the audience who are new to Rambus, the ALJ's decision -- ALJ is Administrative Law Judge -- the ALJ's decision is on our website and is over 300 pages long. It followed a three-month 2003 trial conducted by the ALJ and remains a very good overview of key parts of Rambus history and its intellectual property position.

Moving now to private patent litigation in the United States, the ongoing Hynix patent case has been and is a key inflection point for Rambus. It is our first opportunity to present any of our patent claims to a jury using claim constructions that reflect the federal circuit claim constructions we won in 2003 as part of our Infineon appeal.

The Hynix trial has been structured by the court to be tried in three separate hearings. The first was a bench trial from October 17 to November 2 to consider Hynix's claims -- really, its defenses -- that Rambus had unclean hands and had committed document spoliation. On January 4, the Northern District of California issued its 42-page opinion rejecting these allegations and denying Hynix's motion to dismiss our patent claims. This January 4 decision is available both on Rambus' and the court's website.

Judge White, the judge in the Hynix case, Judge White's January 4 decision reflects documents and testimony not previously considered by any court. Nevertheless, it does essentially echo the earlier conclusion of the Federal Trade Commission ALJ that no material Rambus documents are missing. Our belief is that the analysis and factual discussion of the January 4 decision in the Hynix case should prove to be definitive. Although of course, neither is formally binding on other courts and we fully expect that other parties will continue to try to litigate this issue.

The second phase of the Hynix trial is scheduled to begin on March 6 of this year and will include patent issues of infringement, validity, and damages. This phase will address 10 claims from six of Rambus' patents. Of these 10 claims set for trial, which are by the way a subset of the 59 claims that are in the case, the court has ruled previously in Rambus' favor on summary judgment that Hynix's DRAM products do indeed infringe two of these 10 claims. So as to those two claims, we don't need to prove infringement anymore to the jury.

The March 6 jury trial will have to decide infringement as to the other eight claims. The March 6 jury will also have to decide whether Hynix has proven by clear and convincing evidence that the six Rambus patent at issue in that trial are invalid. We do not believe Hynix will carry its burden of proof as to invalidity as to the six patents and we very much look forward to the March 6 trial.

After the March trial, there will be -- there may be a third phase in June to address the antitrust, unfair competition and fraud issues that Hynix has asserted as defenses. We expect fairly soon to file motions for summary adjudication seeking dismissal of some or all of these claims before the third phase trial. We do not, in any event, believe that these third phase claims by Hynix materially detract from the value of our patent or antitrust claims against Hynix.

In addition to this Hynix case Judge White of the Northern District of California also has two other Rambus cases currently before him, the DDR2 case against Hynix, Nanya and Samsung, and also the SDRAM DDR case against Samsung. Now that we have the result of the Hynix unclean hands trial, we expect that those other cases may become more active.

Other U.S. patent litigation currently pending involves Samsung and Micron. As to that other U.S. patent litigation, there are no trial dates currently scheduled, but there was one important event last week that we've been waiting for for a long time. On January 13, 2006, Judge Jordan of the District Court of Delaware granted Rambus' motion to set aside a stay that had prevented Rambus from asserting or litigating its patent rights against Micron in any other courts.

After the Delaware stay was lifted, Rambus filed suit against Micron in the Northern District of California on January 13th. That new suit against Micron asserts 18 patents against DDR2 and various graphics and DDR parts, and brings the patent claims and products at issue in the Micron cases roughly in line with the patent claims and products at issue against the other defendants. In other words, it brings into the cases against Micron patents that [have] issued to Rambus in the past four years and new products that Micron has brought out that we contend continue to infringe more of our IP.

The newly filed Micron suit, like the earlier Samsung and DDR to suits, also assert Rambus patents with priority dates from 1995 and 1997, not simply the Farmwald/Horowitz patents with priority dates in 1990.

As to our other cases with Samsung outside of California, there remains one key threshold issue for the Virginia court to decide. That is whether it has jurisdiction to decide whether the Samsung case merits an award of attorney's fees against Rambus. That jurisdictional issue in Virginia, which is prerequisite to the consideration of any other issues in Virginia, is set for hearing on February 21 of this year.

That February 21 day is a continuation of a hearing date that had been set for today. It was moved for the convenience of counsel. Rambus believes that the Virginia court no longer has jurisdiction to reach the attorney's fees issue. Rambus further believes that even if the Virginia court were to reach that issue, no attorney's fees are due for a number of reasons, including that Samsung was not a prevailing party in its case and that Rambus' good faith in asserting counterclaims against Samsung is made clear by the recent decisions from the Hynix case. Including the Collateral Estoppel ruling last summer and the Hynix decision last week rejecting claims of spoliation and unclean hands.

Finally, I would like to turn to Rambus' antitrust case in San Francisco state court which is against Micron, Hynix, and Samsung. On October 31, 2005, the San Francisco state court denied Samsung's motion to [compel] arbitration, as it had previously denied Hynix's similar motion. In both cases, the court relied on its discretion to avoid multiple conflicting results, and we believe that is a very strong basis for its decision.

Hynix has filed a notice of appeal and Samsung has indicated that it intends to appeal also. We expect resolution of these appeals in 2006. We believe the appeals are likely to be rejected, with Samsung and Hynix having the arbitration request denied and with the trial set reasonably promptly thereafter. In the meantime, there is not an automatic stay in place in the state court action as to Hynix and Samsung, but not as to Micron.

On another front in the state court action, the San Francisco court has scheduled for a February 23, 2006 hearing on the issue of whether and to what extent certain DRAM price-fixing documents can remain confidential under the existing protective order. In the past, various news services have supported our efforts to make certain of these documents public. We hope that that will be the outcome in February. We look forward to having some of the price-fixing documents see the light of day, as we do not believe that any of them merits the trade secrets status that the defendants have assigned to them.

In another related development, on November 30, 2005, Samsung plead guilty to DRAM price-fixing, including specifically fixing the price of Rambus DRAM which we called RDRAM. I'm sorry -- which we call RDRAM. Between January 1, 2001, and January 15th 2002. Those -- our DRAM price-fixing dates, which Samsung has now admitted to, correspond to the time period when we contend Rambus' RDRAM product was pushed out of the market for computer main memory.

We believe the Samsung plea agreement and its guilty plea -- and its confession will be very helpful to us in our antitrust case against Samsung and its admitted co-conspirators. All told, the DRAM companies have now collectively agreed to pay fines totaling $646 million, the second-largest amount in the Department of Justice's history.

While Samsung has so far refused to make its DOJ price-fixing documents available to us, we believe will get them in time. And we believe that in any event, we can show through the documents of other cartel members that a key aim of the DRAM price-fixing conspiracy was to push the Rambus RDRAM price-fixing from the market for computer main memory, which we believe is exactly what occurred in 2001 and 2002.

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

Great. Thanks, John. So operator, we're now ready to take questions. And when we get a chance, we'll also respond to one of the questions that has been sent in to us by a shareholder.

Certainly, sir. (OPERATOR INSTRUCTIONS). Daniel Amir, WR Hambrecht.

Congratulations on a good quarter. I have a few questions here. First of all, Bob, a bit on the March guidance -- just to clarify, does this include already the payment from AMD or does not?

This includes the payment from AMD. As you can see, contract revenue is going to be down a bit next quarter, which we anticipated as a result of the Sony program.

So is that -- considering many of your revenues are usually recorded kind of in a rear-view mirror I guess, and Q4 is considered a seasonally strong quarter, is the major reason -- is this the Sony -- is this largely related to the Sony issue? Or is there something else going on?

Well there are other offsets with other agreements as well, but one of the things we clearly can point to is the change in the Sony contract revenue.

Okay. And is this something that we should expect to continue on into Q2? Or is this more of a Q1 issue?

Well, I think we're going to stick to our policy of giving guidance for one quarter out. I think on the contract revenue side, I think you can expect that to be fairly consistent. The reality is the Sony program was a three-year program and we finished the bulk of that work at this point.

Okay. Now, as we go -- I think -- Harold, you mentioned a bit -- companies are currently trying to negotiate long-term licensing deals. Is this -- is there any update there? What is going on? Why is it taking so long I guess to renew some of these licenses even though you have these interim license agreements? What's the obstacle there?

Well I think -- the good news was we have several to get done, and rather than have them expire, we jointly elected to do a continuance. And as I said, I am highly confident that we will sign them. We also were beginning a much broader licensing program, as I mentioned, one result of which is the AMD deal. And we have several others that are under discussion now, and to a certain extent, we had just a block of getting everything done.

So this is more of a bandwidth issue I guess?

It was. I think we have structured ourselves in a way that we can get more done.

Okay, so you're not concerned in any way that these two interim agreements are something that will collapse?

No, I'm not.

Okay. Now with regarding to -- you highlighted a bit in your remarks a bit about the PlayStation 3. Can you give us some sort of idea -- when do you expect this to be something that will meaningfully contribute to your business, or indications of what type the impact that could happen when Sony starts shipping this product?

Not if we want to stay in Sony's good graces, obviously. But the deal does contemplate our receiving royalties, and I think Bob can give you some insight into those amounts per unit. But obviously, we are not going to announce someone else's product here.

Yes, and we actually have not given per unit guidance at this point. I think we've always said we'll wait until it becomes a real event. And like Harold said, we're looking to Sony to announce when the product is going to launch.

So I guess from an -- the way to look at it is this will be a quarter after? So if Sony hypothetically releases this in Q3 let's say, then this would more show up in your Q4 numbers? Is that a way to look at it?

Well, let's talk about the two different pieces. The XDR DRAM will probably come in about the time the product ships, because they -- just the way the supply chain works, they are going to have to have the product -- the DRAM in order to build the product. We also get royalties from Sony as the product ships for the memory controller and for the interfaces that are in the system. And those are likely to be about a quarter after the shipment takes place.

Okay. Now, all right, one other question I have is related to traction with XDR. Can you comment a bit -- what you're seeing in the marketplace? I guess last quarter you were saying that you're definitely seeing more and more traction. Can you comment where -- here a quarter later, what you're seeing in the market?

Not beyond generalities. Obviously, we would like to work with as many companies as possible on XDR. And in process of negotiating patent licenses, one of the things that we talk about is how effective XDR might be as an addition to someone's current product, but let's wait until we sign deals to be more specific on that.

There is one significant deal with signs that we can't talk about yet. And I think we talked about that last quarter.

We signed last quarter a deal with a consumer application. The product is not ready yet. And obviously we can't announce a customer's product, as much as we would like to.

Is this something that in 2006 will be releasing this product?

I am thinking late 2006.

All right. Thank you.

Michael Cohen, Pacific American Securities.

When we try to get a handle on the valuation of most companies, we have information about the price of their products. With your intellectual property business model, it becomes a little difficult. And I tend to hear estimates from my clients that range all over the place. Accordingly, it would seem appropriate to give us some sort of guidance as to the royalty rates that you are seeking with regard to DDR and I was wondering if you could do that.

Hi, Mike. It's John Danforth. As you know, we're in the middle of negotiations here, there, and everywhere and it would not be in the best interests of the Company to start disclosing rates. You have a pretty good sense of where they've been historically just from the FTC record which I know you have studied, and that is where I would refer you.

And would you say that the negotiations that you're having are at least in the area of those historical rates, or can you give us any sort of feel?

I really don't want to say one way or the other.

Okay. Harold, when you talked about these settlement efforts, you classified them actually as ongoing. And you said there's three of them. The recent ones that I'm aware of was the one with Samsung back in Chicago in mid-November -- sorry, mid-December. Last week, there was the one with the antitrust participants. I believe that was at Hynix's law firm. And then there was the one that ended last night with them Samsung, Hynix, and Nanya. Are there any others? And is it correct to kind of classify these as ongoing as opposed to recent?

Yes, it's correct to call them ongoing.

And all three you would characterize as ongoing?

Well, I would say they have varying degrees of ongoing-ness, but yes, I would call all three of them ongoing.

And the three that I just mentioned are the same three Harold was referring to in his comments?

Those are the three. Correct.

Okay. My next question is your AMD license included integrated -- or really was about integrated memory controllers, and you haven't had many suits that really focused on memory controllers yet. I was wondering if you could give us your thoughts in terms of the infringing products on the other side of the channel and then -- (multiple speakers) and what your thoughts are. Would their licensing fees be similar to memory products? Would you be expecting slightly lower than memory products? Any guidance you could give us there.

I think that we do not want to start listing the people with whom we are having discussions right now. I don't think that's productive. I think you do have some data, again from a historical record, as to what we have sought and what we have obtained by way of controller licenses. You got a data point very recently with AMD. So I would kind of point you in that direction and beg off more details at this point.

Okay, and you just classified it as with whom we are having discussions with. Has the AMD thing sort of renewed memory control -- I should say the manufacturer to memory controllers' interest in obtaining a license?

Well, we don't know what their interest is, but I think it's an appropriate thing for people to pay attention to who are on the controller side of the interface.

Got it. Thank you.

(multiple speakers) [We have been] talking about that now for a few conference calls, is the prospects looked better and the first solid example of our efforts very well done by members of the licensing and sales team was the AMD deal.

Okay. Yes, most of the people I talk with, they tend to focus on the memory side, and they are not even really focused on the other side of the interface.

As I said in my remarks, we believe that our technology can improve dramatically the performance of memory controllers, especially when looked at -- viewed at the system level. And in that regard, our sales approach is slightly different. And we apologize for not being able to disclose all of these rates, but bear with us. We're in the middle of both complicated negotiations and obviously litigation, and from personal experience, I know that anything I say it is played back to me.

Okay. And I look forward to the day when we can find out with those rates are. Thank you very much.

(OPERATOR INSTRUCTIONS). Mike Crawford, Barrington Partners.

Thanks. First question is could you provide any further detail on which aspects of your IP are required for NAND controllers?

This is for flash controllers?

Yes.

Well, it's high-speed interface patents. Beyond that, I don't know if we have been more specific.

Okay. And then this is more of a -- I think a question for John. In the antitrust case, let's just say a jury determines the damage to Rambus is X amount and some defendants previously settled for, say, some amount less amount, Y. If there was only one party left standing, would they be liable for X, or would it be X minus Y?

This is an important question. They would be liable for -- if we bring the antitrust case against only one remaining conspirator and the others have settled out, right? The last conspirator is responsible for the total damage caused by the entire conspiracy. And the only offset is what we actually recover. And so the last guy standing could face a very significant dollar amount, even if he was a latecomer to the conspiracy.

So just to put that into numbers, let's say if they said that the damage was 1 and everyone else had settled for 0.2, then the remaining guy would be liable for 0.8? Is that --?

Yes, that's true, but -- and the other way it works is this, if the actual damages to Rambus was 1 billion, say. Just use that number. And we got 0.2 billion from everybody else, my understanding of the law, and I haven't researched this recently because frankly the numbers are big enough so -- I'm comfortable with the level of understanding I have. My understanding is what you do is you take the 0.2 and you subtract it not from the one, but from one [trebled]. So the damage award we would get would be $3 billion minus 0.2.

Okay. Yes, that would be -- I would hate to be the last guy standing when the music stops.

It would be a bad day.

We've got a minute here. Harold, I'll ask you the question we got in over the Internet. Can you further explain the AMD deal? Is it a flat rate or based on units shipped?

Well, as we disclosed, it is a flat rate, but exactly how it's calculated we prefer it remained confidential. And as I said in my remarks, it's just the first part of the deal. We're looking forward to working with AMD on technology deals to produce wonderful products.

Great. Well, at this point, I don't think we have any more questions, so I want to thank everybody for joining us today. We appreciate your ongoing interest in Rambus and we are very excited to get going in 2006.

This does conclude today's conference call. We do thank you for your participation and have a great day.