Rambus Inc (RMBS) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to this Rambus first quarter 2006 conference call. Today's call is being recorded. At this time, I would like to turn the call over to Miss Nicole Noutsios. Please go ahead.

Thank you, operator, and welcome to Rambus' first quarter 2006 conference call. I'm Nicole Noutsios, Rambus' Investor Relations, and with me today are Harold Hughes, our President and CEO, Satish Rishi, our Chief Financial Officer, and John Danforth, our General Counsel. The press release for the results that will be 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 8412297 when you hear the prompt. In addition, we are also webcasting this call, and a replay can be accessed on our website beginning today at 5:00 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 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. Now, with that I'll turn the call over to Harold.

Thanks, Nicole, and good afternoon, everyone. I'm very happy to report another great quarter, turned in by the Rambus team. In Q1 we achieved all-time record revenues of $47.2 million, near the top end of our upwardly revised guidance. We've set a very strong pace for the year with this result. During the quarter, we announced important new patent agreements with AMD and Fujitsu. And we had, after many years of work, the opportunity to present a jury with our position regarding the validity and enforceability of our patents. Like you, we are eagerly awaiting their verdict. Individually, any of these accomplishments would have made for an outstanding quarter. Collectively, we believe they demonstrate the strength of Rambus' intellectual property and business model. As you recall, our business model is to invest in the development of leading edge chip interface technology, foundational to digital electronics across computing, communications and consumer applications. From that core technology, we have developed a world-class patent portfolio and a family of leading edge products, both according to our own leadership specifications and also in conformance with industry standard specifications.

The latest data point that we believe validates our IP position and business model, is the agreement we signed with Fujitsu. The Fujitsu agreement is a 5 year patent license whose value can range from 108 million to 198 million over the full term. Fujitsu's payments will vary on the percentage of Rambus license DRAM it purchases for use in Fujitsu system products. The more Rambus licensed DRAM Fujitsu buys as a percentage of total purchases, the lower its total payments under this license agreement.

The Fujitsu agreement illustrates 3 important factors about our business. First, like our $75 million patent agreement with AMD, the Fujitsu deal is another demonstration of the enormous revenue opportunity we have outside of the DRAM market. The [tamfer] semiconductor products, which use Rambus technology and memory controllers and high speed logic interfaces, is in excess of of $100 billion, and we have many companies left to sign yet.

Second, Fujitsu is our first system level patent license agreement. Because our technology addresses the increasingly critical high speed interfaces between chips, the greatest value contribution of Rambus technology has always been at the system level. This was amply demonstrated in the performance of the PlayStation 2, which has sold over 100 million units worldwide, and continues to sell strongly. Rambus' contribution to system performance will be further demonstrated in the groundbreaking performance of the highly anticipated PlayStation 3, slated for introduction later this year. Like the opportunity in semiconductors, the licensing opportunities in systems is great. Our technology is truly foundational in digital electronics, and the relevant TAM for electronic systems using Rambus patented innovations exceeds $1.5 trillion.

The third element, demonstrated by the Fujitsu agreement, is our desire to align our strategic goals with those of our patent licensees, both at the system and chip level. I've already mentioned that the Fujitsu deal contains significant incentives for Fujitsu to purchase Rambus licensed DRAM. On the flip side, our DRAM licensees should be increasingly well positioned to win more business as we increase the number of system license agreements with terms such as Fujitsu's. Rambus, our system customers, and our DRAM licensees are therefore all aligned in the goal of moving the industry to Rambus licensed memory solutions.

Thanks in large part to the contributions of our patent licenses, revenues from AMD and Fujitsu, we delivered all-time record quarterly revenue of $47.2 million this quarter. That's outstanding market validation of the value of our technology. We think that, with these deals, we have developed strong momentum for our licensing program. And we have negotiations ongoing with a number of companies. Another key part of our business strategy is to develop technology -- is to deliver technology to our customers that helps them differentiate their products and win in the marketplace.

In Q1, we signed an agreement with IBM for our XDR memory interface and FlexIO processor bus for cell processors and companion chips. These chips enable Rambus technology, are slated for consumer uses and high performance client server applications. We believe our interface solutions help unleash the tremendous power of cell, which is slated to enable breakthrough performance across a broad range of products.

Now, before I turn -- now, before we turn to detailed discussions of the quarterly financial results, I want to cite one more recent significant accomplishment; namely, hiring Satish Rishi as our new Chief Financial Officer. As a reminder, our former CFO, Bob Eulau, resigned in February to pursue another opportunity. Satish and I have worked together in the past at Intel, and we are pleased to have him join the Rambus team, and I'm certainly pleased to go back to just 1 job. Satish will now give us details on the financial results for the quarter. Satish.

Thank you, Harold. It's great to have joined a Company with such tremendous positive momentum, and such a great history of value creation for customers and for the industry. I've only been here for a week, but I'm already extremely impressed with the energy and drive my Rambus colleagues bring to their jobs. I'm looking forward to making a contribution to helping Rambus realize the tremendous future that lies ahead.

Now, let me give you some more details on the Q1 financial results. As Harold mentioned, we achieved record revenue for the first quarter, topping our fourth quarter record results. Total revenues of $47.2 million for the first quarter were up 19% over the first quarter of 2005. Operating income, excluding stock-based compensation as calculated for the provisions of FAS 123R, increased by 61% over the first quarter of 2005. Net income, excluding stock-based compensation, increased by 58% over the first quarter of last year.

Now, I'll give you some additional information on revenue. As I mentioned, total revenue was a record $47.2 million, total royalties for the quarter were $41.7 million, up 26% over the first quarter of last year, and up 20% sequentially. Most of the increase is due to royalties as a result of the Fujitsu and AMD agreements. With regard to costs and expenses, total costs and expenses, excluding stock-based compensation for the first quarter were $39.3 million. This was up 13% from the first quarter a year ago, or $4.6 million, and up 15%, or $5.1 million from the previous quarter. Cost of litigation was down by $2.7 million compared to the first quarter of 2005, and up by $200,000 on a sequential basis. The year-over-year decrease in litigation expenses reflects, among other things, the expenses associated with the Infineon settlement in Q1 '05, offset in part by the increased costs associated with Hynix and Samsung litigations.

Operating expenses, excluding cost of litigation and stock-based compensation, were up 31% when compared to the first quarter of 2005, and up 19% compared to the last quarter. The increase in non-litigation operating expenses over the first quarter of last year was largely attributable to increased worldwide investment of the engineering area, including our U.S. and Bangalore, India, design centers. The increase in expense in the marketing and general and admin areas was due to employee-related cost and continued infrastructure investments to support growth. In addition, there was approximately $1.6 million of incremental employer payroll tax expense associated with the exercise of stock options in the first quarter of 2006.

Net income for the first quarter, excluding stock-based compensation, was $7 million compared to $4.4 million in the first quarter last year, and $9.4 million in the previous quarter. The decline in net income over the previous quarter was primarily due to a net gain of approximately $3.2 million from the repurchase of a convertible note that occurred during the previous quarter. Our cash equivalents, short and long term marketable securities, ended the fourth quarter at $391 million versus $355 million as of December, 2005. Our cash, cash equivalents, short and long term marketable securities were up $35 million from the last quarter primarily due to cash from stock option exercises and operating cash flow, offset in part by cash used to repurchase stock.

Now we'll give you some thoughts on what to expect in the second quarter of 2006. This guidance reflects a reasonable estimate, and our actual results could differ materially from what I'm about to review. We expect that Q2 revenue will be between $48 million and $51 million. Without stock option expense, we expect that our operating costs and expenses will be in the range of $39 million to $42 million, and our current estimate for stock option expenses is in the range of $8 million to $9 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 causes us to incur additional expenses in any particular quarter. Evidence as produced in hearings can also cause us to change our plans . Based upon this, we estimate our litigation expenses will be in the range of $8 million to $9 million, but again this figure is very dependent on what may happen in our ongoing litigation. We are estimating net interest and our other income to be between $3.5 million to $4.5 million, and the tax rate is likely to be in the range of 39 to 40% next quarter. So, with that, I'll turn the call over to John to provide an update on litigation. John?

Thank you, Satish. It's good to see you, and welcome. Well, I guess the bad news is that I'm here for this conference call, rather than sitting in San Jose listening to a jury verdict. And the good news is that because there is not yet a jury verdict, I get to skip the first 5 pages of my prepared remarks. We, after the patent trial, have a number of other matters that are progressing, and I want to cover those with you. I want to talk first about the Hynix case, and what remains of it after the patent case. There is a phase 3 of the patent case, sometimes called the conduct phase, which addresses various Hynix counterclaims. It's currently expected to be tried this summer. Those of you who followed this in the past may recall that we had a May 15th date for that trial. It's pretty clear that the judge will push that date out to some time later in the summer.

The Hynix counterclaims in that phase include challenges to the enforceability of Rambus patents and allegations that Rambus somehow defamed DDR, or SDRAM, or otherwise impeded the market adoption of DDR. In March we argued a number of summary judgment motions that we had filed earlier in the year, addressing this third phase. Those motions would, we believe, significantly reduce the scope of the third phase trial. We do not know yet when those motions will be decided. But in open court, the court has indicated that it is mindful of both parties needs to plan their resources and structure the trial based on how those motions are resolved, so we hope to get decisions on the summary judgment motions in the relatively near future.

Also, in the Northern District of California, we have other pending patent cases against Micron, Samsung, Nanya, and Hynix, relating to a variety of memory products and technologies. Those cases have not yet been set for trial. In Delaware, we are on track for a phase 1 unclean hands trial currently set for October. The discovery cutoff for that trial is currently July 31.

In the Eastern District of Virginia, we have only 1 remaining live case of the 3 that were in that court when I last spoke with you, which was in Q4. One of those cases, the Micron/RICO racketeering case was enjoined, or rather, Micron was enjoined from pursuing that case. And that injunction was issued pursuant to a motion we made in Delaware, pointing out that Micron was engaging in claim splitting and forum shopping by filing that Virginia case. We anticipate that Micron will seek to have that case now transferred to Delaware, or try to amend it's Delaware complaint. And the second case in Virginia, is the TRLabs case. That case has now been transferred to California, following our successful challenge to venue. That case also has pending against it our motion to dismiss. But there's not been yet a ruling on the motion to dismiss, and we would assume that the motion will be decided by the California court when the case arrives here. It's, I believe, going to be sent to the same court ultimately, as our other pending Northern District cases, but that hasn't yet been decided.

Which means that there's only 1 case in Virginia remaining that has any potential significance, in my view. That's the Samsung Case, which you'll recall was filed shortly after we filed a lawsuit against Samsung in California. In that Samsung case, there remain no patents at issue, that is in the Virginia case there are still patents at issue in California. But there are no patents at issue in that case, and that Virginia case has been reduced to an attorneys fees motion that Samsung made. Although the court in Virginia may decide otherwise, we believe that we've established that the Virginia court no longer has jurisdiction over that Samsung case, that it has no records sufficient to decide the attorneys fees issue, and that in any event, there is no factual or legal basis that would support an award of fees. We do not know when this 1 remaining motion in Virginia will be decided. It's been fully briefed.

Finally, I want to address the major upcoming events in the San Francisco anti-trust case. You may have seen that we have further disclosure about that case in our latest Q. That anti-trust case is not yet set for trial, and won't be set until 2 defendants have a chance to appeal the denial of their request to compel arbitration. Such appeals in California are supposed to be expedited. In the meantime, 3 events merit attention: First, there is a group of documents, approximately 12 internal e-mails from Hynix and Micron, that were previously marked confidential, that relate to communications among competitors, and that we expect to be able to provide to the FTC and otherwise make public in the next months or so.

One more round of briefing about these documents will be completed in about 6 days. After that, defendants will have a chance to take a writ to an appellate court. But if, within 20 days, that appellate court declines to issue what the trial court has characterized as a "gag order", then the documents in question will become available. We believe neither the trial nor the appellate court is likely to issue such a gag order. And so these documents may be available as early as May 15th. We believe, as we indicated in our opposition to the Samsung demur, that we filed with these documents under seal last year - actually there's a redacted version which is still available of that demur opposition - that these documents are highly supportive of the allegations of our anti-trust complaint.

Second, as to the anti-trust case, the court in that case has indicated that certain discovery will go forward, pending the resolution of the arbitration issue. For example, the court has indicated it will order Samsung to produce to us all documents that Samsung provided to the Department of Justice, or to the DRAM class action plaintiffs in connection with the DRAM price fixing conspiracy to which Samsung has plead guilty. In indicating its intended ruling, and we do expect an order shortly, the state court in the anti-trust matter rejected an argument by the defendants, that documents relevant to the admitted 1999 to 2002 DRAM price fixing should not be relevant or discoverable in our case. The court indicated they were all discoverable.

And finally, thirdly, with respect to the timing of the trial for the anti-trust case, we do not know when it will be set, but that will depend to a significant extent on how quickly the appellate court can finish its work on the arbitration issue. As I said a moment ago, that issue is to be decided on an expedited basis; however, briefing on that issue, although it's begun, may not conclude until as late as late summer or early September. Thank you. I now wish to hand the floor back to Harold -- to Satish for questions.

Thanks, John. Operator, we are ready for the Q&A.

Thank you. [OPERATOR INSTRUCTIONS] Michael Cohen, Pacific American Securities.

I'm actually at the courthouse in San Jose. The question I have, is you mentioned about the systems level license, the first one being Fujitsu, and you said about a $1.5 trillion TAM. I was wondering if you could give us what I guess the criteria of what we should think a system would have to qualify for the need of a license. Is it anything that uses DRAM or a controller?

Well, I thought that number might catch your attention, yes. I mean, it looks obviously, with PCs, consumer items, that goes on to medical, mobile phones, test measurement, all the way to automotive. I mean, all of these markets need DRAM and memory controllers. And we believe it likely that they will use Rambus technology. The sum total of those markets is a relatively staggering $1.5 trillion.

So I should think of anything that either had the controller or DRAM or both in it, would be subject to needing a license?

Yes. And Tim Messegee, in our marketing department, can get you far more detail on it, if you're interested all of the specifics.

I definitely am. And my next question is for John.

Yes.

In the conduct phase of the trial, and I realize this question is subject to motions in limine, do you think or have any opinion whether evidence of price fixing would be admissible or non-admissible?

I really don't want to speculate about that, because -- can you hear me, Michael?

Yes, I can.

You probably saw during even the patent case, that there were a number of instances in the patent case where, although there was a motion in limine that we were not to tell the jury about the evidence we had of price fixing by Hynix and others, there were a number of instances where we thought that Hynix had clearly opened the door, and that we would -- we should have a right to tell the jury that information. So it's hard to kind of guess ahead of time what will or won't be relevant during the conduct phase.

So you -- do you imagine they will likely file a motion in limine to keep it out?

Well, I think I would if I were them.

Okay. That answers my question. Thank you.

Daniel Amir, WR Hambrecht + Co.

Hi, this is Betsy Van Hees calling in for Daniel. I have a couple of questions. Could you comment a little more on the IBM deal and let us know when this is going to become material?

I can't comment on the dollars involved. It's just -- it was a relationship that obviously had existed previously under the Sony Toshiba IBM relationship, the purpose of which was to build PlayStation 3. But IBM was in need of a direct license as they took that product into different markets. And that's what we concluded. [inaudible] last quarter.

Okay. Great. Can you comment a little bit about the RDRAM market and let us know how that's going right now? Are you seeing any new applications adopting it?

RDRAM? I don't think so, ma'am. We still receive royalties from RDRAM, but I think they are dwindling. I don't have the number off the top of my head.

Okay. Do you plan to -- ?

We have other wonderful products to replace it.

I know. You guys do. Do you plan to continue to do any buyback of shares?

We have a Board approval to buyback a significant number of shares, and based upon Satish's ideas and my ideas, we'll continue to do that.

Okay, and that's going to be -- can you give us like any idea in terms of the quarter and the timing?

No. No. I think that like every item on the balance sheet, we try to manage it as expertly as possible. So we'll try to find timing that makes the most sense for our overall shareholders.

Thank you very much.

[OPERATOR INSTRUCTIONS] Mike Crawford, Barrington Partners.

Thanks, I wanted to go back to these 12 documents, these e-mails from -- between Hynix and Micron. It's my understanding that those have been now made available to the Board of Directors. Is that correct?

It's not entirely correct. The Board is able to see them if they want. They would have to sign a protective order and -- but I've seen them.

I've seen them.

Okay. So the second half of that question is, after seeing them, has the Board, or maybe you, conveyed any difference in perception of your case after seeing these for the first time?

I think the best way between now and say, May 15th, when these documents -- that's probably the earliest when they become public. But between now and then, I think the best way for you to assess what these documents mean, is to go back and look at the redacted version of the opposition we filed in state court to the Samsung demurrer. Because if you read that, you'll see what's been redacted out, but you'll also see the language leading up to it, which shows you the context. And shows you, to some extent, what we think these documents establish. These are documents that we think support the allegations of our complaint quite well.

Okay, great. And then a final question relates to -- well, could you just reiterate what Rambus innovations you believe are relevant to NAN-Flash?

To NAN-Flash right now?

Uh-huh.

Not significant innovations. We have -- we have IO patents and technology that affects synchronous NOR Flash. But as I've said, NAN-Flash has a certain capacity limit right now. And if that limit is increased, the number of pins won't increase at a rate commensurate rate. And eventually, the interface will have to run at a speed which we believe will have bearing on our patents.

Okay, great. Thank you.

All right. We would like to thank everyone for your questions today, and your continued interest in Rambus. We are looking forward to a very exciting 2006. Thank you.

Ladies and gentlemen, this does conclude today's conference. At this time, I'd like to thank you for your participation. You may disconnect at this time. Thank you, and have a great day.