Rambus Inc (RMBS) 2006 Q3 法說會逐字稿

Good day everyone, and welcome to this Rambus third quarter 2006 conference call. [OPERATOR INSTRUCTIONS] At this time, I would like the turn the conference over to Mr. Satish Rishi. Please go ahead, sir.

Thank you, operator. And welcome to the Rambus third quarter 2006 conference call. I'm Satish Rishi, Chief Financial Officer. And with me today are Harold Hughes, our President and CEO; Bob Kramer, our Acting General Counsel; and Sharon Holt, Senior VP of Sales and Marketing. 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 also 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 5624274 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 5:00 p.m. Pacific Time.

Before we begin, I need to advise that you 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-K's, 10-Q's and 10-K's and these forward-looking statements could differ materially from our actual results. Now, I'll turn the call over to Harold. Harold?

Thanks, Satish. Good afternoon, everyone. In Q3, we delivered revenues that exceeded the guidance we provided in our last call delivering $45.9 million in revenues. This result is particularly significant, given that last quarter we received our last payment under the Intel agreement. Even without the $10 million quarterly Intel payment, we still turned in one of our best quarters ever and 28% growth over the year-ago quarter.

I'm really proud of how our team rallied to make the quarter a success. As we've said before, the key to delivering successful revenue growth is signing new licensing deals and helping our customers deliver great products. In Q3, we signed a new technology licensing deal with Toshiba, which allows them access to the XDR memory controller cell. Toshiba will implement the XDR controller in its 65 nanometer for its own applications, as well as making it available to their ASIC customers. The XDR memory architecture is seeing increased traction for a growing number of digital consumer electronics products. And we'll be able to talk about those when those products are introduced.

The flagship product for XDR is, of course, Sony's next-generation game console, the Playstation 3, set to launch in November. Elpida, one of our leading DRAM customers, announced in Q3 that it had begun shipping XDR DRAM in high volume for the PS3. Three years after we officially unveiled the XDR memory architecture, we're very excited to see it a part of the highly anticipated Playstation 3. This validation of our business model and of the superior products and technology that our engineers and scientists invent years ahead of market adoption.

Not only are we seeing adoption of our memory interface technologies but our logic interfaces designs as well. In addition to XDR controller, Toshiba also licensed our PCI express interface cell. We developed industry standard interface solutions in support of our core customers' high-speed interface needs. And given the number of fundamental Rambus inventions incorporated in these standards, we believe we can implement them better than anyone else.

We recently announced our design for the second generation of the PCI express interface at Intel's fall developer forum, and demonstrated it with a silicon implementation. The core of our business model, as you know, is our patented products. I've touched on the recent progress we've made on the product front and now I'd like to spend a few moments on our patent portfolio. In Q3, we surpassed a 1,000 total patents, with 539 issued and 479 pending.

Among the many inventions for which we were issued a patent during this quarter, is one for Transmit Pre-Emphasis, a key means of ensuring signal integrity in high-speed serial links such as PCI express. We also received a patent for our invention enabling wholly buffered DIMM's. Fully buffered DIMM's allow for a large memory capacities in servers and workstations. I'm both impressed and proud with the ability of our engineering team to create world-class technologies for our customers. And speaking of world-class engineering talent, I'm also pleased to say that both of our founders are back working at Rambus.

Both Mark Horowitz and Mike Farmwald are brilliant technologists who have agreed to dedicate time collaborating with our engineering teams to continue developing some of the world's most advanced technologies. Through the the years, Rambus has always had a tremendous impact on the industry and given this and the challenging work done here, we have the ability to attract some of the industry's best and brightest. Last week announced that Dr.Gary Bronner had joined Rambus to serve as Technical Director. Prior to Rambus, Gary had a distinguished 21-year career at IBM and we're happy to have this renowned memory expert at Rambus to help design world-class solutions for our customers. With regard to our Board of Directors, last week we developed Dave Shrigley to the Board. Dave and I know each other from our Intel days and we're happy to have the benefit of Dave's experience and insight as we work to advance our business strategies. Dave will also serve on the Compensation Committee.

We announced in a press release earlier today an update to our independent stock option investigation. The Audit Committee and the investigators have made significant progress, given that they had to examine 1.5 million e-mails and other documents covering over 200 stock option granting actions. This obviously takes time and the investigation is proceeding with due diligence. Our preliminary estimate is that the pretax, noncash, stock-based compensation charge in connection with these stock option grants will be in excess of $200 million.

I want to emphasize this estimate is preliminary. The Board has also formed a special Litigation Committee consisting of Tom Bentley and retired judge, Abe Sofaer. The special Litigation Committee has the charter to evaluate potential claims and other possible and necessary actions necessary from the stock option granting activities. Satish will provide more details on the results of the investigation in his section of the call. I've spent many years of my career at a very well-controlled Company. I and my team are committed to bringing the same level of business control and operational excellence to Rambus as is the hallmark at Intel.

I again apologize to our shareholders and promise both to resolve these issues as quickly and fairly as possible to take actions to insure they never happen again. In closing, I'm very proud of the work that the team put forward in delivering Q3 results. While we have challenges to overcome, our technologies continue to gain traction in the marketplace and our team remains focused on delivering on promises we've made to our customers. And with that, I'll turn it over to Satish to review financials and to talk further about the investigation. Satish?

Thank you, Harold. Due to the ongoing investigation of historical option granting practices, I will not be discussing our full financial results for the quarter. Some of the expense items will change when we restate our financials. I'll confine my remarks to revenue and cash balances, give you an update on the investigation and provide revenue guidance for the fourth quarter.

As Harold mentioned, we completed recognizing revenue associated with the Intel patent cross-license agreement during the second quarter. For that reason and given the uncertainties surrounding the current environment in which we operate, I'm especially encouraged by the strong revenue results for the third quarter. Total revenues are $45.9 million or up 28% over the third quarter of 2005 and down 6% over the second quarter of this year. Most of the increase from the third quarter of 2005 was due to royalties such as the result of the [Jitsui] and the Infineon agreements, partially offset by lower royalties associated with Intel's patent cross-license agreements.

Cash and investments were at $421 million, an increase of $33 million over the same quarter a year ago and an increase of approximately $5 million over the last quarter. Regarding our stock option investigation, we announced that yesterday the Audit Committee reported its findings to the Board of Directors. Of the more than 200 stock option granting actions reviewed, a significant number of the stock option grants were not correctly dated or accounted for. A majority of incorrectly dated grants occurred between 1998 and 2001.

Between 1998 and 2001m for a substantial number of annual and special grants, the grant dates used differed from the actual measurement dates. The majority of the noncash compensation expense associated with the financial restatements will relate to grants on about five grant dates within this time period. In addition, the Audit Committee also found that during the period from 1999 through 2003, Rambus had a regular practice for grants to new hires of selecting the lowest price of the quarter between the employee's start date and the end of the quarter.

We also had prestock option grants during 2003 and 2004 for which the price was set on the same date as the Board of Directors or a Compensation Committee meeting date, at which a pool of stock options was discussed and approved. But the individual allocation of the stock option pool had not been completed as of that date of those meetings. And consequently, were recorded an incorrect measurement date for those grants. Our preliminary estimate is that we would book a pretax noncash charge in excess of $200 million to account for the difference between the initial grant price and the grant date and the stock price and the correct measurement date. Depending on the vesting periods of the options with incorrect measurement dates, some of this charge could be reflected in current and future periods.

We have not yet determined the tax consequences that may result from these matters and it is possible the tax consequences could also result in cash charges, which may have to be satisfied in a future period. There could also be other additional charges which we have not yet estimated. We will be working with the independent auditors to finalize these charges and to file our restated financials.

As a part of the restatement process, we'll continue to develop and implement remedial measures to insure that in the future, proper procedures are followed with respect to awards of equity compensation. And as Harold said, not have this ever happen again. We met with the Listings Qualification Panel of NASDAQ on September 21, 2006 to request continued listing and an extension to December 19, 2006 to file a 10-Q for the quarter ended June 30, 2006. We have not yet received word from the Listings Qualifications Panel as to whether they granted our requested extension. We are making every effort to file a restated financial statement and delinquent quarterly reports as soon as practical.

We also announced that on September 8, 2006, we had received a notice of purported defaults from the trustee in reference to a Zero Coupon Note. The notice asserted that because we were delinquent in filing a 10-Q for the second quarter, we were in default. While we continue to question as whether we're in default under the terms of the indenture, if an event of default were to occur, the trustee or holder of at least 25% in aggregate principal amount of the notes could accelerate the notes and put the notes back to us at par. And we would be obligated to pay them the principal plus some additional interest. The notes have been trading above par for the past few weeks. With approximately $421 million in cash and investments, we feel that if the notes were put back to us, we have adequate financial resources to pay any unfit principal and any additional interest due on the notes. That being said, we continue to evaluate our options with respect to the notes.

Moving to guidance for the next quarter. I will limit my remarks to revenue guidance only and this guidance reflects our reasonable estimate and our actual results could differ materially from what I'm about to review. We expect that Q4 revenue will be between $44 and $47 million. Bob will now provide you with an update of the status of our litigation, Bob?

Good afternoon. A number of things have happened this quarter on Rambus' litigation. Let me update you by starting with the private patent cases. As of the last revenue call, we were gearing up for the third phase of the Hynix case. You may recall that on April 24 and the jury found that Hynix' SDRAM, DDR and DDR2 products infringed valid Rambus patents and awarded damages amounting to $307 million for products sold in the U.S. prior to 2006.

Following this decision, the court granted the motion, offering Rambus the option to take a reduced award $133.5 million instead of a new trial. Rambus accepted the remitter on July 27, which the court held was supported by applying a 1% royalty rate for SDRAM memory and 4.25% for DDR SDRAM memory, which was paid by a licensee in the year 2000. The court also applied the 4.25% royalty rate to Hynix' DDR2 products for the same time period.

Following the Federal Trade Commission's August 2 decision, which I'll get to in a few minutes, on August 22, the Hynix court conditionally stayed the case until the earlier of February 2, 2007 or the issuance of a final order of the FTC. The court noted two reasons for this stay. First, the potential for resolution of the case, once the FTC sets royalty rates on SDRAM and DDR. And second, to afford Hynix 90 days to try to establish the applicability of any of those findings from the FTC to this phase of the Hynix case. This stay was conditioned in part upon Hynix' agreement to post security adequate to cover the damages should Hynix fail to prevail in the third phase of the trial or on appeal.

Hynix has agreed to post a bond but the amount has not jet been finalized. Just this week, Hynix filed it brief, seeking to establish the applicability of the FTC's findings to the third phase of the Hynix trial. Rambus also filed a motion for reconsideration of the court's decision, suggesting that findings made by the FTC may be given an effect. For information on these briefs, they're available on our Website. A hearing on both these issues will be -- is scheduled now for July 12, 2007.

Hynix has also asked to court to certify for appellate review certain issues decided by the Hynix court in the first of two phases of the trial. The hearing on that motion has been scheduled for November 17. Depending on the trial schedule and Hynix's lead attorney, the third phase of the Hynix is scheduled to go forward either on March 19 or July 9 next year.

Turning to the Micron case. As of the last revenue call, Rambus was preparing for an October 21 trial in the first phase of that case, which Micron had brought in Delaware. On September 18, the Delaware court continued the trial to a later date. The court has since offered two trial dates, one in late January and the other in May. As of today, I don't believe the date has been set.

Moving on to the DDR2 group of cases. On October 6, Rambus, Samsung, Micron, Hynix and Nanya participated in a case management conference before Judge White for the three additional patent cases pending in that court in San Jose. These are two cases filed by Rambus related to DDR2 and subsequent graphics DDR manufactured by these parties, as well as a case against Samsung that related to SDRAM and DDR SDRAM products. These cases had been stayed by the court pending the conclusion of the third phase of the Hynix case mentioned earlier. And the defendants were moving in this management conference to continue the stay until after a judgment in the Hynix case and a final decision of the FTC. The court heard arguments from the parties and stated that it would issue an order shortly, followed by a chance for the parties to provide brief comments. We have not yet received an order from the court on this issue.

Let me move now to an update on our nonpatent cases. In the case filed by Rambus in 2004 related to what we believe was the joint boycott of Rambus' RDRAM products, you may recall that the San Francisco State Court had previously denied Samsung and Hynix' motions to compel arbitration. In both cases, the court relied on its discretion to avoid multiple conflicting results and we believe this is a very strong basis for its decision. Both Hynix and Samsung have filed appeals. The briefing on those appeals is complete and the parties await an appellate hearing. If the appellate hearing occurs mid-November, we believe it may be resolved late this or early next year. Meanwhile, discovery is ongoing on a number of matters and a case management conference is scheduled for December 11.

Moving to the U.S. Department of Justice investigation of price fixing in the DRAM industry. The only additional information I have for you came yesterday in the form of indictments of three DRAM company executives. Two from Samsung in Korea and a third from Hynix in the United States.

Finally, as you know, on August 2, the Federal Trade Commission issued a decision reversing the decision of its Chief Administrative Law Judge and holding that by attempting to draft patent claims that read on JEDEC standards, which Rambus did to protect aspects of its earlier inventions, Rambus violated the expectations of other JEDEC members. The FTC has held such conduct to be deceptive. However, the Commission rejected both parties' proposed remedial royalty rates. Calling them both extreme and called for further briefing as to the proposed remedy. Briefing has since been completed and the Commission subsequently scheduled a hearing in Washington, D.C., for November 15.

We cannot at this time project when the FTC will reach a final decision or what that decision will be. We do, however, continue to believe the FTC erred in reversing its Chief Administrative Law Judge. At this point, I'll ask the operator to open the lines for question.

[OPERATOR INSTRUCTIONS] And we will take our first question from Jeff Schreiner with American technology.

Just wanted to ask two quick questions here. The first question is kind of theoretical in name. Looking at the Company and the FTC case and wondering how would the Company proceed or think it might proceed in terms of a possible appeal of any royalty cap that might be implemented by the FTC? And during this appeal, would the Company be able to open negotiations with other players within the memory industry? And to follow on this some more, if any of these settlements were negotiated during this time, would the Company move to possibly include any clause which would allow for the rates to be raised upon a reversal of the FTC decision? That's the first question.

Let me, this is Bob, I'm going to try and break this apart and answer the first half of that question. Sharon can address the other half of that. My understanding, you were breaking apart a little bit. But my understanding of your question on the first part is, whether we would appeal the royalty rate decision of the FTC. That's speculation at this point until we know what particular rate they come out with. We indicated in our briefing that what we thought was the appropriate amount, if the FTC is going to reach a royalty rate. I have to stop there.

This is Sharon. To address the second half of your question, really, how it would impact our ability to continue with negotiations or begin new negotiations, is really yet to be determined. Clearly, we will wait and see what decision comes back from the FTC. Obviously, make a decision on thousand handle an appeal if we decide to go that route. And then make sure we have a plan in place to either use that or not, to continue with our negotiations. Where we are right now, I can tell you, is evaluating different potential scenarios so that we will have a plan ready to roll out when the decision comes through.

Okay. And just a final question, Satish, I was wondering if you could break out the allocation of revenue in the quarter between contract and royalty?

We haven't broken it out, but I think it's very similar to last quarter, it was about $4 million in the on the contract revenue and about $41 million on the royalties line.

Thank you.

[OPERATOR INSTRUCTIONS] We will now hear from Michael Cohen with Pacific American Securities.

Hi, guys.

Hi, Michael.

Many Rambus investors have been concerned about a possible acquisition of [Kumanda] by companies such as Micron or Samsung in light of the favorable deal given to Infineon. While Kumanda has the market cap of $5.4 billion, Rambus only currently has a market cap about $1.9 billion, which finally brings me to my question. I was wondering if you could refresh us on the takeover defenses that Rambus currently has in place?

As relates to our takeover defenses, they're fairly typical for the industry. There's nothing unique about them. There is some element of, I would say, if you will, an industry standard poison pill. I suspect it's more a question of the takeover math, actually, than the legal defenses you have had.

Actually, I'm more concerned about the defenses. Could you elaborate a little bit more on what this industry standard poison pill consists of? Is it a rights offering?

Michael, they're all in the public domain, I think we filed them with the FTC. I think from the time we filed them, there have been some changes and some amendments that have been made. So, that's why we can't answer all of them at this point in time but you will find them on the Website, I think, on the FTC Website.

And the amendment that is would have been subsequently made, when will we learn about those?

Whatever the filing requirements are, we follow them and if we're required to file them right away, we'll file them right away. But we are not delinquent in our filing with the SEC on any of these issues.

Okay. And would you be sort of willing just to share your philosophy with regard to either a friendly or hostile takeover?

Well, we're here to serve the best interests of the shareholders, obviously. I mean, whatever answer could I give you. How I would elaborate further is takes me down paths I probably would not like to go down, quite frankly.

Okay. And that's fine.

And Michael, just to, well, this is nothing, I'm not aware of any amendments that have been filed or any amendments that need to be filed, at least since I've joined.

Okay. My next question is, regarding John Danforth. When John Danforth joined Rambus as General Counsel your legal situation was suffering and many investors regard the subsequent improved situation really as directly attributable to his efforts. In light of this, I was wondering if can you offer any explanations as how his removal from the post of General Counsel can be considered in the interest of shareholders?

Well, as you preface in your question, I think John's greatest skills by far, his ability to help Rambus deal with our complex interactive and difficult legal issues. And he continues to serve in that capacity and he continues to serve effectively in that capacity.

And as General Counsel, he would have the full ability to delegate everything that's underneath, so why would that necessity a removal from the office of General Counsel?

Well, that's really internal to the management of Rambus, isn't it? I put my staff together based on what I think is in the best interests of moving the Company forward. And quite frequently since I've been here, I have rearranged the respective responsibilities of staff members.

Okay.

I think to the better result of the Company.

Okay. And I have some more questions but I'll jump back in queue and I'll come back if there's time permitting. Thank you.

[OPERATOR INSTRUCTIONS] We will take a question from Daniel Amir with WR Hambrecht.

Hi, this is Betsy Van Hees for Daniel Amir, thank you for taking my question. I was wondering if you could give us a little bit of color as to where to you expect the growth in the revenue guidance that you provided for next quarter or calendar Q4?

Hi, this is Sharon Holt. We've had a push throughout the year to try to expand our product and service technology engagements with our customers. So, we certainly expect to see growth over time in that area. I cannot give you specific customer names or deals but from the guidance that Satish provided, it's coming from a variety of different customers and products and technology.

Great. Thank you. Do you expect to sign another license agreement within the quarter?

I cannot comment on that.

Okay. Thank you very much. [OPERATOR INSTRUCTIONS] And Mr.Rishi, it appears that we have no further questions. I will now turn the conference back to you for any closing or additional comments.

All right. Well, thank you, everybody, for your continued support and we look forward to speaking to you soon. Thank you for joining us on the call.

And thank you, everyone. That does conclude today's conference, we do thank you for your participation. On behalf of today's speakers, I would like to wish everyone a great day.