Rambus Inc (RMBS) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to this Rambus fourth quarter 2006 conference call. Today's call is being recorded. At this time, I'd like to turn the call 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 is Harold Hughes, our President and CEO. We also have Sharon Holt, Senior Vice President of Sales, Licensing and Marketing; and Tom Lavelle, Senior Vice President and General Counsel with us today for Q&A. The press release for the results that will be 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 2814941 when you hear the prompt. In addition, we are simultaneously web casting this call and a replay can be accessed on our website beginning today 5 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 documents that we filed with the SEC, including our 8-K's, 10-Q's, and 10-K's and these forward-looking statements may differ materially from our actual results. Now, I'll to turn the call over to Harold. Harold?

Thanks, Satish, and good afternoon everyone. I'm very proud of what we've accomplished in the past quarter and over the past year. For Q4, we delivered another record revenue result, the $51.7 million. Total revenue for 2006 was $194.2 million, itself a record year, and coming close to $0.5 million dollars in revenue per employee. Reflecting back to the beginning of last year we had a number of challenges that made 2006 a pivotal year for the Company.

Primary among these challenges was the need to address a $10 million per quarter revenue reduction after the last payment of the Intel cross license agreement was received in Q2 2006. The team worked very hard not only to address this shortfall, but also to build on that effort and deliver record results in Q4 and for the full year. Full year revenue for 2006 was up 24% over 2005 and Q4 2006 was up an equal percentage over the same quarter of the previous year.

Parenthetically, I would remind shareholders that the FTC's quite remarkable decision was issued in August 2006. That decision increased the challenges faced by the Company and made the results just reported even more satisfying.

Capping off a strong performance in 2006 and contributing to the record results of Q4 was the highly anticipated launch of Sony's Playstation 3. Sony introduced PS3 in Japan and the U.S. in November. The PS3 employs our XDR memory architecture to deliver unprecedented performance from four XDR devices manufactured by Rambus customers Elpida and Samsung. PS3 also uses our FlexIO processor bus to provide ultra-high bandwidth between the cell broadband engine, the graphic processor, also known as the RSX, and the SouthBridge chip which provides connectivity to the hard drive, network and peripherals.

We very are proud to have worked with Sony, Toshiba and IBM to bring this flagship implementation for this cell broadband engine to market in such an exciting product as the PS3. We showcased this powerful platform at a number of events around the world, including the Rambus Developer Forum Japan, held at the end of November last year, where we had nearly 800 engineers and business managers joining us for technical training sessions and customer presentations.

We also showcased our contribution to the PS3 at the recent consumer electronics show in Las Vegas.

We have started with another solid technology win with our XDR DRAM license agreement with Qimonda. This is a significant milestone for system companies because it gives them another XDR DRAM supplier in addition to Samsung and Elpida. Thus system companies can take advantage of both the industry leading performance and lower device count afforded by XDR memory architecture while at the same time achieving greater assurance of supply by having three world class manufacturers of XDR DRAM.

We are seeing increased momentum for XDR DRAM in applications such as high definition digital television and set top boxes. In these applications, XDR delivers the needed performance for full HD with the fewest DRAM devices delivering performance, simpler design, and reduced billige materials, all enabled by XDR's superior bandwidth capability. And this advantage is dramatic. One XDR DRAM can deliver the performance of DDR2 devices in these applications. From a revenue standpoint, the technology license with Qimonda is completely additive to the patent license we signed with Qimonda, which at the time was part of Infineon, in March 2005. This is an excellent illustration of our business model in action and what makes Rambus unique.

We want to put in place patent license agreements that give our customers access to our innovations. Just as importantly, we then want to work with our customers on specific product initiatives, such as XDR, that deliver great value to our customers and the end market. We are proud to have built our relationship with Qimonda and to that solid technology partnership and look forward to helping make Qimonda an even more successful memory supplier with products like XDR DRAM.

Moving to our patent licensing, we also started 2007 with a patent license agreement with Spansion, a leader in the flash memory market. Over time, Rambus innovations, first employed in high performance applications like computer entertainment systems in PCs, will make their way into applications with less demanding performance requirements such as mobile phones. This is what underpins the Spansion patent license agreement with certain sub-segments of the flash memory market now using Rambus synchronous interface innovations.

While Spansion does have a significant share of the flash market, this agreement is not expected to deliver material results for Rambus this year, but we'll advise if this changes in the years ahead. Just as a point of clarification, this is a separate patent license agreement from the one we signed with AMD in the first quarter of 2006. AMD's patent license along with patent licenses we announced in 2006 with Fujitsu, Toshiba and Panasonic all contributed to the record revenue results of 2006.

We continue our unwaivering commitment to fundamental research to augment our leadership patent portfolio. As a measurement of this effort, Rambus received a record number of patents issued in 2006, 145. We continue to deliver tremendous value to the market relative to our size. We now have 579 issued patents having only just passed the 500 issued patent milestone in June 2006, and we have 469 patents pending. We have made great progress from where we were at the end of 2005 with respect to our patent development and management process, and I am pleased to say we have increased our overall patent portfolio of both issued and pending patents by 40% year-over-year.

Now I'd like to say just a few words about where we are with regards to the pending FTC action. We do not have any additional information outside of what is publicly available, nor do we have any indication as to when we'll hear anything further from the FTC. While the FTC's actions could have a material, but at this time unknown, impact on our future revenues our focus is to continue to move the business forward through innovation and design of world class interface patents and products.

To that end, we continue to hire top talent for key leadership positions within the Company. Back in November, we hired Tom Lavelle as Senior Vice President and General Counsel. Tom joins us from Xilinx and before that he was 15 years at Intel. I obviously know him well and recognize his capabilities. We are very pleased to have him here to manage our overall compliance and governance responsibilities.

John Danforth remains our senior legal adviser focusing primarily on our joint boycott case filed in California state court in San Francisco. We recently had a positive development in that case where the appellate court for the State of California denied Hynix and Samsung's motion to compel arbitration, and more recently denied their motion for reconsideration. Hopefully, this removes further delay in the case and gets us one step closer to going to trial. And, again, I'm very happy to have Tom as a key member of our leadership team.

In addition to Tom, we hired Martin Scott as a Senior Vice President charged with leading our product engineering team. Martin comes to us from PMC-Sierra after starting his career at HP Labs and later as an engineering general manager at both HP and Agilent Technologies. Martin replaces longtime Rambus Samir Patel, who for the past 16 years has been an engineering leader of the Company. I'd like to thank Samir personally for his dedication and service to Rambus. As particular career highlights, Samir's contributions were instrumental in our success in Playstation 2, Playstation 3, and the establishment of our successful design center in Bangalore. We sincerely wish Samir all the best as he embarks on the next phase of his career.

We are very fortunate to have someone of the caliber of Martin Scott to take the baton from Samir as we deploy our technology products and an expanding number of customer semiconductor and system applications.

In summary, we had a strong year in 2006 with increasing product technology wins and deployment as well as continued solid progress in our patent licensing program. We continue to deliver record quarterly revenues even with the wind down of payments from Intel on the patent cross-license agreement. I am very pleased with our progress and very optimistic about the future. While we clearly have some challenges, such as the independent investigation in the financial restatements, which Satish will address momentarily and the unknown impact and timing of the action of the FTC, I am looking forward to continuing our momentum in technology, patents and product leadership and helping our customers deliver the best electronic products in the world. And with that, I'll turn it over to Satish.

Thank you, Harold. As Harold mentioned, we achieved record revenue for the quarter and for the year. Total revenues of $51.7 million were up 13% over the third quarter of this year. For the full year revenues were $194.2 million, an increase of 24% over last year. As most of you know, the fiscal 2006 revenue included only $20 million of payments from Intel for the cross-license agreement which was fully paid up as of the end of Q2 2006. In contrast, payments for the Intel cross-license agreement totaled $40 million in fiscal 2005.

Despite the significant year-on-year decrease in payments from a key customer, we were able to grow revenue by $37 million year-over-year. Most of the increase in 2006 versus 2005 was due to royalties from new customers such as Fujitsu, AMD and some from Sony's Playstation 3 related agreements. Given that we are in the process of restating our financials, we do not have GAAP numbers to share with you. Until the restatement is complete, I cannot provide detailed information on any single line item expense on our P&L.

But to help you gauge the overall performance of the business, there are a few items I can and will try to highlight. Our overall cash, defined as cash, cash equivalents and marketable securities, increased $81 million year-over-year. This includes an increase of approximately $34 million related to stock option exercises in the first two quarters net of the share repurchases we had done in the first quarter of the year.

It also includes payments of approximately $39 million related to our ongoing litigation expenses, which also includes a $10 million bonus we had announced in July, and also includes approximately $11 million of bills paid related to the stock option investigation so far. Again, these are cash-based numbers but I believe they can provide some insight into the performance of the core business of the Company, of which we are very pleased.

Let me provide you with a brief update on the status of our financial restatement. As we had mentioned the last call, the investigation into the stock option granting process has been largely completed. However, as a part of the restatement process, we have had to go through additional procedures to ensure that other areas, both related and unrelated to stock options, had been accounted for correctly. Other companies have gone through successful restatements have investigated areas of severance agreements, cash exercises, stock loans to officers, leaves of absence to name a few.

While not all of these apply to us, we need to ensure that we are fully researched and investigated any areas that could potentially give rise to accounting concerns and to remediate them. It is due to this additional research that the restatement process is taking longer than we had expected. These issues are often tedious and time consuming to investigate and in the end we may find that the accounting impact of some of these may be inconsequential. However, until that research is completed we cannot make a determination on materiality.

Let me give you an example. Our stock option plan is ambiguous as to whether or not stock options continue to or cease to vest when an employee takes a leave of absence. Before we determine the accounting impact and make any change, we need to first determine how many people took a leave of absence. While we have implemented systems in the last two years that give us visibility to these LOAs, or leaves of absence, we lacked those systems for most of the time period concerned that is under investigation. Given the lack of historical information systems, we have had to go through payroll records manually for all past and current employees as far back as 1997, log what leave they took, and then cross reference these with the personnel files to determine which one of these leaves were paid, which were statutory, and which were non-statutory unpaid leaves of absence.

At the end of the day, what we may or may not find may not have any significant on the financial statement, but, nevertheless, we have to go through this thorough process to ensure such issues have been addressed and researched appropriately. This is just one example. There are other similar issues where also the process is time consuming. While we continue to make progress, we do not believe we will have the restatement completed by February 9 which brings me to the NASDAQ update.

Last quarter we announced that as of November 20, we had received an extension from the listing qualification panel for the filing of our second quarter and third quarter 10-Q's until February 9, 2007. Because they could only grant an extension to February 9, we elevated our request to the NASDAQ listing and hearing review council to call this matter for review and in connection to grant us a stay.

The NASDAQ listing council has recognized the special complex circumstances surrounding stock option-related restatements and is using its discretion on a case by case basis for companies in such circumstances given that they meet certain criteria. Based on our reading of the guidelines we believe we meet this criteria. We expect to hear from them soon. While their can be no assurance as such, given the circumstances we are hopeful that the listing council will call for review and/or grant us a stay while we complete the restatement while remaining listed on the NASDAQ. We will provide additional updates on this process via 8-K and press releases as appropriate.

Now I will give you some thoughts on what to expect for the first quarter of 2007 in regards to revenue. This guidance reflects our reasonable estimate and our actual results could differ materially. We expect that Q1 revenue will be between $48 million and $52 million. With that, we'd like to take your questions. Operator, please open the call for Q&A.

Thank you. The question-and-answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] And we'll take our first question from Jeff Schreiner with American Technology.

Good afternoon, gentlemen.

Good afternoon.

Satish, I was just wondering if you could give us a little color on the Spansion, just trying to dig a little bit here. What would Rambus consider material? Some companies would judge that at 3% of revenues, 4%, 5%. What would Rambus consider material to be if this is going to be a non-material contribution in 2007?

Jeff, we don't disclose what our material thresholds but these are guidelines that we use, but without telling you what a material threshold is I can tell you that knowing what the number for Spansion is it's not material to our revenue for 2007. It's a good foray into a new market for us, but as far as, I think, for the future we have expectations, but for this year it is not going to be material.

Okay. I know that you stated that you cannot provide any line items in terms of the call structure due to the ongoing options investigation. Can you give us any breakout between royalties and contract revenues?

We'll do that when we file our 10-Q. We were not ready to do that on the call because we haven't done that for the last two or three quarters. So trying to give this for the quarter or the full year without having broken it out in the past, we'll do that in thorough detail when we do our Q and 10-K.

Okay, and just one last question, I was just wondering if the hearing that was previously scheduled in Judge White's court for February 2 and has been moved to this Friday, the 26th, was that just due to scheduling in his court and the schedule he needed to abide by for other cases?

Actually, this is Tom Lavelle. I believe that was actually pushed out from an earlier date to the 26th which is Friday and, yes, it's largely based on scheduling of a variety of people.

Okay. Thank you.

Thank you. We'll go next to Daniel Amir with WR Hambrecht.

Yes. Thanks a lot, guys.

Daniel, how are you?

Good, how are you?

Excellent, thank you.

A few questions here. First of all a follow-up question on the previous with related to Hynix and Judge White. I mean originally it seemed like that he postponed the, kind of the hearing as we await a final resolution or a final judgment from the FTC. Now that we're still waiting for the FTC what is -- what can play out basically in the courtroom? Is this just something that we're still waiting for another phase or where does it exactly stand with Hynix now?

As you heard, we're having the hearing on the 26th which is Friday. I suspect we'll know a lot more after the hearing, although it's possible that Judge White may not make decisions given the issue in front of him that the FTC has not yet made its decision. It's hard to anticipate exactly what Judge White is going to do Friday and all I can say is we'll know more then.

Okay, and related to some of the milestones for 2007, I mean, can you highlight what's the goals here for '07? What are you're laying out to your employees? How do you want the Company to play out here in the next 12 months?

I think the way I would answer that Daniel is to say that there are many things over which we have control and there we want to execute very well. We, obviously, will try to grow both aspects of our revenue, both licensing and the technology side. Obviously, the licensing side is impacted by what the FTC might do and when they might finally get around to doing it. But we will have a challenging plan to present to employees and I have every confidence that the employees will accept that. We hope to do, we hope to do as well in 2007 vis a vis that plan as we did in 2006.

Is it to assume that we should see further licensing agreements in '07?

There are certainly plans to do that. We obviously can't commit as to timing and names. But that is our business.

Okay. One final question to Satish, can you comment whether you've done any buy backs thus far. I know you have a buy back plan, but have you done any buy back of shares?

In 2006 in Q1 we had some buy back which we'd announced at that time. I think it was about $21 million or $22 million worth of buy back. But once we had the investigation started we have not done any buy backs since then.

Okay. All right. Thanks a lot.

Thank you.

[OPERATOR INSTRUCTIONS] We'll take our next question from Michael Cohen with Pacific American.

Congratulations on the revenue number.

Thank you, Michael.

I was wondering if you could talk a little bit more about the flash memory opportunity. We saw the licensing deal with Spansion and I was wondering where do you think your technology can specifically play in flash, and what I'm referring to is different speeds, different densities, or are you only focused on the controller market? A little bit of color in terms of where your opportunity is in flash.

Hi, Michael. This is Sharon. I'll take that question. Essentially, what we see right now happening in flash is technologies that we developed some time ago which initially found their home in high performance electronics.

Some of those technologies and inventions have migrated their way down into the consumer market, in this case the mobile market and flash, and so really inventions of ours from several years ago have found their way into that space. And that really, as Harold mentioned earlier in the call, is what is underlying the agreement that we just did with Spansion.

Obviously, since Rambus is a company whose hallmark is development of new technology, we have many efforts going on across different technology spaces, including flash. We're certainly not prepared today to say specifically what future announcements you may see coming from us in terms of new products or new innovations.

Do you think it applies to NAND as well as NOR?

In terms of future development, again, I'm not prepared to specifically say where our efforts are going there. In terms of the inventions underlying the agreement with Spansion they are specifically related to synchronous flash technologies.

Okay and my next question is for Satish, and I'm not sure if he's going to be able to answer this or not. What I was wondering is you used to break out your revenues between SDRAM, DDR and RDRAM, and I was wondering if you could give us kind of a rough idea of where the current revenue breakdown is with regard to SDRAM, DDR and DDR2?

I think your first premise was fairly accurate.

Okay, nice, worth a try.

We don't mean to be a black box, Michael, but in our opinion, it only works to the benefit of parties that we don't want to have benefited when we're very specific on what our licensing rates are.

Right.

It's in the best interests of our shareholders to keep this as confidential as we can reasonably, I think. I hope you understand that.

Okay, and I was wondering, you mentioned that the deal with Qimonda is a technology license was additive to the patent license. Do the two together come in the same ballpark as it would be with let's say Samsung and Elpida?

We can't comment on that, Michael, but, yes, just to clarify the first part of your question, it was additive, so I think you're aware the agreement that was signed with then Infineon in '05 was a broad patent license agreement. It did not involve the transfer of any product or other technology deliverables to the company that is now Qimonda.

So the agreement that was signed recently is a very specific agreement around our XDR technology and certainly does involve engineering effort as well as deliverables going from Rambus to Qimonda. It is a, really something we're very, very excited about as Harold mentioned. Having another one of the top DRAM companies on board with our flag ship technology is very exciting to us and should lead to a lot of new opportunities for XDR in the market.

Great. Thank you very much.

Thank you.

Thank you and at this time it appears there are no further questions.

Hello. Hello. I think we got cut off.

At this time it appears there are no other questions.

All right. Then thank you, operator, and let me turn this over to Harold for his closing remarks.

Thank you, everyone, for joining. As you can see, we made a lot of progress in 2006. There are still unknowns that confront the Company, but I think we all have growing confidence of our ability to address those. Quite frankly, it's made us tougher if anything. We are optimistic about 2007. We are certain as to our ability to create technology that will have great value for the shareholders down the road. With that, I'll end and look forward to talking to your next quarter. Thank you.

That does conclude today's program. You may disconnect your line at any time.