Rambus Inc (RMBS) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to this Rambus quarterly 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.

Thank you, operator, and welcome to the Rambus third quarter 2007 conference call. I'm Satish Rishi, CFO, and with me today are Harold Hughes, our President and CEO, and Tom Lavelle, Senior VP and General Counsel. We also have with us Sharon Holt, Senior VP of Sales, Licensing, and Marketing, for the 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 the ID number 4789665 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 Daylight Time. Before I 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 we file with the SEC, including our 8-K, 10-Q, and 10-K. These forward-looking statements may differ materially from our actual results. Now I will turn the call over to Harold. Harold?

Thanks, Satish, and good afternoon, everyone. I'd like to start by talking about the just completed financial restatement. It was truly a tremendous effort by Satish and the finance team. They had to work through an analysis and autoprocess that spanned hundreds of thousands of documents. The long process entailed many thousands of man-hours of effort to complete the restatement of our historical financials. I sincerely thank our stockholders for their patience and perseverance during the many months it took to work through all of these issues. You can rest assured that we are absolutely committed to operating to the highest standards of corporate governance and providing the market with timely and transparent reports of our financial performance.

Now, regarding our third quarter results, we achieved revenue of $41.7 million. This was on the low end of our guidance and down from the prior quarter. While we are still making progress on our strategy providing critical memory architecture technology to leading system and semiconductor companies, our short-term results were nonetheless impacted both directly and indirectly by the remedy order issued by the FTC. As we talked about in an earlier call, we expected to see a significant slowdown in licensing momentum while we implemented the actions required to comply with the FTC's order. It took some time for all parties to digest the complex nature of the order. It was a slowdown in momentum more than anything else that led to the results at the low end of our revenue guidance. The actual payments held in abeyance in accordance with the FTC's orders were only about $1 million so far. In any case, we have restarted a number of licensing negotiations that had been stalled following the FTC's actions and are again moving forward on that front.

Meanwhile, we've got a number of exciting developments on the product side of our business to discuss. Whether in computing, consumer electronics, or mobile devices, the need for greater bandwidth is a common theme as electronics deliver more rich media, more 3D graphics and more video. Rambus's leadership memory architectures are on the forefront in meeting this need. Earlier this month, Elpida announced the availability of a 4.8 gigahertz (inaudible) of our DRAM device. Elpida's a trailblazer in bringing the world's fastest memory to market, and we're very pleased to be their partner. Also this past quarter, Toshiba unveiled the new SpursEngine, a new high performance stream processor derived from the cell broadband engine. According to Toshiba, the SpursEngine is designed to take video processing and digital consumer products to new levels of realism and image quality. The SpursEngine integrates four of the (inaudible) high performance risk course with hardware dedicated to decoding and encoding MPEG-2 and H.264 video. Toshiba showcased the SpursEngine at CEATEC in Tokyo earlier this month. It uses XDR memory to achieve the high data transfer rates for amazing rich media performance. We originally announced the XDR technology license we signed with Toshiba for this program a year ago. We're happy to be able to discuss another exciting application that delivers breakthrough performance thanks to the XDR memory architecture.

Two weeks ago, we held our annual developer forum in Taiwan, where we hosted over 200 engineers, a record number, who came to learn about designing with our leadership and industry standard memory architectures. One of the highlights from the event in Taiwan was a presentation by Leon Vervoort, a senior systems architect for Phillips Consumer Electronics. Leon discussed how HDTVs require high levels of memory bandwidth to deliver features like advanced motion compensation and image enhancement, 12-bit color, and the ability to handle multiple streams with HD content. In fact, the next generation of HDTVs requires as much memory bandwidth as that of many PCs. At the same time, HD designers in a memory architecture delivers this performance of the fewest possible devices to keep costs low, both in terms of direct bill of materials as well as overall system complexity. As Leo pointed out in his presentation the high bandwidth per device performance of XDR makes it the ideal choice for HDTVs. We are very grateful for this endorsement from a leading manufacturer of HDTVs and excited at the prospect of enabling a new generation of consumer electronic products with the XDR memory architecture.

Also in Taiwan, we announced our new controller interface product for DDR3 memory. This solution provides the physical interface between the digital controller logic and DDR2 or DDR3 DRAM devices for data rates of up to 1,600 megahertz or 1.6 gigahertz. It leverages both our signal integrity expertise and utilizes key Rambus innovations such as FlexPhase to enable robust DDR3 implementation at [1] gigahertz and above. Speaking of innovations, our engineers and scientists continue to invent and develop technology for advanced memory architectures, high-speed logic interfaces, and low power interface solutions. One measure of the pace of innovation at Rambus is our growing portfolio of patents, which at the end Q3 stood at 667 issued patents with another 519 patent applications pending. It's through this continued commitment to innovation that we deliver extraordinary value to our customers and enable breakthrough products that enrich the lives of consumers. With that, I will turn it over to Tom to provide an update on the legal front, where all is not quiet.

Thanks, Harold. And good afternoon, everybody. I'd like to provide some context around some of the events that have taken place over the course of the last few months. Back in August, we received from the European Commission its statements of objections alleging violations of European Union competition law. The statement of objections follows complaints by certain DRAM manufacturers originating from our '92 through '95 participation in JEDEC. We filed our response to that statement of objections today in Brussels. We believe the EC's allegations are misplaced and we intend to demonstrate to the Commission just that, and we are working with them to get to that point. Moving to the FTC action here in the U.S., on September 21st we filed our appeal of the FTC's decision with the Court of Appeals for the District of Columbia circuit in Washington. We expect the briefing be completed shortly after the beginning of the new year. No oral argument has been set at this point, but we do expect to see a decision sometime in 2008 on that case.

There have also been developments in some of our private litigations. In August, a hearing was held in front of a three-judge panel at the Court of Appeals for the Federal Circuit to argue the Samsung matter arising from the case in District Court for the Eastern District of Virginia. We are hoping this decision will finally put this case behind us. The first phase of the Micron trial in Wilmington, Delaware addressing alleged spoliation and litigation misconduct by Rambus is currently scheduled to begin November 8 of this year in Wilmington. Moving on to the price fixing case in the Superior Court in San Francisco, the U.S. Supreme Court denied Hynix's petition to review Judge Kramer's decision denying arbitration in favor of a jury trial on Rambus' allegations of price fixing and unfair practices by the three DRAM manufacturer defendants. Discovery on that case has been proceeding, and the next hearing is currently scheduled for December 20th of this year. We expect the trial date will be set for sometime in mid-2008. In the Hynix patent case, the third phase is currently scheduled to begin near the end of January of 2008. You will recall that we won Phases 1 and 2, including a judgment of approximately [$133 million], plus interest. The Phase 3 trial will address Hynix's allegations that we engaged in misconduct. This trial is currently scheduled to be a coordinated trial with Micron, Samsung, and Nanya because of the large overlap of issues and claims among both parties and Rambus. There's clearly a lot going on with regards to our litigation, and our litigation expenses as disclosed in the press release reflect that increased activity. It's been our strategy to move the private litigation matters forward to resolution as quickly as possible. The level and nature of the activity I just described reflects that we are making progress on that strategy. Now I'll turn the call over to Satish to review the financials. Satish?

Thank you, Tom. As Harold mentioned earlier in the call, we are quite pleased to have completed our filings to be current with the financial reporting. It has been a long and grueling process, but one that we had to go through to ensure accuracy and completeness in our filings. After our final outstanding 10-Q, we received notification from NASDAQ that we regained compliance with the rules for continued listing, and that the matter has now been closed. Again, we thank our shareholders for their patience as we went through the process of becoming current and are happy to be back to a normal reporting process.

Our revenues for the third quarter were $41.7 million, which is down 12% from the previous quarter and 9% from the year ago. Revenue decreased primarily as Harold explained due to the direct and indirect impact of the FTC orders and a scheduled decrease in royalty payments. Operating expenses for the third quarter were $58.2 million, up 1% from the previous quarter and down 19% from the third quarter of last year. Excluding the restatement related expenses and stock-based compensation, operating expense in this quarter at $45.3 million were up 14% from the previous quarter and 21% from the quarter year ago. The primary drivers for this were an increase in our general litigation expenses as well as incremental expenses related to audit accounting and related consulting. Cost of [gen] litigation which excludes costs related to our restatement was $11.7 million, up 75% as compared to the second quarter of 2007 and up 34% from the third quarter of last year. The increase in litigation expenses reflect expenses associated with the preparations for the responses to the European Commission, the appeal of the FTC decision, Phase 1 of the micron trial, the price fixing case in San Francisco, and Phase 3 of the Hynix patent case, all of which Tom described in some detail. Even though general litigation expenses increased quarter over quarter, our year to date general litigation expenses are slightly down as compared to the same period a year ago.

Within SG&A, incremental expenses related to audit accounting and consulting were up $1.4 million as compared to the previous quarter. Other SG&A expenses were generally in line with spending in the previous quarter and the third quarter of last year. Our operating loss of $16.5 million was up $6.3 million or 62% from the previous quarter and down 36% from the third quarter of 2006. The increased loss from the previous quarter was primarily associated with lower revenue of $5.8 million, increased non restatement related legal expenses of $5 million, and a decrease in restatement related expenses of $3.3 million, while the decrease from the third quarter of 2006 was primarily associated with lower cost of restatement. Bottom line net loss of the third quarter was $6.5 million compared to a loss of $2.7 million in the second quarter and a loss of $22.6 million in third quarter of last year. Overall cash, defined as cash, cash equivalents and marketable securities, excluding restricted cash, was $445 million, an increase of approximately $3 million from the second quarter of 2007 and up $24 million from a year ago. This year-over-year increase in cash was notwithstanding the fact that we had no cash generated from stock option exercises, and that we paid out approximately $30 million in cash for restatement related expenses in the last 12 months. During the quarter we also received notice from a trustee, who on behalf of a majority of our note holders informed us that the holders of the $160 million of outstanding notes were extending the acceleration of the notes and were waiving all existing events of default. The notes mature in 2010, and we have reclassified the notes back to long term as of the end of this quarter. Now that we are current with our filings, we should be able to restart our share repurchase program soon.

Now let me give you some thoughts regarding the fourth quarter. This guidance reflects our reasonable estimate and our actual results could differ materially from what I'm about review. We expect fourth quarter revenue to be between $45 million and $50 million, and operating expenses excluding stock-based compensation in the additional restatement related expenses and a one-time severance payment to be between $47 million and $55 million. Litigation expenses are difficult to predict because we do not control timelines and requests from the courts, nor do we control the actions that adversaries may take which may cause us to incur additional expenses in any particular quarter. Including the range of operating expenses I just gave you, are general litigation expenses of $10 million to $16 million, a very wide range, given the level of activity that we are expecting in Q4 of 2007. Also would like to remind you that as we outlined in the 10-Q, we plan to hold our annual shareholders meeting on December 19th at the Westin hotel in Palo Alto. And we look forward to seeing many of you over there.

That concludes our prepared remarks. Operator, would you please open the call for questions?

(OPERATOR INSTRUCTIONS) We'll take our first question from Jeff Schreiner with American Tech Research.

Good afternoon, gentlemen. Thank you for taking my questions.

Hello, Jeff.

Wanted to dig a little bit into the agreement previously with Infineon and Qimonda and the potential triggers that may relate to the extension of payments. Had those triggers been met and will we see additional revenues in future quarters from the Infineon agreement?

Hi, Jeff, this is Sharon. With respect to the agreement which, by the way, is now with Qimonda, the agreement was transferred shortly after Qimonda was spun out of Infineon -- certainly if we had met any of the triggers you would have heard from us about that by now. Because I think you're well aware of what the triggers are roughly are part of that agreement, and we haven't made any announcements about that. We certainly continue to work toward positive outcomes in the litigation with the other players in the DRAM industry, and we certainly hope to trigger the follow-on payments from Qimonda, but we have made no announcements to that effect yet.

I was wondering, Satish, if you could talk about the commentary in the most recent Q in relation to fixed royalties not being affected by the FTC decision. Should we assume, going forward, that only agreements with variable portions are going to be included or encompassed by the remedy?

Jeff, the FTC order is fairly complex, and I'm not sure we can do it justice in one or two sentences, but the application definitely is towards the variable royalty payments. And for the fixed royalty payers, each and every customer is treated differently. So we have to go and talk to the individual customer and see if any of the revenue that they believe is subject to the FTC order is above MAR or not above MAR. So I wouldn't blanket it to say it's related only to the fixed payers, but by and large at a high level it would be right to say that the variable rate -- the variable rate royalty payers or subject have a bigger impact than the fixed payers.

Okay. Then Harold recently there was a press release, I appreciate you taking the time, in which you were quoted in saying that there was going to be a breakout year in calendar year '08. Not sure if you were misquoted or if that's what you wanted to say. But could you reaffirm that statement and kind of go over some of the drivers you see in terms of driving a breakout year for Rambus in calendar '08?

I don't recall having used exactly those words. Oftentimes translation produce results maybe slightly different than what I had intended. But to add some inputs to that general concept, this is a year where many of the legal cases that we've worked very, very hard to bring to trial are coming to trial. We remain optimistic that our position is the stronger one, and the expense notwithstanding, and Satish and Tom took you over the enormous expense incurred in these trials, we look forward to getting into court and winning, and as a result of which increasing significantly our chance of coming up with settlements that we find acceptable. Secondly, many of the markets -- frankly, all of the consumer markets, the PC markets -- are moving in directions of very, very high bandwidth, and secondly, the explosion in handheld devices has added to the bandwidth requirement a very, very low power requirement. It's in those areas that we believe have excellent technology, have announced certain products, and as long as the marketing people next to me don't hit me, we intend to announce products sometime during 2008 with regard to low power. So the combination of finally getting to court on some of these very important trials and having our proprietary product successful in the marketplace, we do believe are two factors that should allow for something -- I don't know if I would have ever said breakout, but obviously puts us in a pretty advantageous industry verse the DRAM industry that hasn't settled. Hope that helps.

It does. Thank you very much for your time.

My pleasure.

We'll take our next question from Mike Crawford with Riley Investment Management.

Thank you. First, on NAND, I think previously you said that NAND needed to go faster for that market to see the benefits of your -- of Rambus' controller IP. Is there any color you can provide? Like how fast does NAND have to go before a Rambus solution really helps?

Hi, Mike. This is Sharon. I seem to recall from the last conference call when we spoke about NAND, and I think in general when we spoke about flash, we mentioned that we were working on some new technology to apply to flash, and specifically to maybe enable the use of flash in applications where it has not traditionally been seen. And so we're continuing to work toward that. In terms of a specific speed, I wouldn't say that there is a specific speed that would trigger the use of our technology, but if you tend to look at the performance levels of flash versus DRAM, flash does still lag behind, particularly from the perspective of the interface and the performance of the interface. So that may be the comment you're referring to.

Okay. Thank you. And I have another maybe, I don't know, Sharon, this might be for you as well, but Transmeta just signed a $250 million settlement with Intel, and they have some low-power [IPD]. Is there any way you can compare and contrast what they have with what you have? Is it complimentary or is it competitive? Any way to have some comments on that?

My recollection is it was with regard to very process-specific functionality dealing with slowing down clock speeds while still maintaining the system. And much of our technology, not surprisingly, is focused on high-performance memory. And to the extent that we have controller technology enabling that, it tends to be somewhat removed from what Transmeta has.

Finally, I don't know if this might be for Tom, but there had been a counsel change in Delaware, and I think Greg Stone had to come into the case late. Is he comfortable that everyone's up to speed and you're ready to go?

We're very comfortable with Greg. As you probably know, Greg has done very well in our cases, and I am very pleased that Greg is able to step in and do this but he knows this case very well, and we're lucky to be in a position where we have a Greg Stone working with us.

Okay. Thank you.

Always good to give the ball to your best pitcher.

We'll take our next question from Michael Cohen with Pacific American Securities.

Thank you. Congratulations on getting current with your filing.

Thank you.

My first question is for Tom. We're all eagerly waiting the CAFC ruling, and that has to do with the spoliation issue in the Samsung case. And then we on November 8 -- we're going to see the spoliation trial start in Delaware. Wondering if you could talk about what would happen if we don't have the CFC ruling prior to the start of that trial and how those two issues kind of relate to each other.

Actually, I don't think the Delaware trial is going to have any particular major impact if we don't hear from the CAFC first. We're going forward with that and all plans for the Delaware trial in front of Judge Robinson irrespective of what happens in the CAFC. We are obviously very hopeful about a decision in the CAFC which could come down any time now. It could happen before, could happen during, could happen after the case in Delaware. So our plans are to go forward and win in Delaware irrespective of what happens at the CAFC.

If hypothetically, the CAFC ruled first and ruled your favor, could you see a situation where a collateral estoppel might apply and we wouldn't need the bench trial?

Actually not. They're different parties. Estoppel is a very interesting concept, and I would rather not give a legal lesson on a conference call, but it doesn't work that way, unfortunately, for us.

My other question, I believe you have some patents up for reexamine, the PTO, and I was wondering if you could talk about where all that stands.

We're comfortable that our patents are well researched, well analyzed, and will withstand scrutiny on a reexam, which, as you are pointing out, is happening in some of our patents and as Harold pointed out earlier, we've got a lot of patents. If one were to be found invalid, which so far has not happened, but if one were to be found invalid or were changed by the process, we have a lot of other patents upon which we rely and which we think constitute the value of this company going forward.

Do you know off the top of your head how many are under reexam?

No, I was just counting the number of active litigations on which we're expecting outcomes, and so I didn't look at the reexams and put it into that list. So, no, I don't have that number with me right now. I'm sorry.

But you're confident that you have some patents that have already, let's say, in a Phase 2 Hynix case, been deemed infringed that are not up for reexam?

Yes, we're confident, as confident as we can be, based on the status of the patents that have been already in front of Judge White and continuing to go forward with those patents. And frankly as we said, there are so many other patents that we have, I just -- I'm not too concerned about any one particular patent.

Okay. And my next question, probably would be best for Sharon. There's a very interesting standardization effort in the flash area called ONFI. Stands for open NAND flash interface. When I was looking at this, it looked really like a perfect place for your technology, and I was wondering if you could talk any bit about what you think of ONFI or if you think it's a potential target market for Rambus technology or any comments you have on ONFI.

Should, Michael. First of all, yes, we are familiar with ONFI. And in terms of commenting on whether we would be specifically targeting some of our technology toward that, I guess what I would say in general is what we try to do is rather than look at something that's already kind of out there in the standardized space, we actually try to look further ahead to solving new problems. And so in that regard we tend to run ahead of the market a bit. And so as we're looking at our NAND efforts going on here, we're actually obviously engaging with potential customers, taking a look at very difficult system level problems and how we could apply our flash technologies to those. That's the approach we're taking versus looking at the existing flash space and even existing standards in the current flash market.

Thank you. And my last question is for Harold. This is kind of expanding on the question that Jeff already asked about the breakout year. There was a recent PC World article that came out just two days ago, and it stated that you see 2008 as a breakout year for Rambus technology to enter higher volume production as it wins over some HDTV clients. You already talked about Phillips. It used the word clients, plural. I was wondering if you could talk a little bit more about the HD -- high definition TV space, and how you think that fits into 2008 being a potentially good year.

I think the specifics of the market are extremely high bandwidth requirements and growing at rates I think of surprise to even us. And coupled with the high bandwidth requirement is the high bandwidth per device requirement in order to keep the cost of the systems down and the system architecture, because these are becoming literally PCs within a TV, less complicated. XDR we believe is the ideal market, ideal market for the XDR to enter. Obviously we are engaging with as many of those developers -- designers as we can. We'll never announce no in advance of signing them, and many times, as we pointed out in the past, even when we do sign them, our customers are reluctant to allow us to talk about it, and we never [point] out the customer's product. So we ask your forbearance here. It will be awhile. But Sharon is working very hard in that area.

Okay. Another thing the PC World article talked about is XDR technology making headway into cell phones and mobile devices, another area you touched on in the script. Is there any comments you'd like to talk about in terms of the low-power that you have coming in?

I think that's the issue that I touched on earlier. It is amazing what people are doing with cell phones, up to and including receiving broadcast full motion video. This produces -- this produces two very, very difficult to solve problems. Number one, the memory has to have a bandwidth -- has to have the bandwidth necessary to decompress and allow the presentation of full motion video, and number two, and probably even more vexing, that needs to be done with very, very little power dissipation. You may recall that in -- was it January of this year, February of this year, we had a paper at ISSEC that talked about our new technology in that area. So the combination of that technology and the high bandwidth made possible by the XDR architecture again would be a pretty good solution for the world's cell phone manufacturers.

Okay, and I missed the presentation from the International Solid State Circuit Conference. Is that technology out of Chapel Hill?

That's correct.

Thank you very much.

Thank you.

At this time, we have one question remaining in the queue. (OPERATOR INSTRUCTIONS) We'll go next to Vahid Khorsand, BWS Financial.

My question is regarding the sequential declines that there's been in the royalty revenues, and I want to see what kind of assumptions you're using in Q4.

This is Sharon. While I can't obviously speak specifically to the details that are in the Q4 guidance, clearly we're counting on an improvement over what we did in Q3. As we've mentioned, I think in the last few calls, we have a lot of new business development efforts going on, both on the product side as well as on the patent licensing side. We also do expect to see an uptick from customer engagements that are already underway. Some parts of our business do experience a seasonality, especially consumer electronics, where there are builds in preparation for the Christmas season. So we do see upticks in royalties from a number of sources. So we've got, I would say, all three those things in play here in the fourth quarter.

Just in talking on the conference call about the HDTVs and previously with Texas Instruments -- is that the focus you're going to move forward with on the consumer electronics side?

Well, I think it depends on what you put into the consumer electronics category. Right now we have four major markets of focus. We continue to focus on computing systems, which has been a traditional area for Rambus and high performance memory interfaces. We also, as you know, for many years have been a participant in the game console market. We continue to focus on that for future platforms. In addition, the HDTV market, which we talked about here, and then mobile, which is really a new market of focus for Rambus as we look at taking our low-power technologies and applying them outside of our traditional market segments.

Okay. My last question is, regarding the $1 million that's been held by the FTC -- now, is there been a transition away from the DDR [of the FTC] by those customers to DDR technology that is not under the FTC ruling?

This is Satish. No, not that we're aware of.

Should we expect that to happen with the new DDR replacing the older DDR that's being used currently by those customers?

Are you talking about the transition to DDR 3?

Yes.

Obviously over time that takes place, yes, and as a result, the MAR rates in the FTC ruling have less impact. But how and when that transition takes place we would be reluctant to speculate and comment on.

and for clarification, the FTC is not holding any of the money. It's either in escrow or held --

Held in abeyance, yes.

Thank you.

And that does conclude our question and answer session today. At this time I would like to turn the call back over to our speakers for any closing remarks.

Well, thank you, everybody, for joining our call. We look forward to seeing you at the analyst-shareholders meeting. Thank you.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.