Rambus Inc (RMBS) 2008 Q4 法說會逐字稿

Please stand by. We're about to begin.

Good day, everyone, and welcome to the Rambus Quarterly Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Satish Rishi. Please go ahead, sir.

Thank you, Operator, and welcome to the Rambus Fourth Quarter and Full Year 2008 Conference Call. I'm Satish Rishi, Chief Financial Officer, and on the call today are Harold Hughes, our President and CEO, Tom Lavelle, Senior VP and General Counsel, and Sharon Holt, Senior VP of Licensing and Marketing.

The press release with 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 4263715 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 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 technologies, among other things. These statements are subject to risks and uncertainties which are more fully described in the documents we filed with the SEC, including our 8-Ks, 10-Qs, and 10-Ks. These forward-looking statements may differ materially from our actual results.

Now I will turn the call over to Harold. Harold?

Thank you, Satish, and good afternoon, everyone.

Reflecting on 2008, given the challenges we faced and the accomplishments made, it was a pivotal year in our history.

We started the year still operating under the shadow of the FTC's remedy order, which followed from its deeply flawed liability findings. In April, the D.C. Court of Appeals overturned and vacated the FTC's order by a three to zero vote. The Court later denied the FTC's request for a re-hearing by an 11 to zero vote.

Despite what, in our reading, was a strong repudiation by the Appellate court, the FTC has appealed to the Supreme Court. In March, [we won the] coordinated trial against Micron, Hynix and Nanya, where a jury in Judge White's court in San Jose found unanimously that Rambus did not engage in anti-competitive conduct or make any misrepresentations while a member of JEDEC in the early 1990s.

And we were able to put aside a case tried in Virginia [when] the Supreme Court denied Samsung's request for appeal of the Court of Appeals for the Federal Circuit decision to vacate Judge Payne's order, all of this accomplished thanks to the hard work of our Legal team, led by Tom Lavelle.

Progress on the legal front, however, never seems to proceed in a straight line, would that it were so. Despite the fact that Judge White found that the document retention plan we had in place back in the late 1990s was proper, Judge Robinson in Delaware, when presented with largely the same set of facts, came to a different conclusion, a conclusion with which we respectfully, but nonetheless strongly disagree, and one in which we plan to appeal.

To say we are disappointed is a gross understatement. We share the frustration the shareholders feel with regard to the slowness of process. But, we are no less determined, and we'll continue the steadfast defense of our intellectual property while seeking fair compensation for its use. Given the adversity we have overcome in the past and the quality and commitment of the teams at Rambus, we remain confident we will ultimately prevail.

Turning now to our performance in the fourth quarter, we delivered revenues of 37.6 million, which was above the top end of our guidance. This result was driven by our licensees paying us royalties that had been withheld per the FTC's remedy order. As I mentioned earlier, those FTC orders have now been vacated. Needless to say, this was a one-time benefit to revenues.

In the past year, we worked through a very difficult restructuring that saw us eliminating about 90 positions. With the restructuring, we expect to achieve about $17 million in annual cost savings. Further, we maintain a strong cash position of $346 million at year-end.

We remain confident in the financial strength of the company. Our cash position gives us the flexibility to pursue opportunities that present themselves to complement, through acquisitions, our strong internal efforts to drive innovation. Given the economy and the challenges many are facing, there is no shortage of opportunities.

Meanwhile, thanks to our continued investment in research and development, at the end of Q4, we had 740 issued patents, another 501 pending applications.

We've also seen continued progress on the technology development front. Just recently, Elpida announced it had started sampling a one-gigabit XDR DRAM device that delivers an astounding 7.2 gigabits per second data rate, making it the world's fastest DRAM. Putting this in context, single XDR DRAM running at 7.2 gigabits per second enables an aggregate bandwidth up to 28.8 gigabytes per second. That's an almost order of magnitude more bandwidth than the fastest DDR3 device can deliver.

Thanks to the outstanding Rambus technology behind XDR memory architecture, though it was introduced in 2003, XDR outperforms the latest DDR5 memory launched five years later. We are further demonstrating the benefits of the XDR roadmap for cost-conscious applications, such as set-top boxes and HDTVs, [to] demonstrating the XDR memory controller can operate reliably at high speed and ultra low-cost [price] packages.

Thanks to Rambus innovation, this low-cost package technology alone can help XDR controller customers save an estimated $1.00 to $1.50 in the bill of materials cost of HDTV chips that typically sell for $10 to $15. We will be presenting the results of this effort, as well as showcasing it in a silicon demo, next week at DesignCon.

We will also be presenting five other papers at the show. One of these papers, for instance, will discuss more state-of-the-art advancements as part of the Terabyte Bandwidth Initiative unveiled at the end of 2007. Our team is also delivering some interesting technology papers at ISSDC in February. And we will have more exciting technology developments to unveil in the near future.

For example, the mobile market offers some great opportunities for innovation. Desire to offer compute-intensive media-rich applications in a sleek, small form factor and remain within the power constraints of current battery technology creates enormous challenges for mobile platform designers.

Tremendous challenges offer great opportunities for engineers and scientists at Rambus. They're gearing up to outline key innovations that will enable high performance, low-power memory architectures that meet the needs of the next generation of mobile phones and mobile multimedia products. Stay tuned for more news on this front.

And with that, I'll turn the call over to Tom to discuss our legal activities. Tom?

Thanks, Harold, and good afternoon, everyone.

As Harold just mentioned, and as we discussed at our January 9 special conference call, we did experience a setback in Delaware, with Judge Robinson finding that we spoliated documents in bad faith, a finding that is completely contrary to what Judge White found on the same issues in 2006 in the Hynix I case.

As a result, Judge Robinson found 12 more patents unenforceable against Micron. We plan to appeal her decision, but we understand that the real question, how this will impact the coordinated trial currently in front of Judge White.

The hearing was held on January 14 in front of Judge White, where he indicated he is currently weighing his options. All parties have filed briefs, and oral arguments will be heard tomorrow.

One of the options he's considering is to close out outstanding issues so that he can enter final judgment in Hynix I and certify Micron and Nanya's conduct-base claims, Samsung's spoliation and licensing claims, and perhaps the claim construction in the '05-'06 cases for appeal. Under this option, the court would stay the patent trial to allow the appellate process to play out.

We think the most efficient and fair approach would be for the court to resolve pending issues so that it could enter final judgment in Hynix I and certify for appeal the conduct-based claims relative to Micron and Nanya, as well as Samsung's California Law, Section 17-200 and contract claims while going forward with the patent trial on DDR2 plus claims against all four defendants. As it currently stands, Judge White scheduled the patent trials to being February 17.

Moving now to the price-fixing case in San Francisco. The trial there is still scheduled to begin March 16 in front of Judge Kramer. With regard to the complaint we filed in the International Trade Commission against NVIDIA Corporation and other companies whose products incorporate the accused NVIDIA products, the ITC in early December granted our request for an investigation. Our first meeting with the administrative law judge in that matter will also be held tomorrow in Washington, DC.

Going back to the FTC. As Harold mentioned, through our success in overturning that order, we had stronger than expected revenues for the fourth quarter. However, as expected, the FTC filed a petition for certiorari with the Supreme Court at the end of November. We filed our opposition brief to that writ last week, and we could hear any time between the end of February and October as to whether or not the court will grant the writ to hear the case. As we outlined in our opposition brief, we believe the petition for review would be denied.

During the quarter, we received notification from the US PTO that NVIDIA and Micron separately have filed re-examination requests regarding some of our patents involved in the cases. To date, 26 re-examination requests have been filed against 20 of our patents in various lawsuits, and the US PTO has issued eight office actions.

Note, however, that, once patents are issued by the US PTO, they are presumed valid until all appeals by the patentee -- that's us, in this case -- have been exhausted. One study indicated that it takes up to six and a half years for re-exam claims to work their way through the US PTO, and then the cases can be appealed to the Federal Circuit and possibly to the US Supreme Court. So, this is a very long process, and the patents remain valid during the whole process.

We have a lot of important legal events in the months ahead, and we will keep you updated as matters dictate.

With that, I'll turn the call back to Satish to review the financials. Satish?

Thanks, Tom.

As reflected in our press release today, we finished the fourth quarter with revenues of 37.6 million, up 28% from the previous quarter and down 7% from the year-ago quarter. Revenues were higher due to the collection of 5.2 million, or substantially all of the remaining FTC-related amounts previously held in abeyance. As you will recall, the FTC order was vacated, allowing us to collect the license fees in accordance with the contractual obligations with our customers.

As compared to the previous quarter, the increase in revenue was also driven by higher royalties, including the withheld royalties, and higher technology royalties related to the PS3. The increase in PS3 royalties was associated with seasonality in Q4. The decrease in revenue of 7% from a year ago was primarily due to lower contract-related revenue associated with lower bookings.

We completed 2008 with full year revenues of 142.5 million, down 21% from the previous year. The decrease in revenue was primarily due to the decrease in patent royalty payments from Qimonda and Elpida.

Operating expenses for the fourth quarter were 55.6 million, down 7% from the previous quarter and down 23% from the fourth quarter of last year. These operating expenses include approximately 8.7 million of stock-based compensation, 200,000 in restructuring costs, and a credit of 300,000 related to past stock option restatement. To provide a better comparison period-over-period, I'm excluding expenses related to these from my discussion.

Excluding stock-based compensation, restructuring and restatement expenses, adjusted operating expenses in this quarter at 47.1 million were up 6% from the previous quarter and down 10% from the quarter a year ago. This includes litigation expenses. Excluding litigation, our controllable expenses were down 19% from a year ago. The increase from the previous quarter was primarily due to higher litigation expenses and higher SG&A cost. The decrease from the quarter year ago was primarily due to lower engineering and SG&A, offset in part by higher litigation expenses.

Adjusted engineering expense of 17 million were essentially flat to the prior quarter. SG&A, excluding litigation, at 12.4 million was up 11% partially due to an internal transfer of a group from engineering. And litigation, at 17.7 million, was up 2 million, or 12%, from the previous quarter due to the higher case-related activity.

From the quarter a year ago, adjusted engineering expenses were lower by 25% primarily due to lower cost of contract-related expenses, compensation and facility and IT (inaudible). SG&A, excluding litigation, was lower by 10%, the lower corporate, marketing, consulting, travel and accounting, as well as audit costs. And litigation was higher by 10%

Our adjusted operating loss for the quarter was 9.5 million, or 37% lower from the previous quarter and 20% lower than the fourth quarter of 2007. For the full year, operating expenses were 231.2 million, down 8% from the previous year. These operating expenses include approximately 37.7 million of stock-based compensation, 4.2 million in restructuring costs, 3.3 million in expenses related to the prior stock option restatement issues, and 2.2 million in impairment charges. Again, to provide a better comparison, I'm excluding expenses related to these from my discussion.

Excluding these expenses, adjusted operating expenses for the year at [184.4] million, were up 5% from the previous year due to higher litigation expenses. Excluding litigation, we have controllable expenses at 128.8 million were down 6%. Litigation was up 16.2 million, or 41%, from the previous year due to higher case-related activity.

Our adjusted operating loss for the year was 41.9 million as compared to the adjusted operating profit of 4 million in the previous year. Overall cash, defined as cash, cash equivalents and marketable securities, excluding (inaudible) cash, was 346 million, a decrease of approximately 33 million for the third quarter of 2008.

During that quarter, we repurchased 1.6 million shares at an average price of approximately $9.02, amounting to $14.3 million. We also spent 18.7 million to repurchase and retire 23.1 million of face value zero-coupon convertible notes that are due in February of 2010. In addition, we received 2.9 million from stock option exercises.

Year-over-year, cash was down by 95 million. During the year, we spent approximately 49 million to repurchase shares, 18.7 million to repurchase the convertible bonds, and 18.3 million to settle the class-action stock option lawsuit, which was offset in part by the 5 million received as reimbursement from an insurance carrier and approximately 18 million received from stock option exercises.

As noted from above, litigation expenses continue to be a significant and varying portion of our operating costs. During the quarter and full year, we incurred 17.7 million and 55.7 million of litigation costs respectively. The restructuring that we announced in the third quarter, along with our ongoing focus on maintaining a strong balance sheet, aim to ensure that we will continue to pursue a strategy with solid funding.

Now, I will give you some thoughts regarding the [fourth] quarter. This guidance reflects a reasonable estimate, and our actual results could differ materially from what I'm about to review.

We expect third quarter revenue to be between 26 million and 30 million. We expect operating expenses, excluding stock-based compensation, to be between 57 million and 64 million, which include an estimate for litigation expenses of 25 to $31 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 our adversaries may take which may cause us to incur additional unplanned expenses in any particular quarter.

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

(OPERATOR INSTRUCTIONS.)

Jeff Schreiner with Capstone Investments.

Good afternoon, everyone. Thank you very much for taking my call.

Tom, the first question I have, I was just wondering, could you provide some interpretation for us and for investors, and what, if any, significance Judge Robinson's decision to stay, providing a final ruling over in Delaware has, or it might have, on the Northern District of California proceedings with Judge White?

Yes, that's a good question. Thanks, Jeff.

We're hoping and expecting that the two judges who have nearly opposite rulings on the same set of facts will enable the cases to go up on appeal together, and that I think would make an awful lot of sense from a judicial efficiency point of view and enabling things to get resolved as expeditiously as possible.

And so, that's what we're hoping and expecting is happening with respect to Judge Robinson. Judge White has already indicated he's interested in accomplishing that same goal, as I think I've pointed out in my prepared remarks.

All right, thanks. Just another question here.

What about -- you know there's a hearing tomorrow, obviously, after all the briefings have been filed, as to what impact, if any, Delaware may have in Judge White's courtroom. Would it be logical to think that that decision will need to be made before the first pretrial hearing on February 5?

I would hope so, but I don't want to predict that. Certainly it's going to have to be made before February 17, and obviously would make sense to make it earlier than that. We'll probably know a lot more after tomorrow afternoon's hearing in front of Judge White.

Okay. One more for you, Tom.

Do you have any more insight -- you just stated tonight on the call the trial's still set at the 16th of March in terms of Judge Kramer's court. Any more insight into whether or not the defendants in that case are going to try to bring a Delaware decision into that case?

Yes, there is definitely an intent on the part of the defendants to bring in the Delaware decision to try to impact that case. Whether they're successful is a very different question. Keep in mind that the San Francisco case is not a patent case. It is an unfair competition, effectively antitrust case, that doesn't depend on patents whatsoever. And it is our expectation and hope that the Delaware decision has no impact on San Francisco, but, again, it's a court of law, and we'll find out more when we are in front of Judge Kramer.

Okay. Just one last question, thank you.

Sharon, if you're there, if not, maybe Harold, but just trying to get an understanding now. We've seen this before. We saw a lot of momentum coming. The FTC came along in late '06, and it seemed to almost shut licensing down for the greater part of two years. What impact are you seeing right now, or what are customers saying in relations to the Delaware ruling, and how is that impacting licensing right now?

Well, I can make a few comments. Obviously I can't talk about specific engagements we have going on.

Certainly we've been asked many questions by our existing licensees. They're just curious to understand our take on the situation, but nothing really beyond that.

In terms of companies that are in discussions with us now about taking a license, as you would expect, anything like the Delaware decision is useful from a negotiation standpoint, and we certainly expect parties to continue to bring it up in the context of our negotiation. But, so far, it's too early to say what real definitive impact there will be.

Okay. Thank you very much for taking my questions.

(OPERATOR INSTRUCTIONS.)

Michael Cohen with [MDC] Financial.

Thank you very much for taking my call, and congratulations on reducing quarterly expenses by almost $17 million over last year's quarter. That's quite a feat. And also, congratulations on the buyback of the convertible debt. I think that was a pretty good move.

My first question is probably for Sharon. I was wondering if you could give us an update on who's currently licensed to produce XDR memory and which companies, then, are actually producing it, and maybe list that in order of who's producing the most quantity.

So, there are three companies who are currently licensed to produce XDR DRAM. Elpida, Qimonda and Samsung are all currently licensed and are all shipping XDR DRAM devices.

And which ones are producing -- if you could give us those three companies in the order of which one's producing or shipping the most?

That's a very good question. I certainly know that Elpida is shipping the highest volume. Between the other two companies, I don't even want to hazard a guess. But, it's that they are all three shipping. I can definitely say that Elpida is shipping in the highest volume currently.

Great. And my next question's for Tom. I was wondering, Tom, could you disclose the total amount of damages that Rambus is seeking in the antitrust trial in San Francisco?

We will be able to do that after the trial starts, but I can't do that now.

Okay. And this is -- my next question's something you probably don't have the answer to right in front of you, but I was wondering if you could, at some point, give us a total figure on the amount of litigation expenses that have been spent going all the way back to 2000.

As of -- maybe about six months ago, I think the number we had was about 250, so I'm pretty sure it's very close to 300 million, plus-minus maybe 20 million at this point in time. But, we can definitely tally it up. It shouldn't be very difficult. But, it's not a small number.

Okay. And that's close enough. I was mostly just curious.

Okay, thank you very much. I appreciate it.

You're welcome.

That concludes our question and answer session. I'll turn the conference back over to Mr. Harold Hughes for additional or closing remarks.

Well, thank you very much for coming. Look forward to talking to you next quarter.

That concludes today's conference. You may disconnect at this time. We do appreciate your participation.