Rambus Third Quarter Conference Call, 10/19/2006 Operator: Please stand by. Good day everyone, and welcome to this Rambus third quarter 2006 conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Satish Rishi. Please go ahead, S -- Sir. Satish Rishi: Thank you, Operator, and welcome to the Rambus 3rd quarter 2006 conference call. I'm Satish Rishi, Chief Financial Officer, and with me today are Harold Hughes, our present CEO; Bob Kramer, our acting General Counsel; and Sharon Holt, Senior VP of Sales, License and Marketing. 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 web site at www.rambus.com on the Investor Relations page and the 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 a -- accessed on our website beginning today at 5pm 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 sta -- These statements are subject to risks and uncertainties which are more fully described in the documents that we file with the SEC, including our 8-Ks, 10-Qs, and 10-Ks, and these forward-looking statements may differ materially from our actual results. Now, I'll turn the call over to Harold. Harold? Harold Hughes: Thanks, Satish, and good afternoon, everyone. In Q3, we delivered revenues that exceeded the guidance we provided in our last call, delivering 45.9 million in revenue. 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 our team ra -- 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 Q through -- Q3, we signed a new technology licensing deal with Toshiba, which allows them access to the D -- to the XDR memory controller cell. Toshiba will implement the XDR controller in its 65 nanometer process for its own applications as well as making it available to their ASIC [application-specific integrated circuit] 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, PlayStation 3, set for 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 [PlayStation 3]. Three years after we officially unveiled the XDR memory architecture, we're very excited to see it part of the highly anticipated PlayStation 3. This validation of our business model as a superior products and technology that our engineers and science -- 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 the XDR controller, Toshiba also licensed our PCI Express PHI interface cell. We develop 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. Core of our business model, as you know, is our patents and products. I've touched on the recent progress we've made on the product front. Now, I'd like to spend a few moments on our p -- 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, key me -- a key means of en -- ensuring signal integrity in high speed serial links such as PCI Express. We also received a patent for our invention enabling fully buffered DIMMs. Fully buffered DIMMs allow for very large memory capacities in servers and workstations. I'm both impressed and proud of the tremendous ability of our engineering team to create world class technologies for our customers. Speaking of world class engineering talent, I'm also pleased to say that both of our find -- 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 technology. Throughout 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, we announced that Dr. Gary Bronner had joined Rambus to serve as Technical Director. Prior to Rambus, Gary had a distinguished 21 career -- 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 welcomed 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 strategy. Dave will also serve on the compensation committee. We announced in a press release early today an update to our independent stock option investigation. The audit committee and the invest -- and the investigators have made significant progress given that they had to examine 1.5 million emails 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 pre-tax, non-cash, stock-based compensation charge in connection with these stock op -- stock option grants, will be in excess of 200 million dollars. I want to emphasize this estimate is preliminary. The board has formed -- 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 for the stock option granting activities. Satish will provide more details on the results of the investigation in his section of the call. I 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 of Intel. I again apologize to our shareholders and promise both to resolve these issues as quickly and fairly as possible to take actions to ensure 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. With that, I'll turn it over to Satish to review financials and to talk further about the investigation. Satish. Satish Rishi: 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 that I give -- give an update on the investigation and provide revenue guidance for the 4th 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 3rd quarter. Total revenues of 45.9 million dollars were up 28% for the 3rd quarter of 2005 and down 6% over the 2nd quarter of this year. Most of the increase from the 3rd quarter of 2005 was due to royalties such as the result of Fujitsu, AMD, and Infineon agreements partially offset by lower royalties associated with Intel patent cross license agreement. Cash and investments were 421 million, an increase of 33 million of the same quarter a year ago, and an increase of approximately 5 million over the last quarter. Regarding the 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. The majority of incorrectly dated granted occurred between 1998 and 2001. Between 1998 and 2001, for a substantial number of annual and special grants, the grant dates used differed from the actual measurement dates. The majority of the non-cash compensation expense associated with the financial restatements will relate to grants on about 5 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 3 stock option grants between 2 -- 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 allocations of 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 pre-tax non-cash charge in excess of 200 million dollars 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 the future period. There could also be other additional charges which we have not yet estimated. We will we working with 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 ensure 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 -- We met with the listings qualifications panel of Nasdaq on September 21st, 2006 to request continued listing and extension to December 19th, 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 it has granted our requested extension. We are making every effort to file a -- to file a restated financial statement and delinquent quarter -- quarterly reports as soon as practicable. We had also announced that on September 8, 2006, we had received a notice of forfeited default 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 the question as to whether we [are] in default under the terms of the indenture, if an event of default were to occur, the trustee or holders of at least 25% in aggregate principal amount of the notes could -- could accelerate the note 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 dollars in cash and investments, we feel that if the notes were put back to us, we have adequate financial resources to pay any unpaid principal and any additional interest due on the note. 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 -- what I'm about to review. We expect that Q4 -- Q4 revenue will be between 44 and 47 million dollars. Bob will now provide you with an update of the status of our litigation. Bob? Bob Kramer: Good afternoon. A number of things have happened this quarter on Rambus's 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 24th, the jury found that Hynix's SDRAM, DDR, and DDR2 products infringed valid Rambus patents and awarded damages amounting to 307 million dollars for products sold in the U.S. prior to 2006. Following this decision, the court granted a motion offering Rambus the option to take a reduced award of a 133.5 million instead of a new trial. Rambus accepted the remittitur on July 27th, 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 Rambus licensee in the year 2000. The court also applied a 4.25% royalty rate to Hynix's DDR2 products for the same time period. Following the Federal Trade Commission's August 2nd decision, which I'll get to in a few minutes, on August 22nd, the Hynix court conditionally stayed the case until the earlier of February 2nd, 2007 or the issuance of a final order of the FTC. The court noted 2 reasons for this stay. First, a potential for a 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. The stay was conditioned in part upon Hynix's agreement to post security adequate to cover the damages should Hynix fail to prevail in the 3rd phase of the trial or on appeal. Hynix has agreed to post the bond, but the amount has not yet been finalized. Just this week, Hynix filed its brief seeking to establish the applicability of the FTC's findings to the 3rd 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 some effect. For more information on these briefs, they're available on our web site. A hearing on both these issues will be scheduled now for July 12th, 2007. Hynix has also asked the court to certify for appellate review certain issues decided by the Hynix court in the first of two phases of the trial. A hearing on that motion has been scheduled for November 17th. Depending on the trial schedule of Hynix's lead attorney, the 3rd phase of the Hynix case is scheduled to go forward either on March 19th or July 9th next year. Turning to the Micron case, as of the last revenue call, Rambus was preparing for an October 21st trial in the first phase of that case which Micron had brought in Delaware. On September 18th, the Delaware court continued the trial to a later date. 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 6th, Rambus, Samsung, Micron, Hynix and Nanya participated in a case management conference before Judge Whyte for the 3 additional patent cases pending in that court in San Jose. These are two cases filed by Rambus related to DDR2 and subsequent graphics DDR products manufactured by these parties as well as a case against Samsung related to SDRAM and DDR SDRAM products. These cases have been stayed by the court pending the conclusion of the 3rd phase of the Hynix case mentioned earlier, and the defendants were moving in this motion -- in this case management conference to continue the stay until after a judgment in the Hynix case and a final decision of the FTC. A 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 comment. We have not yet received an order from the court on this issue. Let me move now to an update on our non-patent cases. In a case filed by Rambus in 2004 related to what be believe was a joint boycott of Rambus's RDRAM products, you may recall that the San Francisco state court had previously denied Samsung and Hynix's 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 in November, we believe it may be resolved late this or early next year. Meanwhile, discovery is ongoing on a number of matters in a case management conference scheduled for December 11th. 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 3 DRAM company executives, 2 from Samsung in Korea, and a 3rd from Hynix in the United States. Finally, as you know, on August 2nd, the Federal Trade Commission issued a decision reversing the decision of its Chief Administrative Law Judge in holding that by attempting to draft patent claims that read on JEDEC's standards, which Rambus did to protect aspects of its earlier inventions, Rambus vio -- 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 15th. 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 questions. Operator: Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the * key followed by the digit 1 on your touchtone telephone. If you're on a phone that has a mute function, please make sure to turn off your mute to allow your signal to reach our equipment. Once again, that is *1 to ask a question, and we will pause for just a few moments to allow our audience members a moment to respond. And we will take our first question from Jeff Schreiner with American Technology. Jeff Schreiner: Just wanted to ask two quick questions here. The first question's kind of theoretical in nature. Looking at the company and the FTC case, and I'm 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 on this some more, if maybe 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. Bob Kramer: Let me -- this is Bob. I'm gonna try and break this apart and answer the first part of that question ... and the other half of that, and my understanding -- you were breaking up 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 gonna reach a royalty rate. I have to stop there. Sharon Holt: 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 -- 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 how to handle an appeal if we decide to go that route, and then -- 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. Jeff Schreiner: OK, and just a final question. Satish, I was just wondering if you could break out the allocation of revenue in the quarter between contract and royalty? Satish Rishi: We -- we haven't broken it out, but I think it's ... to the last quarter about 4 million dollars in the -- on the contract revenue, 41 million on the royalty side. Jeff Schreiner: Thank you. Operator: Once again, before we move to our next question, I would like to invite our audience members to signal to ask a question by pressing *1. Again, that is *1. You will now hear from Michael Cohen with Pacific American Security. Michael Cohen: Hi, guys. Harold Hughes: Hi, Michael. Michael Cohen: Many Rambus investors have been concerned about a possible acquisition of Qimonda by companies such as Micron or Samsung in light of the favorable deal given to Infineon. Well, Qimonda has a market cap of 5.4 billion. You know, Rambus only currently has a market cap of 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. Harold Hughes: 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 -- of the -- of the -- of the -- of the takeover math actually than the -- than the legal defenses you have had. Michael Cohen: 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, or? Satish Rishi: Yeah, Michael. They're -- they're all in the public -- they're -- they're in the public domain. I think we filed with the SEC. I think from the time we filed them, they've 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 web site, I think, on the SEC web site. Michael Cohen: OK. And the amendments that would have been subsequently made, when will we learn about those? Satish Rishi: Whatever the filing requirements are, we follow them diligently, so we're required to file them right away, we'll file them right away, but, you know, we are not delinquent in our filings with the SEC on any of these issues. Michael Cohen: OK. And would you be sort of willing just to share your philosophy with regard to either a friendly or hostile takeover? Harold Hughes: Well, we're here to serve the best interests of the shareholders, obviously. I mean, whatever other 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. Michael Cohen: OK. And that's fine. Satish Rishi: And Michael, we, you know, just to -- well, we -- we -- there's 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. Michael Cohen: OK. My next question is regarding John Danforth. When John Danforth joined Rambus's General Counsel as your legal situation was suffering -- and many Rambus investors regard the subsequent improved situation really as directly attributable to his efforts -- in light of this, I was wondering if you can offer any explanations as to how his removal from the post of General Counsel can be considered in the interest of shareholders. Harold Hughes: Well, as you preface in your question, I think John's greatest skills by far are 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. Michael Cohen: And as General Counsel -- I mean -- he would have the full ability to delegate everything that's underneath, so why would that necessitate a removal from the office of General Counsel? Harold Hughes: Well, that's -- that's really internal to the management of Rambus, isn't it? I mean, I -- I put my staff together based upon what I think's in the best interest of moving the company forward, and quite frequently since I've been here, I have rearranged respective responsibilities of staff members. Michael Cohen: OK -- Harold Hughes: I think -- I think to the better result of the -- of the company. Michael Cohen: OK. And I have some more questions, but I'll jump back in queue and come back if -- if there's time permitting. Thank you. Operator: Once again to our audience members, if you do have a question, please signal by pressing *1 at this time. Again, that's *1, and we will pause again [tones for *1] for just a few moments. Once again, that's *1, and we'll pause for [tones for *1] just a few moments. We will take a question from Daniel Amir with W.R. Hambrecht. Bessy Van Hees: Hi, this is Bessy 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 you expect the growth in the revenue guidance that you provided? For next quarter? Or calendar Q3? Q4, excuse me? Sharon Holt: Hi, this is Sharon Holt. We've had a push throughout the year to -- 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, you know, from -- from the guidance that Satish provided, it's coming from a variety of different customers and products and technology. Bessy Van Hees: Oh, great. Thank you. Do you expect to sign another license agreement within the quarter? Sharon Holt: I cannot comment on that. Bessy Van Hees: OK. Thank you very much. Operator: And, once again to our audience members, if you would like to ask a question, please signal by pressing *1, and we will pause again for just a few moments. 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. Satish Rishi: All right. Well, thank you, everybody, for your continued support, and we look forward to your -- to speaking to you soon. Thank you for joining us on the call. Operator: 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.