Rambus 4th Quarter 2006 Conference Call, 01-24-2007 Operator: Good day, everyone, and welcome to this Rambus 4th quarter 2006 conference call. Today's call is being recorded. At this time, I'd like to like to turn the call over to Mr. Satish Rishi. Please go ahead, Sir. Satish Rishi: Thank you, Operator, and welcome to the Rambus 3rd [4th] quarter 2006 conference call. I'm Satish Rishi, Chief Financial Officer, and with me today is Harold Hughes, our President / 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 [questions and answers]. The press release for the results that'll be discussed here today has been filed with the SEC on form 10-K -- 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 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 simul -- simultaneously webcasting this call, and a replay can be accessed on our web site 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 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 ov -- turn the call over to Harold. Harold? Harold Hughes: 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 is 194.2 million dollars, itself a record year and coming close to a half a 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 -- pivotal year for the company. Primary among -- among these challenges was a need to address a 10 million dollar 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 was -- for 2006 -- was up 24% over 2005, in Q4 2006 was up an equal percentage over the same quarter, 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 4 XDR devices manufactured by Rambus customers Elpida and Samsung. PS3 also uses our Flex I/O processor bus -- provide ultra high bandwidth between the Cell Broadband Engine, the graphic processor, also known as the RSX, and the South Bridge chip which provides connectivity to the hard drive, network, and peripherals. We are very proud to have worked with Sony, Toshiba, and IBM to bring this flagship implementation of the Cell Broadband Engine to market in such an exciting product as the PS3. We showcased this powerful platform at a number events around the world, including a Rambus developer forum Japan, held at the end of November last year, where had nearly 800 engineers and business managers joining us for technical training sessions and customer presentations. We also showcased our contributions to the PS3 at the recent Consumer Electronics Show in Las Vegas. We started 2007 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 3 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 bill of materials, all enabled by XDR's superior bandwidth capability; and this advantage is dramatic. One XDR DRAM can deliver the performance of 4 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 excellent -- This is an excellent illustration of our business model in action and what makes Rambus unique. We put in place -- 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 a relationship with Qimonda and to that a 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 by computer entertainment systems and PCs, will make their way into applications with less demanding performance requirements, such as mobile phones. This is what underpins the Spansion passion -- patent license agreement with certain sugmements -- segments -- 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 result of 2006. We continue our unwavering commitment to fundamental research to augment our leadership patent portfolio. As a meas -- 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 -- having only just passed the 500 issued patent milestone in June 2006, and we have 469 patents pending. We've made great progress from where we were at the end of 2005 with respect to our patent development and management process, and I'm 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 posi -- 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're very pleased to have him here, man -- to manage our overall compliance and government responsibilities -- governance responsibilities. John Danforth remains our Sen -- Senior Legal Advisor, focusing primarily on our joint boycott case foiled -- fi -- 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 I'm very ha -- 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 -- Martin Scott as a Senior Vice President, chartered 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 long-time Rambuser Samir Patel who for the past 16 years has been an engineering leader at the company. I'd like to thank Samir personally for his dedication and service to Rambus. As particular career -- 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 which Shami -- Samir all the best as he embarks on the next -- next phase of his career. We are very fortunate to have someone of the caliber of -- caliber of Martin Scott to take the baton from Samir as we deploy our technology products and expanding number of customer semiconductor and system applications. In summary, we had a v -- 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 lic -- patent cross-license agreement. I am very pleased with our progress, very optimistic about the future. While we clearly have some challenges, such as the independent investigation in the financial restatement, 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, patent and product leadership, and helping our customers deliver the best electronic pro -- electronic products in the world. And, with that, I'll turn it over to Satish. Satish Rishi: 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 dollars 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 dollars 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 dollars 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, Sony's PlayStation 3 related agreement. Given that we're 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 ex -- line item expense on our P&L, but to help you gauge the overall performance of the business, there -- there are a few items I -- I can and will try to highlight. Our overall cash, defined as cash, cash equivalents, and marketable securities, increased 81 million dollars year over year. This includes an increase of approximately 34 million dollars related to stock option exercises in the first 2 quarters net of the share repurchases we had done in the first quarter of the year. It also includes payments of approximately 39 million dollars related to our ongoing litigation expenses which also includes a 10 million dollar bonus we had announced in July and also includes approximately 11 million dollars 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 which we are very pleased with. [Sound of Blackberry interference.] Let me provide you with a brief update on the status of 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 insure that other areas both related and unrelated to stock options have been accounted for correctly. Other companies who have gone through successful restatements recently 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 insure 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 take -- 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 of 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 2 years that give us visibility to these LOAs, or leaves -- leaves of absence, we lacked the systems for most of the time period concerned that is under investigation. We -- 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 -- 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 find -- what we may or may not find may not have any significant impact on the financial statement, but nevertheless, we have to go through this thorough process to insure such issues have been addressed and researched appropriately. This -- This is just one example. There are other similar issues where the process als -- where also the process is time-consuming. While we are continuing to make progress, we do not believe we will have the restatement completed by February 9th, which brings me to the Nasdaq update. Last quarter, we announced that as of November 20th, we had received an extension from the listing qualification panel for the filing of our 2nd quarter and 3rd quarter 10-Qs until February 9th, 2007. Because they could only grant us an extension to February 9th, we elevated our request to the Nasdaq listing and hearing review council to call this matter for review and in -- and connection with this to grant us a stay. The Nasdaq listing council has recognized this -- this -- has recognized the special complex circumstances surrounding stock option-related restatements and is uses -- 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 these criteria. We -- We expect to hear from them soon. While there 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 1st quarter of 2007 in regards to revenue. This guidance reflects our recent -- our reasonable estimate, and our actual results could differ materially. We expect that Q1 revenue will be between 48 and 52 million dollars. With that -- would like to take your questions. Operator, please open the call for Q&A. Operator: Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the * key followed by the digit 1 on your touch tone telephone. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, for -- *1 for questions, and we'll take our first one from Jeff Schreiner with American Technology. Jeff Schreiner: Good afternoon, gentlemen. Harold Hughes: Good afternoon. Jeff Schreiner: 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? Is -- you know, some companies would judge that as 3% of revenues, 4%, 5%. What would Rambus consider material to be if this is gonna be a non-material contribution in 2007? Satish Rishi: Well, Jeff, we don't -- we don't disclose what our material -- our materiality thresholds are, but, you know, we -- these are guidelines that we use, but without telling you what our materi -- materiality threshold is, I can tell you that knowing that knowing what the number for Spansion is, it is not material to our -- to our revenue for 2007. It is -- it's -- you know -- it's a -- 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 gonna be material. Jeff Schreiner: OK. I know that you say that you cannot pull out any line items in terms of the cost structure due to the ongoing options investigation. Can you give us a breakout between royalties and contract revenues? Satish Rishi: We'll -- We'll do that when we file our 10-Q. We were not ready to do that at the call, because we haven't done that for the last 2 or 3 quarters. We're trying to give it this quarter or the full year without having broken it out in the past. We'll -- We'll do that in thorough detail when we do our Q and 10-K. Jeff Schreiner: OK, and just one last question. I was just wondering if the hearing -- there's 2 to 3 scheduled for Judge Whyte's court February 2nd and has been moved to this Friday the 26th. Was that just due to scheduling in -- in his court and the schedule he needed to -- to do -- to abide by for other cases? Tom Lavelle: Actually -- this 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 -- of a variety of people. Jeff Schreiner: OK. Thank you. Operator: Thank you. We'll go next to Daniel Amir with WR Hambrecht. Daniel Amir: Yes, thanks a lot, guys. Harold Hughes: Daniel, how are you? Daniel Amir: Good, how are you? Harold Hughes: Excellent, thank you. Daniel Amir: A few -- a few questions here. First of all, a follow-up question on the previous with related to -- to Hynix and Judge Whyte. I mean, originally, it seemed like that he postponed the -- kind of the hearing -- as we await a final resolution or final judgment from the FTC. Now that we're still waiting for the FTC, what, you know, what is -- what can play out basically in the court room? I mean, is this just, you know, is this something that we're still waiting for another phase or -- or where does it exactly stand with Hynix now? Tom Lavelle: Well, as you heard, we're having the hearing on the 26th, which is Friday. I suspect we'll know a lot more Friday after the hearing, although it's possible that Judge Whyte may not make decisions given the issue in front of him that the FTC has not yet made its decision, so it -- it's hard to anticipate exactly what Judge Whyte is gonna do Friday, and all I can say is we'll know more then. Daniel Amir: OK, and, you know, with related to some of the, I guess, milestones for 2007. I mean, can you a bit highlight kind of what's -- what's the goals here for '07 -- what -- what's kind of your -- your laying out to -- you know -- to your employees of, you know, how do you want the company to play out here in the next 12 months? Harold Hughes: The -- 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 -- will try to grow both aspects of our -- 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 doing it, but we will have a challenging plan to present to employees, and I have every confidence that the employees will accept that, and we hope to do -- we hope -- to do as well in 2007 vis a vis that plan as we did in 2006. Daniel Amir: So, is it to assume that we should see further licensing agreements in '07? Harold Hughes: There certainly will be plans to do that. We obviously can't commit as to timing and names, but that is our business. Daniel Amir: OK. One of the final questions, Satish. I mean, can you comment whether you've done any buybacks thus far? I know you have a buyback plan, but have you done any buyback of shares? Satish Rishi: In 2006 in Q1, we -- we had some buyback which we had announced at -- at that time. I think there's about 21 or 22 million dollars worth of buyback, but once we had the investigation started, we have not done any buyback since then. Daniel Amir: OK. All right. Thanks a lot. Satish Rishi: Thank you. Operator: Once again, if you'd like to ask a question, please press the *1 on your touch tone telephone. We'll take our next question from Michael Cohen with Pacific American. Michael Cohen: Congratulations on the revenue number. Satish Rishi: Thank you, Michael. Harold Hughes: Thank you. Michael Cohen: 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 -- are you only folks on the controller market? A little bit of color on terms of where your -- your opportunity is in flash. Sharon Holt: Hi, Michael. This is Sharon. I'll take that question. So, you know, essentially, what we see right now happening in flash is that technologies that -- that we developed some time ago which initially found their home in high performance electronics have migrated -- some of those technologies and inventions have migrated their way, you know, down into the consumer market, in this case, the mobile market and flash, and, so, really, inventions of ours from several years ago have -- 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, you know, 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. Michael Cohen: Do you think it applies to NAND as well as NOR? Sharon Holt: In terms of future development, again, I'm not prepared to specifically say where our -- where our efforts are going there. In terms of the inventions underlying the agreement with Spansion, they are specifically related to synchronous flash technologies. Michael Cohen: OK, and my next question is for Satish, and I'm not sure he's gonna 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. Satish Rishi: I -- I think your -- your first premise was fairly accurate. [Laughter in the background.] Michael Cohen: OK. Well, it's a nice, worth a try. Harold Hughes: We don't -- we don't mean to be a black box, Michael, but in our opinion, it only works to the benefit of -- of parties that we don't want to have benefited when we very specific on what our licensing rates are, and the -- Michael Cohen: Right. Harold Hughes: -- best thing for our shareholders to keep this as confidential as we can reasonably. I hope you understand that. Michael Cohen: OK, and I was wondering. You mentioned that the deal with Qimonda is a technology license was additive to the patent license. Do the 2 together come in the same ballpark as it would be with, let's say, Samsung and Elpida? Sharon Holt: We can't comment on that, Michael, but, yes, I -- I just -- to -- to clarify your -- 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 -- a -- a -- really something we're very very excited about, as Harold mentioned. Having another one of the top DRAM companies on board with our flagship technology is very exciting to us and should lead to a lot of new opportunities for XDR in the market. Michael Cohen: Great. Thank you very much. Tom Lavelle: Thank you. Operator: Thank you, and at this time it appears there are no further questions. Tom Lavelle: Hello? Satish Rishi: Hello? Harold Hughes: I think we got cut off. Operator: At this time, it appears there are no other questions. Satish Rishi: All right, then, thank you, Operator, and let me turn this over to Harold for his closing remarks. Harold Hughes: Thank you, everyone, for joining. As you can see, we made a lot of progress in 2006. There are still unknowns that -- that confront the company that I think we all having growing confidence of our ability to address those. Quite frankly, it's made us tougher, if anything. We're optimistic about 2007. We're certain as to our ability to create technology that will have great value for the shareholders down the road, and with that I'll end and look forward to talking to ya next quarter. Thank you. Operator: That concludes today's program. You may disconnect your line at any time.