2007-02-05 Rambus Conference Call to Discuss FTC Remedy [In this conference call, the Rambus personnel are apparently using a recording system which cuts off their speech if the volume of their speech becomes too low or are using a tape recorder which physically skips parts of the audio.] Operator: Please stand by. We're about to begin. Good day, everyone, and welcome to the Rambus Conference Call to Discuss FTC Remedy. Today's call is being recorded. At this time, I would like to turn over the call to Mr. Satish Rishi. Please go ahead, Sir. Satish Rishi: Thank you, Operator, and welcome to this morning's conference call regarding the Federal Trade Commission's -- Federal Trade Commission's order on remedy. I'm Satish Rishi, Chief Financial Officer, and with me today are Harold Hughes, our President / CEO; Tom Lavelle, our General Counsel; and Sharon Holt, our Senior Vice President of Sales, Licensing and Marketing. 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 4208529 when you hear the prompt. In addition, we are 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 state[ments] 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 result. Now, I'll turn the call over to Tom. Tom? Tom Lavelle: Thank you, Satish, and good morning every[one]. This morning, the FTC made public its order on the issue of remedy back to the case against Rambus which was originally brought against us in June of 2002. There are a number of documents the FTC has published as part of its remedy. First, there's a 30 page opinion of the c[ommission]. There are also 2 statements by commissioners Rosch and Harbour which concur in part and dissent in part with the opinion. These statements run 14 pages, respective[ly]. Finally, there is the order itself which spans 12 pages and 12 sections. The FTC provided Rambus a copy of these documents last Friday night. We have been studying ... Given this body of ma[terial], we are still digesting, and further analysis ... has made more difficult by language the commission has used in rendering its remedy, which in certain places is ambiguous. A few things are clear. First, the commission has confined its remedy to JEDEC compliant SDRAM, DDR SDRAM memory and controllers. Second, it has specified maximum allowable royalty ra[tes] ... products as follows: a 0.25% for SDRAM memory, 0.5% for SDRAM controllers. With DDR, it has specified a 0.5% for DDR SDRAM memory and 1% for DDR SDRAM controllers. The commission has also provided a further cap to the non-memory royal[ties] Rambus can ... on broader sys[tems]. These rates would apply only on a forward-going basis. Third, 3 years after the order is final, these maximum royalty rates for JEDEC-compliant SDRAM and DDR products change to 0%. We are disappointed the commission adopted rates below what we argued were reason[able] and were the result of our negotiations. I will return to the question of when the order is final later in this call. Let's talk about what the commission's order does not attempt. It does not attempt to limit our ability to license our patents used in memory and controller products standardized after DDR. This means our rates for products for the DDR2, DDR3 standard, or for graphics memories and controllers, such as GDDR2 and GDDR3, are unaffected by the FTC's order. We now have both the commission's liability and remedy o[pinions]. In both opinions, we believe the commission got it fundamentally wrong. It vacated the decision of its Chief Administrative Law Judge, who, after reviewing all the evidence and hearing the live testimony of witnesses, found resoundingly in favor of Rambus and dismissed the FTC's complaint. The commission, on the other hand, in its liability order, selected findings from the record that supported its theory, but ignored those that did not. It continued this approach in the remedy order. It is very unfortunate that the commission chose to ignore the finder of fact who was in the best position to judge the full panoply of evidence, credibility of the witnesses, and who provided fully nuanced decision. I would also note that the Administrative Law Judge reached the same conclusion that the Court of Appeals for the Federal Circuit found on these facts. The commission, in its opinions, appeared to overlook or to misunderstand important parts of the record. For example, in reaching its conclusion that the royalty rate should be reduced to zero after 3 years, the commission cites one Rambus license agreement where the per unit royalty falls to zero on un -- on -- excuse me -- specified products after reaching certain target quantit[ies]. Fact: That very license was structured to have the market rate determined royalties recommence on the next higher density RDRAM product designed by Rambus, ensuring Rambus of an ongoing royalty stream for its inventions as the benefits of Moore's Law made better products available to the consumer. The commission chose to ignore that key fact. So, where do we go from here, and when is ... effect? The FTC's order will become effective in 60 days absent a stay, first from the commission, or, if denied, then from a federal appellate court. We intend to appeal the FTC's decision. We'll seek a stay of the remedy order. Again, given the amount of material, the complexity of the issue ... possible impact on our existing business, we have a good bit of in -- of additional analysis that we must do before we can comment further on the order. You'll undoubtedly want to know the impact of the order on our current litigation or on our current business, but we're not prepared to comment further on that today. We'll give you additional updates in the future as these issues become more clear. With that, we'll take your questions and provide what answers we can give, given the restrictions as I just stated. Operator, please open the call for questions. Operator: Thank you, Sir. If you'd like to ask a ques[tion] today, please press the * key followed by the digit 1 on your touch tone phone. If you're using a speaker phone, please be sure to pick up the handset or turn off the mute function in order for a signal to reach our equipment. Once again, if you would like to ask a ques[tion] today, please press the * key followed by the digit 1. We go first to Jeff Schreiner with American Tech Research. Jeff Schreiner: Good morning. How's everyone doing this morning? Tom, was just wondering if you could comment on when the patents had been set to expire that had related to SDRAM and DDR. Does that have any bearing on the commission's decision to enact a 0% commentary? Tom Lavelle: That would be speculative as to the expiration of the patents versus their 3 year order. They don't identify in the order the expiration dates of the patents, but as you might know, there are multitude of patents involved, many of which expire 2010, some in 2011, and some beyond that. So -- Jeff Schreiner: OK. Tom Lavelle: -- it's not directly related. Jeff Schreiner: Could you give any further color in terms of what the commission's referring to regarding non-memory products? Tom Lavelle: Oh. You're talking probably in the -- in the systems area. It's -- that's a part of the area we're looking at closely, because the language doesn't specifically identify systems, but that's how we're currently reading it and want to make sure that we're reading it correctly before we finalize that level of detail. Jeff Schreiner: OK. Just one final question. I appreciate the time this morning. Where do we go from here? What's the process? You go, obviously -- the company has made it known through the press release that you plan to appeal. Where will the company appeal to? Have you chosen the venue yet? Tom Lavelle: Well, the venue is set by law, and, ultimately, you have to appeal or ask for reconsideration to the Federal Trade Commission, which, of course, we will do. In the event the Federal Trade Commission does not grant reconsideration, we will appeal to an appellate court, a federal appellate court, and we're not sure which one at this point, assuming we have to do that, if the FTC doesn't grant recon[sideration]. Harold Hughes: But it's our option. Jeff Schreiner: Thank you. Operator: We go next to Daniel Amir with WR Hambrecht. Daniel Amir: Morning. Couple of questions just to clarify. First of all, so, the order takes effective in 60 days, but if you appeal and the order doesn't take into effect -- just -- just to understand that correctly that point? Tom Lavelle: Well, there's -- there's two separate questions. One is the appeal, and, yes, we will appeal or ask for reconsideration and then presume ... Separate question is whether a stay is granted. They're -- They're separate issues, so we're asking for -- we're going to be asking for both. The stay would stop enforcement of the order as proposed by the FTC. Daniel Amir: OK. So, does that mean, basically, that this -- if you understand the FTC correctly -- that 3 years from, let's say, 60 days, let's say in a certain scenario, you won't be able collect royalties on SDRAM and DDR. Is that correct? Tom Lavelle: That would be correct if we don't get the stay and the order goes into effect and we don't win the appeal. Correct. Daniel Amir: OK. The second thing is related to these rates. I mean is this just from now going forward, or is there a retroactive portion? Tom Lavelle: The commission specifically said it's going forward and prospective, so we take them at their word on that right now. Daniel Amir: OK. And, finally, there's no -- I mean at least by reading that gets the document there's no fine associated or anything like that. Is that correct? Tom Lavelle: That's correct. Daniel Amir: OK. All right. Thanks a lot. Satish Rishi: Thank you. Operator: We go next Mike Crawford with Barrington. Mike Crawford: Thank you. I -- I understand you're gonna appeal this order eventually to a federal appellate court, but I'm unclear on this 3 year time frame? Does that -- is that imply -- I'm -- I'm looking through the order. I can't see language relating to the past, the past 5 or 6 years. Mike Lavelle: That's correct. Its intent -- They stated in there that it's intended to be prospective, which is going forward. Mike Crawford: And, so, while they've been dragging their feet for the past 5 years, they s -- would -- would suggest that you would not get royalties for products that infringe your technology over that time? Mike Lavelle: I'm sorry. I don't understand. I didn't hear the question. Mike Crawford: So -- So, they're -- they're -- they're saying nothing for the last 5 years. Mike Lavelle: I don't believe the opinion addresses the past 5 years. I believe it is -- is focused on the future and forward-going. Mike Crawford: Right, so what their opinion of what the FTC's intent is in regarding the last 5 years? Mike Lavelle: We haven't completely analyzed all the language of the agreement at this point -- ah, the agreement -- excuse me -- the opinion -- Mike Crawford: [Chuckles] Mike Lavelle: -- and the order at this point, and so I'm really not in a position -- Mike Crawford: OK. Well, I look forward to overturning this ruling in federal appellate court. Thank you. Operator: I'd like to remind you if you'd like to ask a ques[tion] today, please press the * key followed by the digit 1. We go next to Michael Cohen with Pacific American Securities? Michael Cohen: Yeah. Congratulations in -- in that it could have been worse and --- and I also wish you good luck on the appeal. Mike Lavelle: Thank you. Michael Cohen: With regard to them saying that it should take place 60 days from the order, this is sort of a follow on Mi -- on Mike Crawford's question. Does that mean that it would not apply to any backward royalties in that have infringement could basically go at a rate determined by the court? Mike Lavelle: Well, that -- thank you for the question. That's precisely what we just said we really are not in a position to answer on, what -- what that does backward-looking, and, again, I restate that they focus on forward-looking and prospective, and we're not in a position to say what that does backward-looking. Michael Cohen: OK. And in the oral argument that you had on November 15, there was some interchange with Commissioner Leibowitz on the possibility of follow-on actions. Do you anticipate that that is a possibility or do you think with this order that becomes a lesser likelihood? Mike Lavelle: Well, I'm -- I certainly hope that there are no follow-on actions but for our reconsideration, appeal and stay act[ions]. Michael Cohen: OK. That's it. Thank you very much. Operator: That concludes ... question and answer session. At this time, I would like to turn the call back over to senior management for any additional closing comments. Satish Rishi: With that, we'll -- we'll end the call. Thank you everybody for joining us this morning. We look -- We look forward to giving you updates as -- as more news becomes available. Thank you. Operator: That concludes today's conference call. Thank you for your participation -- may now disconnect.