Rambus's Litigation-Based Business Can't Last

When it comes to Rambus (RMBS), a lawyer might be better qualified than a financial analyst to determine the direction of its shares. Wednesday was another fine example of this stock’s volatile responsiveness to legal and regulatory developments. Rambus shares rose 8.8% after a US District court in San Francisco ruled in their favor on Tuesday afternoon. RMBS is, after all, a high beta (~2.2) stock and large moves are to be expected. The stock has posted double digit percentage gains on 123 trading days since its IPO on May 14th, 1997. However, even when including the years before the tech bubble burst, most of these big moves have come from legal, not product or real earnings related developments.

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Nine out of the ten biggest daily percentage price movements in this stock have been due to legal decisions or speculation of a forthcoming ruling. It’s not likely to end soon either. Ever since Samsung, Hynix and Infineon settled after a price fixing suit by the Department of Justice, Rambus has been fully committed to pursuing legal action to gain compensation for the utter failure of RDRAM in the PC market. RDRAM failed because the minimal performance benefits that it provided were not worth the cost to consumers. This was the core reason for the mass adoption of cheaper chipsets supporting SDRAM and the marginalization of Rambus’s technology.

That didn’t stop them. The company used its memory intellectual property portfolio to levy royalties on DDR (double-data rate) SDRAM and is still fighting the FTC to keep royalty levels high. Rambus also has legal proceedings in process against graphics giant Nvidia (NVDA) and Micron Technology (MU). They would probably sue everyone who has ever put random access memory in a chassis if juicy settlements would come out of it.

In the tech world (or geek speak), a company like this is called a patent troll. The claim is that a company that behaves this way stifles innovation by preventing or inhibiting the creation of open standards that result in cheaper, royalty free (or low royalty) technologies. I personally agree with this claim, but it’s certainly open for debate and viewed differently by those companies who possess valuable intellectual property and those who profit from the proliferation of open standards. With a business model that focuses on the design of memory systems and enforcement of a substantial IP portfolio, Rambus is the former of those two.

That business, however, has been struggling. Rambus has posted a net loss in 9 out its 10 last quarters. Revenues have declined steadily while costs have remained high. Litigation expense is on pace to overtake research and development for the first time in three years. That’s hardly a commitment to innovation. Market factors aren’t working in the company’s favor either. Gartner’s dire forecast for the PC sales is not going to help. Increasing video game console life cycles won’t present design opportunities for Rambus like it did for the Playstation 3.

So, the business of Rambus is in decline. In this economic environment, particularly with memory components and specialty semiconductors, what technology company isn’t struggling? Shares of RMBS are not reflecting this fact. It trades at nearly 4x tangible book value while shares of SanDisk (SNDK) and Micron trade at fractions of theirs. Sure, big manufacturers like those have different cost structures and that should be reflected in valuation, but Rambus even trades at a significant premium to profitable fabless semiconductor companies like Sigma Designs (SIGM – 1.3x tangible book value) and Actions (ACTS – 0.4x). $345M of cash on Rambus’s balance sheet is a positive thing, but using it to fund an army of lawyers and buy back stock on the way down isn’t. This cash came via a zero coupon convertible bond offering (currently yielding 6.86%) that is due on February 1st, 2010. The tangible assets of Rambus are minimal. If the company’s cash burn rate continues (or accelerates) and the credit markets remain tight, then the bond holders may be in just as much trouble.

The potential litigation rewards for Rambus could present ephemeral trouble for anyone who is short this stock. A “not-so-normal” return distribution above demonstrates this. Price movements in RMBS shares are extreme – take a look at the jagged cliffs of any multi-year chart to see for yourself. Given valuation, there is probably a large, nine-figure litigation reward already priced into the company’s shares. I am not a lawyer, but I have followed this company for a long time and believe that I am providing a reasonable estimate. Even if that massive settlement actually happens, where is Rambus headed? It would be a monumental task to get Rambus back to profitability and build its client base after dragging so many technology companies through their legal meat grinder.

Disclosure: The author holds a long position in SIGM at the time of this writing.

Comments

[jlars:]

The reason "The company used its memory intellectual property portfolio to levy royalties on DDR (double-data rate) SDRAM" is that all the DDR products contain Rambus' inventions. The memory makers were, and still are, using Rambus' property illegally. That's why Rambus has had to spend so much time in court.
Did you look at Rambus' side of the story at all? When, time after time, legal decisions come out in Rambus' favor and prove that Rambus' patents are valid and that the memory makers are infringing on those patents, shouldn't Rambus be entitled to be paid for their inventions?
I don't see how you can call Rambus a patent troll when, very early on in the 1990s, Rambus showed their inventions to the memory makers (using non-disclosure agreements that Rambus thought would protect their property) and the memory makers went ahead and incorporated Rambus' ideas into SDRAM and all the generations of DDR.
Rambus is entitled to be paid for all the years of patent infringement by the memory makers and, if the memory makers want to keep producing DRAM, they need to license Rambus' property or try to design around it.
This does not even enter the realm of collusion, price fixing, and anti-trust activity in which the memory makers engaged and to which they have pleaded guitly, paid millions of dollars in fines, and served jail time--all of which directly hurt Rambus.
Yes, I'd say you have some more research to do.

Mar 05 08:26 AM

[atest457:]

You, my dear sir, don't have a clue about what's going on with Rambus. Put your journalist cap back on and do a little research instead of regurgitating the lies that the memory manufacturers have fed you.

"RDRAM failed because the minimal performance benefits that it provided were not worth the cost to consumers."

Why wasn't it worth the cost? Because the manufacturers conspired to fix prices of RDRAM and other infringing flavors of DRAM thereby keeping RDRAM more expensive (remember they pled guilty to this).

"This was the core reason for the mass adoption of cheaper chipsets supporting SDRAM and the marginalization of Rambus’s technology."

No, Intel, Dell and others were ready for mass adoption but the alleged boycott of RDRAM prevented it so. Stay tuned for that revelation.

"The company used its memory intellectual property portfolio to levy royalties on DDR (double-data rate) SDRAM..."

As they should, they invented the technology and patented it, the manufacturers decided to take it and incorporate it into their stale designs.

"...and is still fighting the FTC to keep royalty levels high."

No, the FTC has already suffered humiiating defeats at every level, including the Supreme Court. Rambus has won it's right to price its product in the free market place (problem is that the DRAM market isn't exactly "free" now is it when you have convicted price-fixers)

I could go on picking apart every sentence your wrote, but why bother, I've already demonstrated to your readers what an obviously biased and uninformed article this is.

Mar 05 08:30 AM

[ThisWas:]

Mr Shohfi doesn't claim to be a journalist. See his profile at seekingalpha.com/autho... . I found his article from a link at Yahoo Finance, read it (can I get those 2 minutes of my life back?), checked his credentials, and am moving on.

Mar 05 09:49 AM

[pk de cville:]

"When it comes to Rambus (RMBS), a lawyer might be better qualified than a financial analyst to determine the direction of its shares."

You got it in the 1st sentence! Assuming you're not a paid shill, this explains everything.

Have any lawyer friends in the patent field? I suggest you speak to them. The chicanery, lies, collusion, and prison terms (over 15) revealed and soon-to-be-revealed in the 'Kill Rambus' saga will make patent law history.

In scope, this little Rmabus story will make Madoff's grand ponzi act look like child's play.

Mar 05 11:27 AM

[gefora:]

not surprising that RMBS PPS has large swings, if traders/investors are fed and follow incompetent information bits like this one, and are exposed to the whims of an at best incompetent and at worst corrupt judicial system (Virginia, FTC and the recent Delaware decision by Judge Robinson)

Mar 05 11:29 AM

[rambusince99:]

Did you even read what you wrote before posting?

Let's see. RDRAM failed in the marketplace. Humm. The DOJ said there was no marketplace since the cartel conspired. Reality is that the cartel members conspired to steer OEM's away from RDRAM because they didn't want to pay a royalty. Instead, they incorporated Rambus' IP into their own JEDEC standards. Translated - the stole Rambus' IP. Read the emails at rambus.org. Or better yet, just wait for the same to come out in the AT trial in SF next month. Why do you think the cartel conspired to bring prices DOWN? Think a little - don't hurt yourself.

You have completely forgotten that there was a "memory bottleneck" before Rambus came on the scene. Rambus' technology solved it - according to Intel (read the testimony in Hynix v. Rambus). Rambus simply wants to get paid for it's inventions, whereas the cartel has conspired to see that Rambus doesn't get paid. And you chastise Rambus for seeking compensation in the courts. Is that your view of "open standards"? Your rediculous views, taken to their logical conclusion, would nullify all IP rights. I suspect the folks over at SIGM, your claimed long position, to have a slightly different take.

Based on your obviously biased and clearly erroneous rant and timing of its publishing, I can only conclude that you have been paid by someone. Get your money now, as your bosses will have have a little cash flow problem here very soon after paying that 9 digit (actually 10) settlement to Rambus that you allude to.

Try to stay a little more current before your next piece of "journalism." The now final Hynix v. Rambus case exonerates Rambus of conduct issues you raise. The judge even plainly stated during the case that Rambus was no "patent troll", a label you childishly place on Rambus.

You sir, are a hack.

Mar 05 11:57 AM

[Tom Shohfi:]

First of all, this is an opinion piece. It is my opinion and you are entitled to disagree with it. I am not short RMBS stock. I do not have clients that are short RMBS stock. I have made my disclosures. If you disagree with me, I suggest that you write a counterpoint to SeekingAlpha and consider both the legal AND valuation aspects of this company's stock.

Mar 05 12:24 PM

[Tom Blund:]

Tom:

Do you have any connections to the Rambus case? You say you are not short BUT do you have any kind of connections to any party in this case?
Of course you are entitled to your opinions but a little research would have shown you the fact findings from the FTC ALJ, the CAFC, the jury trial in CA, the ITC action and many more pieces of evidence. I suggest you take a gander at rambus.org.

Mar 05 12:46 PM

[bartlett group:]

the comments from the field regarding this obviously prejudicial publishment have said it all.

rambus has been dealling with the corrupt FTC and the thieves at micron,hinix infineon,samsung at al for almost a decade. the fact that everyone and their mother seems to want to use rambus technology without paying for it has become the most ignored issue in this entire saga. price fixing, colusion, legal repremands, court defeats, appeal after appeal all gone rambus way.

and now just after an award from the california court recognizing rambus' rights and protecting their innovation, on the days before the anti trust triall is to begin (bad news for the combatents in the cartel) the rambus bashers are out in force without thier facts straight screaming from the mountaintop about how bad rambus is!! what a joke and sadly transparent.

the time for rambus to be paid for their innovation and skills is at hand. the desperate attempt to paint them with brush of "patent troll" is so low brow it doesnt warrent retort. over the comming weeks when the conduct of the cartel is brought to light the reputational damage will be sweeping and rambus will be left with a legal victory that should clear the way for them to be rewarded for their innovation, skill and perseverence.

Mar 05 01:10 PM

[nostockpro:]

Hi Tom. I'm reading this piece in complete bewilderment. You literally got nothing right. Your opinions are not based on facts, at all. I have a suggestion for you, do some research.

Mar 05 01:17 PM

[jabberwock:]

What a clueless ignoramus this journalist is.

Mar 05 08:11 PM

[User 370748:]

Tom,

Assuming you are truly sincere and not simply being paid-off by someone, could you please explain your reasoning on Rambus's IP rights?

As you are aware, engineers & scientists don't typically work for free. Rambus has spent tremendous amounts of money & time on R&D to develop new and improved inventions for almost all forms of electronic devices. Several memory manufacturers looked at Rambus's revolutionary inventions and just decided to use them in their products without paying any royalties. If Rambus did not use the legal system to protect their patent rights, then what would deter other companies from also stealing their inventions? How would Rambus get paid, and thus pay their engineers & scientists to continue to make new inventions which make the computers & other devices we use work better, faster, cheaper, and more efficient?

If you believe there should be no patent rights, why on earth would ANY company waste money on R&D??? Wouldn't the pace of innovation basically just come to a complete halt if this happened?

Would you be happier in Rambus never existed, and their breakthrough inventions that solved the memory bottleneck of the 90's didn't occur until many years later, or maybe not at all? Do you wish your computer was much slower?

Mar 05 10:30 PM

[dseo80:]

wow, talk about drinking the company kool aid.

Google: Rambus Slashdot

Seems like this is what happened.

1. Rambus was originally part of a consortium (JEDEC) for open standards on DRAM technology.

2. Rambus pushed though a standard through the consortium, without disclosing that it held patents on said technology

3. waited for manufacturers to tool their fabs to produce

4. sued

Even IF rambus wins a decent settlement from this lawsuit, i wouldn't suggest anyone to ever go long on a company which just alienated their entire industry like this. rambus is not intel or microsoft, they do not have the technological or economical power to be pushing around the big boys.

Disclosure: no positions, but seriously considering riding rambus short all the way down to 0.

Mar 06 12:46 AM

[User 370748:]

Wow, talk about being ignorant.

"2. Rambus pushed though a standard through the consortium,"

Rambus was never allowed to present anything at JEDEC. They simply attended the meetings. The only time they voted, they voted against using their IP in the standard. The standard was designed with Rambus IP because it was far superior to anything else, not because of trickery. JEDEC continued to steal Rambus inventions long after they withdrew from the group.

"without disclosing that it held patents on said technology"

Rambus told the manufacturer's about their technology outside JEDEC and had them sign non-disclosure agreements. Where do you think they got the ideas?

"seriously considering riding rambus short all the way down to 0."

Please do so. I would like to buy more at lower prices before settlements. And when you are forced to cover, it will help drive the price even higher. Thanks.

Mar 06 07:12 AM

[thevoice@vo...:]

Rambus is a stock with great upside potential and is in a similar situation Qualcomm was in back in 2000. Qualcomm is in the business of granting licenses for its use of intellectual property and when main street caught on the stock surged from $20 to $320 back in Dec 1999 followed by a 4:1 split. Since then it split again on August 16,2004 and began paying a dividend on March 12,2003. Currently licensing revenues comprise 33% of their consolidated revenues for fiscal 2008. Should Rambus's claims on patent infringements hold up in court against Hynix Semiconductor Inc , Samsung, Micron Technology and Nanya Technology Rambus is looking at a huge payday, although this case keeps getting pushed further into the future. There are currently over fifty claims across three product portfolios against these companies .

Today Rambus designs, develops and licenses its architecture to a broad range of customers. For the year ended December 31,2008 Rambus technologies were covered by more than 680 US and foreign patents. Rambus is currently claiming damages on DDR, SDRAM, DRAM. Court rulings are expected in the coming months on its patent trial and an anti-trust trial, keep in mind the court rulings could take a few years as well.

On February 3rd Rambus announced its new XDR memory architecture. This technology is set to deliver high memory bandwidth to consumer electronics such as set-top units, gaming devices and HDTV. Rambus currently has a contracts with Toshiba, Texas Instruments and Sony. XDR technology will be incorporated in new HDTV's, DLP projectors and the playstation3. Recently shipments in XDR DRAM for the Sony Playstation3 have been elevated up by Qimonda the fourth largest DRAM manufacturer, to bad the PS3 is being walloped in marketshare by Nintendo's WII. More importantly XDR memory interface is available for the mobile world. This development effort focuses on high-bandwidth, low-power memory technologies targeted at achieving data rates of 4.3Gbps at best-in-class power efficiency. With this performance, designers could realize more than 17Gigabytes per second of memory bandwidth from a single mobile DRAM device. That's a lot of performance to squeeze into your iPhone said Michael Ching, Rambus' director of marketing, admits that, as a whole, those devices don't need it. Yet. "The next generation of multimedia smartphones, the ones that are capable of not only displaying but recording video, particularly high definition video, do need high performance memory solutions that fit within today's standard power dissipation levels," he told InternetNews.com. This memory isn't just for smart phones, but for netbooks, portable gaming consoles like Sony PSP and Nintendo DS and portable media players. Most of the work is done on the controller, so memory does not have to be altered or redesigned. As such, Rambus expects the pricing from customers will be comparable to regular DRAM. Although this is exciting news it will be a while before Rambus makes its way into any smart phones or mobile devices. Ching said the sampling and testing cycle will be about two years.

“Today’s consumer electronics require high bandwidth and low-cost manufacturability,” said Martin Scott, senior vice president of Research and Technology Development at Rambus. “Our team has demonstrated that the superior signal integrity of the XDR memory architecture, which enables the highest data rates of any DRAM technology, also makes possible high-speed operation in very low-cost device packaging.” The presentation for this can be found at
www.rambus.com/us/.

This could be the blockbuster technology that mainstream can grab a hold off as it will also be utilized in smart phones and mobile devices. The claim is that the new memory will deliver 16 times the bandwidth of today's technologies with much less power consumption. Up until now Rambus focused on PC's and excluded mobile devices. Rambus claims the XDR architecture is five times faster than any technology alternative on the market now, and 16 times faster than connections in the chips most widely used in cellphones today. This breakthrough will allow cellphones to match the performance of PCs in carrying out activities such as handling HD video and playing gaming software. This should appeal to the cellphone makers such as Nokia, Apple, Motorola, Research in Motion, Palm as long as costs are kept in line during this weak economic environment. The marketshare of smartphones will steadily increase each year as more consumers demand applications like Twitter its main competitor Jaiku and Facebook amongst numerous other web apps. It is important to realize that the new generation of web surfers are always on the go and the day where a user sat behind a desk and logged into their PC are slowly coming to an end. Why focus on one thing when smartphones allow the luxury of being on facebook while at the same time doing laundry and twittering breaking news as it occurs on your way back home.

With upcoming litigation rulings and Rambus's new mobile memory initiative the stocks future looks promising given its current price of $7.70. [e-mail]/...

Mar 06 02:51 PM

[VPInvestor:]

Of all of the thousands of articles I have read on SA, this one is the most poorly researched, inaccurate, incompetent, untruthful, misleading and embarrassingly (to the author) awful piece I have ever read here.

It makes me wonder if any idiot can get published here.

Most of what I think has already been written, above.

As the true facts continue to emerge and existing ones continue to be affirmed, the author will realize that he has destroyed any editorial credibility he may have possessed with anyone at any time----if indeed he ever had any.

"Patent troll?"

Sir, you are just a troll---period.

Mar 06 07:32 PM

[unabletopla...:]

Tom, your opinion is funny. No one here supports you. Not that they don't but the fact is even the Supreme court sided with Rambus against the FTC.

Rambus cannot win if they own those patent rights. Rambus cannot win if RDRAM was not killed by the cartel.

So, let's go to court and settle this thing out and get all the evidence out to see how much if any the cartel will have to pay for killing RDRAM from being mainstream memeory. Dropped by Intel because behind the scene illegal actions and Intel didn't even know it until Dell blew the whistle.

Mar 06 08:28 PM

[unabletopla...:]

Anyone take this opinion and sold their shares or short the stock????

Tom is truely very funny guy. He is defending himself is truely funny as well.

Of all the economic bad news, this opinion made me laugh and my heart feels so good also. Laughter cures all ills.

Mar 06 08:31 PM

[Small mind ...:]

You are definitely entitled to an opinion. What I don't understand is why hacks like you don't bother to find out facts before you go off spouting the same lies that other paids shill have been screaming since day one. Just this week Judge Whyte issued his final judgement concerning Rambus's conduct at JEDEC. Are you too busy to read 58 pages that has the findings of FACT or do you prefer sounding like a moron?

Mar 06 08:37 PM

[B1uesbro1:]

Don't feel bad Tom. The FTC is looking for a few "good" men. They don't let facts, adverse rulings, or the constitution get in their way either.
What prompted this piece...constipation??

BB!

Mar 10 09:32 PM

[yousaidwhat:]

Wow Tom!! You just destroyed your credibility as a... whatever you are?... BIG TIME!! Not that I am aware that you have any credibility to lose. Nevertheless, it's quite apparent that you obviously don't have a clue as to what has been going on with Rambus. I highly recommend in the future you do your homework BEFORE giving in to temptations to post such nonsense.

Mar 11 08:19 AM

[bagman432:]

It amazes me how some people call themselves journalists.

After reading your article, the first thought that comes to mind is that the author is unethical, uninformed, or both. He is blatantly attempting to distort the facts by perpetrating this malodorous perversion of journalistic refuse on readers who would be mortified by the facts.

This should be a story of greed and corruption within the judiciary and FTC that not only condoned the theft of intellectual property, they actually aided the criminals in their conspiracy to destroy this small but extremely innovative company. Why? To help them steal the incredible technology developed by the brilliant engineers who make Rambus the premier IP company that it is.

Tom, it's people like you that teach us to question everything we read today. You should be embarrassed and ashamed. I suggest you find a job more suited to your talents like cleaning public toilets or septic tanks waste removal.

Mar 11 10:49 AM

[Aj2009:]

Well, even the author has been wrong in so many details, I am sure it shows how outsider( ignorant as I ) should valuate such stock:
1. Litigation result is unpredictable. You can see Rambus was suing foreign companies and the supreme court was ruling in Rambus's favor. It may or may not have some political play there.
2. The memory chip industry for PC is declining. Even the sale for iphone or smart phone is not quite encouraging in near term--although the whole tech industry is betting on that.
3. On the other hand, it might be a good acquisition candidate.

The intellectual property is a very touchy topic. I am sure some Chinese companies steal more from US, yet we rarely heard such case brought to court. Justice shall reign supreme only in the dream land.

Mar 11 03:24 PM

[pomdter:]

Wow, say anything bad about RAMBUS and the cockroaches come out all over to call you on it.
But your discription is fairly accurate.

Rambus isn't a patent troll in the traditional sense, but the sleaziness factor is about the same. They filed a patent on their early Rambus technology (which was lifted from an interchip signalling consortium that disbanded, but I digress). After is was shown as a technological failure, the filed a bunch of patents that cut-and-paste Samsung's SDRAM spec. Back then, it was legal to tie those new patents to the date of the first one. All of the suits are on those patents that aren't even about the "Rambus" they originally "invented".

Mar 13 04:15 PM

[memoree:]

To say Rambus is the victim is hardly accurate people. Rambus has never been interested in making products, just making money. Nothing wrong with that, it just paints a better picture of the companies true nature. Innovation has been driven by the sweat of other companies and Rambus is just looking for their share of the $$$. They used their influence with the standards group to position themselves to hold key patents. And not to mention, they destroyed documentation... Unless you live in a cave or work at Mcdonalds, you know that type of thing doesn't happen by accident. I am not saying that Rambus is the only wrong doer, but in my research, their actions just point to the fact that they are wanting others to bear the risk for them so they can make the $$$. Many of their patents are questionable on how they were developed considering the types of facilities they operate. You can predict of guess a lot, but its not as easy as the average person thinks to develop the types of technologies they have. Just disappointed someone hasn't closed the door on Rambus's tactics.

Mar 16 02:50 PM

[beandog:]

You, bald man, haven't a clue.

JEDEC claiming Rambus secretly "fooled everyone" is a joke. You're talking about technology Rambus has that was way ahead of its time..from changing the then 20mhz to 500mhz memory speed. Rambus' chip design was totally novel and mind-bloggling that everyone would have wondered where it came from before JEDEC adopting it. Truth is, all the committee members knew. Most just want to steal from Rambus. It was Toshiba, a customer of Rambus, who encouraged Rambus to join JEDEC. Toshiba knew Rambus had powerful patents and thought Rambus could benefit the industry.

Besides, it was standard practice that JEDEC members did not have to reveal their patents (but that those patents that get adopted would charge reasonable rates), but Rambus revealed all of theirs (pending patents) anyways.

Is Rambus the next Qualcomm? beanieville.blogspot.c...

Jun 20 02:43 AM