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Rambus, Inc. (NASDAQ:RMBS)

Q4 2009 Earnings Call Transcript

January 28, 2010 5:00 pm ET

Executives

Satish Rishi – SVP & CFO

Harold Hughes – President & CEO

Tom Lavelle – SVP & General Counsel

Sharon Holt – SVP, Licensing & Marketing

Analysts

Jeff Schreiner – Capstone Investments

Michael Cohen – MDC Financial Research

Hamed Khorsand – BWS Financial

Operator

Good day and welcome to the Rambus Incorporated fourth quarter 2009 conference call. Today’s conference is being recorded. At this time, I would like to turn the call over to Satish Rishi. Please go ahead.

Satish Rishi

Thank you, operator, and welcome to the Rambus Fourth Quarter and Full-Year 2009 conference call. I am Satish Rishi, Chief Financial Officer, and in the call today with me are Harold Hughes, Our President, CEO and Tom Lavelle, Senior Vice President and General Counsel and Sharon Holt, Senior VP of Licensing and Marketing.

The press release for the results that will be discussed here today has been filed with the SEC on Form 8-K. 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 4989652 when you hear the prompt. In addition, we have simultaneously webcasting this call and a replay can be accessed on our Web site beginning today at 5:00 P.M. Pacific time.

Before I begin, I need to advise you that discussion today will contain forward-looking statements regarding our financial prospects, pending litigation and demand for our technologies among other things. These statements are subject to risks and uncertainties, which are more fully described in the documents we filed with the SEC, including our 8-Ks, 10-Qs and 10-Ks.

These forward-looking statements that differ materially from our actual results and we are under no obligation to update these statements. W e will discuss non-GAAP financial measures on the call today and we will post reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our Web site too. You can find a copy of earnings release and above mentioned reconciliation on our Web site at www.rambus.com on the Investor Relations page under “Financial Releases.”

Now, I'll turn the call over to Harold. Harold?

Harold Hughes

Thanks, Satish, and good afternoon, everyone. Last week we achieved two tremendously positive milestones for Rambus. We signed a $900 million deal with Samsung that I describe as transformational. And it is. We can now work with the world leader of memory products to accelerate the marketed option of our innovations and leadership solutions. This has absolutely energized our team and its great news for stockholders, electronics manufacturers, and consumers alike.

Also last week we won an extremely important decision at the International Trade Commission. There, Judge Essex found that three of the five patents we asserted against NVIDIA were valid, infringed and enforceable. It was clear confirmation that our patented innovations (inaudible) have great relevance to the industry and continue as an important source of licensing strength.

Common thread in these two great accomplishments is that both resulted in the dedicated efforts of Rambus employees and partners in 2009. 2009 started inauspiciously with a setback in Delaware in the Micron case. But after that point Tom and the legal team notched success after success.

The San Jose Federal Court entered a $397 million final judgment against Hynix in order to pay compulsory royalties for post-judgment use of our patented innovations. We defeated the FTC and the Supreme Court turned away its last gas appeal after it was (inaudible) at the D.C. appellate court.

We agreed to attractive terms for five year worldwide licenses with the European Commission which brought this matter to a successful close. We successfully petitioned the Court of Appeals for the Federal Circuit to hear the Hynix appeal and the appeal of the Micron Delaware decision together

We believe we have a good chance of overturning the Delaware Court’s ruling that came to the opposite conclusion of what the San Jose Court did when looking at essentially the same body of evidence. And we put on a strong case before Judge Essex last fall that led to his finding of patent infringement against NVIDIA.

With all these actions we have vigorously defended the patented innovation resulting from our unfailing commitment to innovation. In 2009 that commitment continued to bear fruit.

In February of last year, we announced our Mobile Memory Initiative or MMI. This is technology that enables high-end computing power in a mobile phone. In May of last year we unveiled innovations in our beyond DDR3 campaign which can improve the bandwidth throughput, our efficiency and capacity main memory solutions for computing products. And later we showcased some of that same technology in last year’s fall at Intel Developers Forum with a threaded module demo co-developed with Kensington.

Our MMI and beyond DDR3 innovations and those of the Terabyte Bandwidth Initiative 4 that were major catalysts for our new agreement with Samsung. A mutual respect of our company’s technology leadership was the basis for the reengagement that ultimately led to this pivotal deal.

License investments align our company’s goals towards the success of a new generation of memory solutions for mobile, graphics, servers and high-speed NAND Flash applications. We hope this collaboration will result in new leadership products like our XDR Memory Architecture.

2009 was a great year for XDR memory, thanks to the growing success of the flagship application Sony PlayStation 3. Sony has now sold over 32 million PS3s worldwide. Remarkably, 8 million of those were sold just in the four months since the launch of the PS3 Slim on September 1 of last year.

The XDR roadmap continues with the announcement of 7.2 gigabyte per second XDR DRAM from Elpida and the availability of one gigabit capacity XDR DRAM from both Elpida and Samsung.

In addition, the first XDR DRAM based HDTV arrived on the scene including Toshiba’s new Cell HDTV on display of this year’s CES. We made great progress on the diversification strategy intended to take full advantage of the exceptional licensing strength we have built at Rambus.

We acquired system in a package patents from Innopack and hired the principal inventor of those patents, Han Ho [ph] continue innovating in this important area.

We also acquired new LED lighting patents and technology from GLT, the principal inventor of this technology and former GLT President, Jeff Parker, along with Chris Picket and the entire R&D team from GLT joined Rambus to form a new lighting technology division.

As described in the special conference call we held back in December, we believe the opportunities of LED-based lighting solutions whether for LCD displays or for general lighting applications are tremendous.

We are very excited to add the innovations developed by Jeff and his team to our Rambus portfolio. Thanks to our continued commitment to innovation, that portfolio, patented innovations continues to grow.

At the end of 2009, we had 867 issued patents and another 607 pending applications. Added to these are the 84 lighting and optoelectronics patents developed by Jeff and his team, which puts our total to over 950. In short, the events of the last week were a perfect capstone to our efforts of 2009 and a great validation of the power of our patent and the strength of our business model.

And with that, I'll turn the call over to Tom.

Tom Lavelle

Thanks, Harold and good afternoon everyone. As Harold mentioned, the past week was a great one or Rambus. I'd like to begin with some additional comments on the ruling from the ITC.

As we announced last Friday, in the case filed against NVIDIA and the other respondents using NVIDIA products, Administrative Law Judge Essex found three of the five patents we asserted valid, enforceable and infringed by NVIDIA. These three patents are known as the Part 1 patents.

On the other hand, the ALJ determined there was no violation regarding the other two patents we asserted in the case Ware patent as well. More on that in a minute. This is an unequivocal win for Rambus. Infringement of a single claim of one patent is all that is needed as the basis for the ITC to issue an exclusion order.

We have numerous claims in the three patents that the ALJ found to be valid, enforceable and infringed by NVIDIA. The next step in this process is for the parties to petition the full commission to review the initial decision. The target date for the Commission’s decision is May 24th of this year. After that there will be avenues of appeal available to both sides in the matter.

If the Commission agrees with the initial decision, we could see the signing of an executive order mid-year, which bars the importation of infringing NVIDIA products and of the other respondents' products which contain infringing NVIDIA products. That order would also require that NVIDIA and other domestic respondents cease and desist the sale of infringing products in the United States.

Our ultimate goal in pursuing this and the patent infringement action against NVIDIA is to get fair compensation for the use of our patented inventions in the past and to ensure that we protect our IP rights going forward including protection of our proprietary leadership products. Returning to the Ware patents, we do plan on appealing to the full commission with regard to their validity and infringement by NVIDIA’s accused products.

Moving next to the price fixing case in San Francisco. With the announced settlement, Samsung will no longer be a defendant in this case. The remaining defendants will be Hynix and Micron. The damages we are seeking remain essentially the same due to joint and several liabilities of the parties and are subject to troubling under California Law.

In a hearing last week Judge Kramer indicated he needed some additional time to assess the situation post-Samsung departure from the case. He granted Micron’s motion for a two-month continuance. Regardless of this latest delay, we intend to pursue our claims with the same vigor as ever and we look forward to putting our case in front of a jury.

Nevertheless, we understand and respect Judge Kramer’s reasoning in granting the continuance, the court asked the parties to submit revised witness lists and time estimates in preparation for trial. Judge Kramer has not set a start date at this point. But we know it will not be before March 22nd. Judge Kramer has indicated that he will conduct various pretrial issues on Thursdays and other days as necessary. For instance, there’s a hearing scheduled in his courtroom next week on Wednesday, February 3rd and another set for Thursday, February 4th

Moving now to the appeals of both the Micron Delaware decision of Judge Robinson along with Hynix’s appeal of the jury verdict in the Northern District of California by Judge White. We received an order just yesterday indicating that the oral arguments on these appeals will very likely be heard in front of the Court of Appeals for the Federal Circuit during the week of April 5 through '09, 2010, just over two months from now.

One caveat with this timing is that the joint appendix of the briefings needs to be filed by February 26th of this year. It is our intent to meet that deadline so the hearing may commence on April 5th or thereabout.

The remainder of the coordinated cases before Judge White concerning Hynix, Micron and Nanya are stayed pending these appeals. Great progress was made on many fronts in the past year and I like to thank Connie Chen, the rest of our Rambus legal team and our excellent outside counsel from Munger, Tolles & Olson, team at Sidley Austin, and the team at Finnegan Henderson for their outstanding work during the year.

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

Satish Rishi

Thanks, Tom. As reflected in our press release today we finished the fourth quarter with revenues of $30.8 million, up 11% from the previous quarter and down 18% from the year-ago quarter. As compared to the previous quarter, royalties were higher due to higher PlayStation 3 related technology royalties and higher technology and variable patent royalties associated with higher shipment volume.

The decrease in revenue from a year ago was primarily due to recognition of previously withheld royalties from license fees in Q4 '08 associated with vacated FTC order and lower contract revenue.

We completed 2009 with full-year revenues of $113 million, down 21% from the previous year. The decrease in revenue was primarily due to a decrease in patent royalty payments from Elpida, lower contract revenue, and the recognition of previously withheld royalties associated with vacated FTC order.

Operating expenses for the fourth quarter were $47.5 million, down 2% from the previous quarter and down 15% from the fourth quarter of last year. These operating expenses include approximately 7.6 million of stock-based compensation and 0.5 million related to the cost of restatement, last quarter included approximately 7.7 million of stock-based compensation and 0.1 million related to the cost of restatement. The quarter year-ago included 8.7 million of stock-based compensation, 0.2 million of restructuring expenses and a credit of 0.3 million for the recovery of restatement costs.

To provide a better comparison period to period, I'm excluding expenses and credits related to stock-based comp, restructuring and investigation from my discussion.

Excluding these expenses, adjusted operating expenses in this quarter at $39.4 million, were down 3% from the previous quarter and down 16% from the quarter a year ago. The decrease from the previous quarter and the quarter a year ago were primarily due to lower litigation expenses. Excluding litigation, our adjusted operating expenses were in line with the previous quarter and down 2% from the year ago.

Adjusted engineering expenses at $15.8 million were in line with the prior quarter. SG&A expenses excluding litigation of 13 million were also flat quarter-over-quarter and litigation at $10.6 million was down 12% from the prior quarter.

From the quarter a year ago, adjusted engineering expenses were lower by 7% due to a lower compensation. SG&A expenses excluding litigation was higher by 5% primarily due to higher consulting expenses.

Litigation expense over the same period were lower by 40%. Our adjusted operating expense for the quarter was $8.6 million or 33% low from the previous quarter and 9% lower from the fourth quarter of 2008.

Moving on to the full-year, for the full-year operating expenses were $188.9 million, down 18% from the previous year. These expenses include approximately 31.6 million of stock-based comp, a recovery of 13.5 million and expenses related to prior stock option restatement issue.

Again, to provide a better comparison, I'm excluding expenses of credits related to these from my discussion. Excluding these expenses, adjusted operating expenses at $170.7 million were down 7% from the previous year due to lower engineering expenses associated with the reorganization. Excluding litigation, these (inaudible) expenses are $115.2 million, were down 11% year-over-year. Litigation for the full-year was 55.5 million unchanged from the previous year.

Our adjusted operating loss for the year was 57.7 million as compared to the adjusted operating loss of 41.9 million in the previous year, primarily driven by a reduction of 29.5 million in revenue.

Overall cash, defined as cash and cash equivalents and marketable securities excluding restricted cash was 460 million, a decrease of 38 million from the third quarter of 2009. This was primarily due to the $26 million we paid for our new Lighting Technology Division or the LTD.

Year-over-year cash was up $114 million. During the year we raised a net of approximately $168 million from the issuance of convertible notes, received $21 million from stock option exercises, and $12 million as reimbursement from insurance carriers and former executives, offset in part by $29 million spent on acquisitions.

Now I would give you some thoughts regarding the first quarter. This guidance reflects our reasonable estimate and our actual results differ materially from what I'm about to review. As a part of the overall settlement with Samsung, we received $200 million for Rambus stock. In addition, we have received the first of the two installments of the additional $200 million of settlement consideration less withholding taxes.

Under current accounting rules we will be required to allocate the settlement consideration to the various elements of the transaction. We will be completing that analysis in Q1 and as a result we cannot provide guidance as to how much of that $200 million would represent revenue or other income, but we do believe that all of it will be recognized within the quarter so the impact of the pre-tax income will be the same irrespective of what the allocation were that to be.

Excluding this issue of allocation, we expect revenue for the quarter to be between $47 million and $51 million. We expect operating expenses including stock-based compensation to be between $50 million and $54 million, which includes an estimate for litigation expenses of $5 million to $8 million and stock-based compensation of approximately $8 million.

Before we open the call for questions, we'd like to address a couple of inquiries that we received from our stockholders via e-mail or through our Web site. The first question is given the settlement with Samsung, the question may be asked to get a trial date set in the price fixing case. But how could Judge Kramer went to continue and is there any chance that Judge Kramer will hand this case over to another Judge?

Tom Lavelle

I'll take that one, Satish, this is Tom. We argued against a continuance citing a number of reasons why a delay is not appropriate or just. But Judge Kramer considered our opposition, heard confidential evidence in camera, that is behind closed doors, to which I am not privy, and he, Judge Kramer, decided there was good cause to grant the continuance. We fully respect his decision and are prepared to start the trial at the earliest possible date. We will be back in his court, as I said earlier, next week to continue working through various pre-trial issues.

As to the second question, Judge Kramer has indicated that he is working through scheduling issues. We are unsure at this point when our trial will start, but we know it will not be before March 22nd and we assume it will be in front of Judge Kramer.

Satish Rishi

Thanks, Tom. The next question is could an NVIDIA deal with an ITC exclusion order by just taking one of the EC patent licenses?

Sharon Holt

Satish, this is Sharon, I'll take that one. In answer to that question, I would say that it is unclear what the result would be, although we would be happy to have NVIDIA take one of these EC licenses. The agreements with the European Commission provide for five-year worldwide patent licenses on a going forward basis. There’s one for DRAM product and another for products with memory controllers. That latter agreement would be applicable in NVIDIA’s product.

The rates are 1.5% for SDR controllers, 2.65% for DDR, DDR2, DDR3, GDDR3 and GDDR4 controllers. Those rates adjust to 1% and 2% respectively in April of this year. While NVIDIA could take one of these licenses if faced with an exclusion order in the ITC, it is not clear how that would impact an ITC order.

In addition, the licenses are forward-looking only and only for the specific products listed. We would still pursue damages for NVIDIA’s past infringement and for other products not covered by the agreement. As a final note, these license agreements for DRAM and DRAM controllers are available for download from rambus.com.

Satish Rishi

Thanks, Sharon. There have been some industry reports in this respect for 3D Blu-ray, CD-enabled LCTVs and other gadgets. Is XDR expected to be in these devices?

Sharon Holt

I’ll answer that one, too, Satish. 3D requires a lot of computing power and a lot of memory bandwidth and XDR DRAM is an excellent solution. The Toshiba Cell-based TV that Harold mentioned in his earlier remarks can perform on the fly conversion of 2D media to 3D, using the power of the cell broadband engine and XDR memory.

Sony has announced an upcoming firmware upgrade, which will occur sometime in their fiscal year beginning in April. That will give 3D capability to the PlayStation 3. PS3 also uses the cell broadband engine and XDR DRAM. So, yes, we think XDR memory can play a big role in 3D. It’s already doing so and I think it can enable many more 3D-capable products in the future.

Satish Rishi

Thanks, Sharon. On behalf of the management team, I'd like to thank those who submitted questions to us during the course of the quarter and we plan to continue addressing questions from stockholders on a periodic basis at this forum. Operator, we are now ready to open the call for questions.

Question and Answer Session

Operator

Thank you. (Operator instructions) We'll go first to Jeff Schreiner with Capstone Investments.

Jeff Schreiner – Capstone Investments

Good afternoon everyone. Thank you very much for taking my questions. Certainly have a lot of them today, but I'll try to just get a few out here on the call. Tom, I'd like to start kind of with some of your comments about the ITC. NVIDIA has been asserting quite vocally that there’s going to be no injunction that they will continue to be able to litigate this on for several years. And I’m trying to better understand, when does the injunction decision typically occur within the ITC and what’s typically required to achieve an exclusionary or injunction against infringing products?

Tom Lavelle

Thanks, Jeff, for the question. First of all, it’s not really an injunction, it's an exclusion order, and it’s an administrative process within the ITC. But it net probably has about the same impact. With respect to timing on it, as I think we said, there is a whole process to go through, but by the end of Q2, early Q3, it’s not out of the question whatsoever that the president could sign an exclusion order such that they are not allowed to import products either directly as NVIDIA or through the named respondents in the case that was heard in Washington D.C. Now that isn’t done, that’s part of the process as we go forward. But this is a very accelerated process.

NVIDIA has its own point of view as you have articulated it that we don’t necessarily agree with as to what they could do to avoid implementation of an exclusion order once it’s signed by the president and my suspicion is, as Sharon alluded to that it probably involves them thinking they’re going to sign a license that we offer under the European Commission settlement and that avoids the entire problem. That remains to be seen. And we’re not going to comment any further on it than that.

Jeff Schreiner – Capstone Investments

Okay. Also I'd just like to understand, Harold publicly commented several times in various forums about we would likely start negotiations with Hynix and Micron following the antitrust and following the appeal review at the CAFC. I was wondering, and I think you said before, Tom, that a settlement possibly with maybe a Hynix or even maybe a Micron could be quite difficult given that Rambus is looking to vacate the adverse decision that was handed down in Delaware. Could a settlement be reached with either of the parties that would add a positive or negative, adder or subtracter just for that specific decision prior to a conclusion in either one of those hearings?

Tom Lavelle

Yes, good question. The answer is, is it possible? Yes. I think you characterize it appropriately just in the first part of your question. It would be difficult to do, but it’s possible. That could happen and you could call out that circuit case as an exception that goes forward with something at stake in those cases either with Micron and/or Hynix. The likelihood of that happening is a very different question, which I'm not going to address, but it’s clearly possible. We would certainly welcome opportunity to speak about it with either of the two parties, but I will have to say and confirm that it would be difficult to do, but possible.

Jeff Schreiner – Capstone Investments

Just a couple more questions here for me. Just trying to understand, because I think there’s been a lot of confusion amongst investors regarding the Samsung license. Obviously, Harold defined it as transformational. It certainly could be that as we get more tangible evidence of the relationship as it moves throughout these years. But where does Rambus stand right now in its licensing stance regarding that? Beyond Samsung, are you going to be looking to obtain the maximum rates allowed by the EC going forward? And even potentially higher rates for past due amounts since this is a forward-looking agreement?

Tom Lavelle

This is Tom. Jeff, I’ll answer the latter part of your question first and then let Sharon answer the forward-looking stuff, where it’s appropriate that she does that, not me. With respect to the past, the European Commission settlement commitments do not affect the past in any way. And we do not have any expectation that that agreement with or the commitment made to offer those agreements through the European Commission will in any way impact past damages on any of our cases. And with that I'll let Sharon answer the rest of it and how we go forward on it.

Sharon Holt

Thanks, Tom. Jeff, with respect to your question about the, I guess the magnitude or the transformational nature of the agreement with Samsung; I think we believe it is for two reasons. No. 1, keep in mind that Samsung has taken a broad license to all of their semiconductor products, virtually all of them, and while everyone thinks of Samsung as being a DRAM supplier, Samsung is also the No. 2 semiconductor company out there.

So, of course, their license does include a license for their flash products, their ASIC products, which include memory controllers and other things that they do. So we believe it does put a stake in the ground not only from a DRAM licensing perspective, but also for our other semiconductor licensing effort. So, I think it’s important to point that out.

With respect to other DRAM companies, I think Tom just talked about where we stand with Hynix and Micron. We certainly intend to go forward this year with licensing activities for other DRAM players. We’ve talked about Elpida in the past and what was going on there. There are also some other smaller players in Taiwan that we hope to be resuming discussions with.

As you know, we’ve also had an active memory controller licensing effort going on. Prior to the Samsung settlement, much of our revenue base came from our memory controller licenses. And we think, again, that Samsung agreement puts a bit of wind in our sails for that effort also going forward. The Friday decision in the ITC doesn’t hurt either. So we intend to take that wind in our sails and move forward. We have a number of controller licenses that we need to renew this year in 2010. And we have several ongoing negotiations with other companies that we expect to take this momentum forward and use it to help us close some of those.

Jeff Schreiner – Capstone Investments

Okay, one last question from me. I appreciate your time, everyone. It’s going to be back at you, Sharon. Just talking about how you’re kind of going back and reengaging people now. I think everyone always tries to ask and understand maybe kind of has the tone changed, has anything changed in licensing negotiations? And given the “transformational settlement” with Samsung and Friday’s decision, have we seen a marked change in unlicensed companies who are on notice and maybe how they’ll approach talking to Rambus now?

Sharon Holt

I can’t share specifically what any particular companies have said. What I can say is this. People have taken notice of the announcements we made last week. That is to be sure. Many of the companies we're in discussions with are fairly sophisticated about intellectual property and licensing issues and pay very close attention to all of the developments in our activities. So I think it definitely helps and we’ll keep you posted as we have actual results from our efforts going forward this year.

Jeff Schreiner – Capstone Investments

All right. Thank you very much, everyone.

Tom Lavelle

Thanks, Jeff.

Operator

We’ll go next to Michael Cohen with MDC Financial Research.

Michael Cohen – MDC Financial Research

Great. Thank you for taking my questions and congratulations on the win at the ITC. My first question is the European Union consent decree appeared to have a most favored nation clause where if one company such as Samsung got a great deal, same equivalent rate would have to extend to everyone. Could you state why the Samsung deal would not limit the potential license revenues from others?

Tom Lavelle

Michael, this is Tom. First of all, it's not a consent decree; it's a commitment that we made to the European Commission in order to get the case completed with no acknowledgment of any liability on our part. So it’s not a consent decree, but given that the actual agreements with the European Commission do not in their final form contain any most favored licensee clauses at all. And so I think that should answer the question. It doesn’t have any impact with respect to Samsung whatsoever.

Michael Cohen – MDC Financial Research

Okay. (inaudible) Perhaps hugely positive in the long-term, several investors that I’ve spoken with seem somewhat disappointed by the terms of the Samsung settlement is reflected in the stock price now trading at pre-settlement values. In light of settling for less than half of Samsung’s pretroubled a share of the 4.3 billion in damages, diluting shareholders by 8.3% and in addition to the five-year license on all their other semiconductor products. How confident are you that the settlement with Samsung would amount in more revenues in the long-term having Samsung as a partner with your numerous innovations?

Harold Hughes

Michael, this is Harold. As I’ve been here for several years, I think been one of the hardest management challenges I’ve faced is the extent to which we have brilliant engineers who we think create wonderful technology. By virtue of the fact that we don’t have enough DRAM manufacturing partners we see that technology go by the wayside. And I’ll say that in my team’s decision to take the deal on the financial terms as described by us that particular issue played no small role.

Samsung is the biggest and I have recognized the math you just went through, but Samsung in their calculation as to how much they might owe is probably did different math, but ultimately they arrived at a decision that in working with Rambus and having more direct use of our technology and adding that to the extent to which they are a world-class manufacturer, they saw the possibility, just the possibility that they would actually make more money from their product sales than they would be paying us, which I would say is the ultimate for us as a licensing company to be successful in the long-term.

Those are obviously complicated equations. They depend upon the extent to which the products that we designed jointly are received by the market and how people not aligned with us can counter that with their own products, some of which we might assume include some Rambus technology. But we thought a lot about it. It's very important that we have manufacturing partners. We can’t simply rely exclusively on the wonderful litigation teams we have. We must have manufacturing partners.

As regards to the math I would point out that the joint and several liability clause does give us the opportunity to get from the other two parties significant amounts of money as we expect to do well in those cases.

Michael Cohen – MDC Financial Research

Okay. That makes great sense. Would it be fair to say that Samsung was in a unique position to settle because of the non-monetary benefits they could provide you and that Samsung settlement is not a template for the remaining litigants?

Harold Hughes

That would be absolutely the case and I think I said so on several occasions. Samsung, you may recall, even during this period of pretty, should we say, strenuous litigation between the parties remained a manufacturer of XDR. And I applaud Sharon for this effort. We continued to talk to them on a company to company, business man to business woman and engineer to engineer basis. That was done by them because they saw the value of our technology and by us because, as I said, we have to have manufacturing partners. And Sharon alluded to the importance also of bringing on Elpida and the point where they currently reside in our desire for finding another partner. Obviously, you get one big partner like Samsung. They are the biggest. By that alone they’re relatively unique.

Michael Cohen – MDC Financial Research

Could either you or Sharon briefly contrast the Intel Memorandum of Understanding with that of Samsung in terms of structure, possible outcomes and time frames?

Harold Hughes

My goodness. I have to run the memory banks just to go back to the Intel MoU.

Sharon Holt

Just a couple of things. You remember when we announced the Intel MoU; we talked about jointly looking at high performance architectures, as they might relate to future Intel products. We obviously continue to have ongoing dialogue with Intel as both their product and technology road maps and ours, continue to evolve and try to address market opportunities. The MoU with Samsung as we said outlines four key technology areas

Server, memory, mobile memory, graphics memory, and high-speed NAND flash as four areas that are of mutual interest, meaning each company already has ongoing investment in advancing their road maps there and we believe there’s an opportunity by working together to create new business opportunities that will be lucrative and beneficial for both companies.

In compare and contrast, obviously, we've got four specific areas with Samsung as we actually engage we hope to turn those into specific point opportunities, but we need to do a little bit more exploration first. With Intel it’s more of an ongoing effort to try to identify a point of intersection where our new technology road map they believe will be useful to them in adopting into one of their new platforms going forward. So that’s the difference as I see it.

Michael Cohen – MDC Financial Research

Okay. My next question is for Satish, what is the amount of cash taxes that Rambus expects to pay on the 200 million in the two lump sum payments in this quarter? And then the four 25 million quarterly payments going forward. I should say the next four $25 million payments.

Satish Rishi

The cash taxes will be the withholding taxes in Korea and on royalty payments, about 16.5% and anything else is considered a settlement, about 22%. So I think those are the cash taxes will pay. But we will be able to use those credits here in the U.S. and over time as you become taxed in the U.S. we will be able to offset the cash taxes here in the U.S. against those withholding taxes, so it’s only a timing issue, so we’ll have cash upfront, we'll recover that by paying less tax in the future here in the U.S.

Michael Cohen – MDC Financial Research

The immediate rate on the $25 million payments in this year would be 22%?

Satish Rishi

No, 16.5%.

Tom Lavelle

But if I could clarify, the revenue would be the gross amount and the payment obviously, as Satish pointed out would go to the Korean government from the withholding. The Korean payments to us would be foreign source income and that withholding would then be deductible in the U.S. On a P&L basis, that would work its way through the tax provision. The main impact, as Satish said, is just a cash.

Michael Cohen – MDC Financial Research

That’s helpful. To offset the dilution of Samsung’s 8.3% would you consider doing a stock buy back with the large portion of cash you’re getting from Samsung?

Satish Rishi

That is an option we have. So we expect to get $400 million in cash this quarter from Samsung total. We received about 300 million; we expect another 100 million in the next couple of weeks. So we are looking at what are the various ways, what the best use of cash would be through either dividend or keep acquisitions or doing a buyback or a combination of all three. So we have discussions and optional buyback is definitely on the horizon too.

Michael Cohen – MDC Financial Research

Okay. But no decisions have been made yet on any of that?

Satish Rishi

Nothing that I'm ready to announce right now.

Michael Cohen – MDC Financial Research

Okay. And the next question for Sharon. Could we get an update on when you expect to possibly have a license agreement with Elpida or when negotiations are going to begin again?

Sharon Holt

I'm not surprised to get that question, Michael. So thank you for being the one to ask it. As we mentioned in previous calls we have a very close and positive relationship with Elpida. We have for years. When we withdrew from the previous negotiations back in 2008 and made the decision to defer ongoing negotiations until after we made more progress with the other DRAM players, we agreed that we would restart those discussions once said progress had been made. Meanwhile we've continued regularly to talk to Elpida obviously about our technology, but also about the status of our dealings with the other DRAM players. We expect to be reopening that dialog very soon, but I don’t want to here in this call predict a timing on when we expect that to be done.

Michael Cohen – MDC Financial Research

And my next question, the remaining questions are probably all for Tom. Do we know yet whether administrative law Judge Essex recommended a limited exclusion order or general exclusion order in its initial determination that obviously one them to notice.

Tom Lavelle

Yes, he’s recommending a limited exclusion order and cease and desist order.

Michael Cohen – MDC Financial Research

Okay. And what’s the approximate percentage of NVIDIA’s customers that were named as direct respondents in the ITC investigation and why didn’t you include all of NVIDIA’s graphic card makers such as PNY?

Tom Lavelle

A substantial percentage of the product that NVIDIA is making and infringing that being imported into the U.S. was named in the named respondents, the percentage of the product I really couldn’t say, but it’s a substantial percentage.

Michael Cohen – MDC Financial Research

And could you share with us how much is now on the Hynix escrow account?

Satish Rishi

No, we’re unable to do that because under a confidentiality agreement we are not allowed to disclose how much we have in the escrow account.

Tom Lavelle

We’ll be disclosing information about Hynix’s business that we wouldn’t be allowed to do and it’s not our money so what was there we can’t tell you how much.

Satish Rishi

It’s within the company, people don’t know what it is except (inaudible) than one or two people in the company.

Michael Cohen – MDC Financial Research

Okay and my final question is in your recent Form 8-K filing you mentioned that Samsung is subject to a voting agreement under its stock purchase agreement that provides the Samsung will vote its shares in favor of routine proposals that are recommended by Rambus’s board of directors. And it specifically states this includes certain compensation matters. I was wondering if you could please state whether that would include votes on option grants to management for example?

Tom Lavelle

This is Tom. And yes, Michael, it typically would.

Michael Cohen – MDC Financial Research

Okay. Great. That answers all my questions. Thank you.

Tom Lavelle

Thanks, Mike.

Operator

(Operator instructions) And we’ll go next to Hamed Khorsand with BWS Financial.

Hamed Khorsand – BWS Financial

Hi, just some questions here, on the guidance you provided with the revenue of 4751, as a rule of thumb, if I take the 25 million out from Samsung, I'm getting about almost a 30% drop in Q-over-Q, if you could just explain that for me please?.

Satish Rishi

Based on seasonality, Q4 was a strong quarter and typically there’s a push for shipments in Q3 for end products that is shipped out in Q4. And the Q4 shipments of devices much lower than Q3 because of the Christmas rush. Lot of the variable royalties that we saw an uptick; we don’t expect to see a similar uptick going into Q1 revenue. And that’s the primary reason. We mentioned PS3, again there’s the rush, PS3 is higher in Q4 typically than in Q1 for us. So it’s attributable to seasonality.

Hamed Khorsand – BWS Financial

Could you explain the rationale behind the increase in OpEx in Q1?

Satish Rishi

So for the OpEx, we have a complete new division of the lighting technology division, which we didn’t have in Q4. So we are bringing out that operation and we hired 12 people and we are ramping that hires too. We also have some additional operating expenses that are seasonal, for example, payroll taxes are higher for the company, in the first quarter than they are in the fourth quarter. And for the other operating expenses that are more front-end loaded that are included in the OpEx findings.

Hamed Khorsand – BWS Financial

Okay. And then on the LED front, do you have a better time line as to when Rambus could see some royalties from that division?

Satish Rishi

I think what we said on the call last month was that we expect to see material revenue sometime in 2011.

Hamed Khorsand – BWS Financial

Okay. So, no earlier timeframe than that?

Satish Rishi

We'll see some revenue, but it won’t be material to our P&L.

Hamed Khorsand – BWS Financial

Okay. And then any update as far as product integrations with your mobile innovations?

Sharon Holt

Hamed, this is Sharon. We’re continuing to work on that. Nothing to announce. You’ll be seeing us at Mobile World Congress in a couple of weeks. We’ve got some exciting things that we’ll be doing as part of that event. And we hope to have news of actual customer wins sometime later in the year, but nothing to announce as of yet.

Hamed Khorsand – BWS Financial

Okay. My last question, it seems like Toshiba has been really the only guy is out there trying to push your technology on the TV front and consumer electronics outside of the Play Station 3. Is there a reason why other manufacturers might be apprehensive into incorporating XDR into televisions or cell technology?

Sharon Holt

So there are, there’s at least one other that I can think of off the top of my head, that is incorporating, although has not announced yet. So we don’t want to be the ones to make an announcement for them. Stay tuned. You may remember a couple of years ago when design wins were happening that are now actually resulting in TVs that are on the market.

We actually had a major push going to secure XDR wins in these next-generation HDTVs. That was about the same time as the memory market was tanking and the DDR 2 prices were dropping below $1. It was very difficult for us except in those cases where the performance was absolutely required. It was very difficult for us to secure design wins for XDR in that environment. We have not thrown in the towel though.

The performance demands on those high-end and now trickling down into even the mid range and lower end are continuing to grow. And so you can expect to see another push from us this year as the memory market stabilizes again. The ASPs on the commodity memory start to come back up. And meanwhile XDRs continue to be in production for a couple more years. We think the pricing environment probably is going to be much more competitive. And we still obviously have the performance and other advantages that we can bring to the system level applications. So we're hoping to secure a few more here in the coming year, but you’ll probably see some announcements of other TVs using XDR sometime during the year as well.

Hamed Khorsand – BWS Financial

Okay. And just a follow-up on those comments. Just hypothetically, once Samsung does incorporate XDR into their TVs, under which agreement would that fall under? Would it be the XDR DRAM or would it be the settlement agreement?

Sharon Holt

So first of all, we’ve not said that Samsung was incorporating XDR in their TVs, although they do produce and ship XDR memory devices. We certainly think it would be a great idea for them to incorporate in their TVs, but that we have not announced or said that. And then your second question, no, we have a separate technology license agreement in place with Samsung that covers our relationship with respect to XDR. And as we said in the announcement of the settlement last week, any other future Rambus leadership products, things beyond XDR would be covered similarly under separate agreements not by the settlement agreement.

Hamed Khorsand – BWS Financial

Okay. Thank you.

Operator

And we’ll take a follow-up question from Jeff Schreiner with Capstone Investments.

Jeff Schreiner – Capstone Investments

Yes, thank you very much. Sharon, you’d mentioned I believe in an answer to one of my questions about possibly, if I heard right, several controller licenses up for renegotiation. I was just wondering if you can help us give us a little bit more clarity about what licensees are up for renegotiation during fiscal year 2010 and has the company started to engage in those discussions?

Sharon Holt

Yes, I won’t give you an exhaustive list, but a few of the more material ones. Toshiba and Matsushita or Panasonic and then AMD towards the end of the year. So we will be pretty busy and focused on reengaging with those folks to get them relicensed when their existing agreements expire.

Jeff Schreiner – Capstone Investments

Okay. And if you could give us a number, Sharon, and maybe this, I don’t know how difficult this is, but how many companies are currently on notice by Rambus at this time? And I'm just looking more for a number as opposed to names or anything of that nature?

Sharon Holt

Jeff, there’s a good reason why we don’t like to address this directly. No. 1, as you well know from following us all the time that you have the ability to take engagements through the pipeline to closer in a predictable timeframe has always been a challenge for us given the ongoing litigation and other events that tend to drive the willingness of the licensees to sign and obviously to pay the rates that we are asking for. So for that reason, we don’t want to miss that expectations, we don’t like to give numbers.

On the other hand, I did say, yes, we have several that are ongoing, both folks that are in the renewal category as well as people who have not yet taken a license, but with whom we’ve been in discussion. And we, as I said, do intend to take whatever momentum we can out of the news from last week and try to move as many of those forward disclosure as we can.

Jeff Schreiner – Capstone Investments

Okay. One last question now. Thank you for your time, everyone. Tom, this is kind of a follow-up to a question Michael asked. And I think that this has been the real concern with investors since the Samsung settlement and the discussions that I've had with many Rambus investors.

And I'm trying to understand that if Rambus was to complete the trial, and that’s the antitrust trial and then some, I know you never like to get into forward thinking there, being a lawyer that you are, but what we’re trying to understand here, I think a lot of investors want to understand is are you going to get some compensation for the antitrust trial? Because I think investors are very concerned that in their mind, you let Samsung walk out of a very significant damage award. And I think that a lot of investors are hesitant to put a higher valuation on the company because they don’t believe that the company actually intends to ever achieve any antitrust damages. Could you help clarify that for us if you can?

Tom Lavelle

I think that’s an interesting point of view. But there’s no doubt in my mind that I fully intend to and hope to get a very large damage award against the two remaining defendants, namely Micron and Hynix. There’s nothing, I mean, if you think Harold is trying to hold me back in this regard, you’re very sadly mistaken, and my goal is to get as much as we can get from that trial for the damage that was done to this company, and we fully intend to get it.

And I'll remind you as what Harold said, it's joint and several liability, so the total damages available can be awarded against Micron and Hynix with there’s possibly somewhat of an offset from what we collected from Samsung, but the totality of the damages is not substantially changed by our settlement with Samsung. And we intend to go and collect that from both Hynix and Micron, both of whom have shown in their recent statements a much better cash position. Some of the questions we used to get were bankruptcy questions. I doubt you’ll get those right now about either company. So we think they are creditworthy and we intend to fully pursue them.

Jeff Schreiner – Capstone Investments

You brought up one other good point for me. Because there’s been a lot of research coming out so-called popping up Rambus experts related to antitrust trials and damages that other firms who don’t currently cover Rambus shares and have been trying to make predictions about potential damages that Hynix or Micron could face at this trial. And they all are continuing to use market share assumptions. Can you remind us again, will there be any market share calculation used in the damage award based on the joint and several nature of this case?

Tom Lavelle

At some level there would be market share, but not the way I think you're asking the question, Jeff. I think what you’re alluding to is the damages that Rambus suffered as a result of the conspiracy at issue is the lost revenues from royalties for sales of DRAMs and controllers that were R DRAM based in the market that didn’t sell and that is irrespective of what any of the defendants actually sold in the way of JEDEC-compliant parts. It had to do with what we were not able to sell, not allowed to sell because of their behaviors, and the defendants responsible for all of those. There is an offset that may well be imposed by the judge, but the damages are real, they're very big and they get troubled. And that’s the responsibility of the remaining defendants. That is what I'm pursuing.

Jeff Schreiner – Capstone Investments

Thank you very much, Tom, I appreciate it. Okay. If I could just say, the market share issue is with regard to what market share would our DRAM-based products have had were not for the conspiracy. And correct me if I'm wrong, Tom, within the JEDEC based market, the market share of the now two, previously three defendants is completely academic?

Tom Lavelle

That's fair.

Jeff Schreiner – Capstone Investments

Yes, thank you.

Operator

And that concludes our question-and-answer session. I’d like to turn the conference back to Mr. Harold Hughes for closing remarks.

Harold Hughes

Just thank you for your continued interest and support and we look forward to speaking to you soon.

Operator

Thanks, everyone. That does conclude today’s conference. We thank you for your participation.

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