MORGAN STANLEY DEAN WITTER
Rambus - June 28, 2000
Hitachi Settlement Fortifies Rambus's IP Position
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Summary and Investment Conclusion:
After the market closed on June 22, Rambus announced that the company settled its legal dispute with Hitachi.
Due to Rambus's belief that Hitachi's products were infringing its intellectual property, management filed
lawsuits in the U.S., Germany, and with the U.S. International Trade Commission. As a result of the patent
license agreement, Rambus has eliminated all of its legal actions. Similar to the Toshiba license agreement
announced on July 16, Hitachi has licensed Rambus's SDRAM, DDR SDRAM, and the controller patents that
directly interface with these memories. As a result, we believe that Rambus's intellectual property position has
gained additional strength and credibility.
Hitachi signed a five-year agreement; according to the agreement, the company will pay an up-front settlement
fee and ongoing royalties on shipments of any SDRAM, DDR, and logic-interface devices communicating with
these memories from April 1, 2000, and beyond. Due to the more combative process necessary to license
Rambus's patents, we believe that Hitachi's up-front payment and ongoing royalty rates are higher than Toshiba's.
Although neither company has disclosed details, we believe that Hitachi's SDRAM royalty rate is probably in a
1.00%-1.25% range, while DDR rates are likely 2.0%-2.5%. We believe the SDRAM and DDR SDRAM
controller IC royalty rates for Hitachi are around 3%-4% and 4%-5%, respectively.
While we believe that the license agreements with Rambus's existing licensees differ from one another, we
estimate that Rambus DRAM royalties are in a 1%-2% range, while the Rambus DRAM-based logic interface
royalties are 3%-5%. We believe that Hitachi is the sixth largest DRAM manufacturer in the world, and the
strength of its SH processor design wins suggest that its logic-based royalties should also be meaningful. Based
on the amortization of the up-front fee and our expectation for incremental royalties to be recorded in the
September quarter (Rambus has a one quarter lag in the recognition of royalties) and beyond, we have increased
our fiscal 2000 (ends in September) and 2001 earnings estimates. Our fiscal 2000 earnings estimate has
increased to $0.16 per share from $0.15, while our fiscal 2001 earnings-per-share estimate has increased to
$0.40 from $0.35. As more licenses are recorded, we expect to continue to increase our earnings estimates, and
we continue to believe that Rambus will enjoy earnings power of $4-$6 in 2003.
Given Toshiba's willingness to license Rambus's patents, and Hitachi's decision to settle out of court suggest
that these leading companies believe that Rambus's patents are legitimate and have considerable value. As a
result, we believe that the Rambus DRAM transition issue is no longer the key issue facing RMBS. Based on the
scope of its patents, we continue to believe that every DRAM supplier and the concomitant logic interface
suppliers will need to license Rambus's patents, including Acer Laboratories, ATI Technologies, Fujitsu,
Hyundai, IBM, Infineon, Intel, LSI Logic, Micron, Motorola, National Semiconductor, NEC, NVIDIA, Samsung,
Silicon Integrated Systems, Transmeta, Via Technologies, and many others. We believe it is likely that several
more companies will complete license agreements before the end of the year, and RMBS should continue to
advance as more companies license its patents. Consequently, we reiterate our Strong Buy rating and 12-18
month stock-price target of $200. |
