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Rambus hits expectations

The high-speed memory interface designer cautions investors to expect earnings to stay level for the next two or three quarters.

Rambus, a high-speed memory interface designer, met Wall Street's expectations for its first quarter of fiscal 1999, but the company cautioned investors to expect earnings to stay level for the next two or three quarters.

The Mountain View, California, company reported net income of $2 million, or 8 cents per diluted share, compared to net income of $1.6 million, or 6 cents per diluted share during the same quarter a year ago.

The earnings announced today met analysts' expectations, according to a consensus estimate compiled by First Call.

Rambus' stock ended up at $98 for the day, up $1.75.

Rambus warned investors that earnings during the next two or three quarters likely would be "no better than flat compared to first-quarter results." The caution is the result of seasonal decline in Rambus memory products used in Nintendo 64 game machines and the discontinuation of Rambus controller development by Cirrus Logic and Chromatic Research, a company acquired by ATI in 1998. Also, Rambus said it expects additional expenses as the company continues its push to become the memory standard for mainstream computers.

First-quarter revenues increased 9 percent from 1998 to 1999, rising from $9.4 million to $10.6 million, Rambus said.

Analysts don't expect Rambus to really take off until the second half of 1999, though, when the release of Intel's Camino chipset will enable computers to take advantage of memory built around Rambus' designs, said Dean McCarron, an analyst with Mercury Research.

Rambus stock has climbed up just short of $110, nearly doubling in value during the last quarter. The increases have been justified based on Rambus' long-term potential, said Morgan Stanley Dean Witter analyst Mark Edelstone; however, when the stock hit Morgan Stanley Dean Witter's target price of $110, Edelstone downgraded the Rambus from "outperform" to "neutral." Subsequently, the stock dipped down below $100.

"The company is doing quite well," Edelstone said. "The company basically is priming the pump right now for Direct Rambus DRAMs," he said. DRAM, or dynamic random access memory, is the main memory used in a personal computer.

The Rambus memory system helps to ameliorate the growing speed disparity between computer CPUs and memory. As CPUs have gotten faster and more powerful, it's been harder and harder for a computer's memory to keep the CPU supplied with the data it needs, so the CPU ends up doing the electronic equivalent of twiddling its thumbs.

Rambus provides higher performance by increasing the speed at which data is transferred, as opposed to widening the pipe that transfers the data, McCarron said. Currently Rambus can transfer a peak of 1.6 gigabytes each second (gbps), twice the peak of current SDRAM, Rambus says.

While other companies have created high-speed memory designs, what sets Rambus apart is its friends. Intel has effectively designated Direct DRAM as heir-apparent to the current memory technology, synchronous DRAM (SDRAM), by planning its future chipsets around Rambus memory. In other words, Rambus will be the memory that works with Intel chips.

Similarly, AMD, Compaq, and Cyrix have chosen Rambus as their memory standard for their future microprocessors. Nearly every major memory manufacturer has followed suit and taken out a Rambus license.

"Whether it's 8 cents, 10 cents, or 6 cents is not relevant. The reason Rambus sells at its exalted multiple is that as Intel rolls forward with higher-speed processors in the second half of 1999, Rambus appears to be the big winner," said Nathan Brookwood, an analyst at Insight64.

Rambus generally charges royalties of about 1 to 1.5 percent of memory providers' Rambus-related revenues--potentially a lot of money when one considers that the worldwide DRAM market was worth $15 billion in 1998, and that was a bad year for the industry.