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Rambus mid-quarter update yields benign news

    Rambus' mid-quarter update after the bell Thursday lacked the usual drama investors have come to expect from technology companies these days considering it didn't lower estimates for the current quarter and had no layoffs to announce.

    The chip designer held the conference call to bring investors up to speed on its ongoing litigation with three memory chipmakers and to trumpet news from the Intel Developer's Forum held in San Jose, Calif. this week.

    This surprising absence of bad news surely comes as a relief to shareholders who have watched Rambus (Nasdaq: RMBS) shares tumble from a 52-week high of $127 a share in June to Thursday's close of $39.75.

    Drew Peck, an analyst at SG Cowen, said he was too busying slashing estimates on the other semiconductor companies he follows to make time for Rambus' benign conference call.

    "Right now, Rambus is the least interesting of the semiconductor stocks I'm following," he said. "Its outlook is completely independent from the rest of the sector because of the litigation issues."

    Chief Executive Officer Geoff Tate said Tuesday's announcement that Intel (Nasdaq: INTC) had invested an undisclosed amount in Samsung Electronics' manufacturing facilities to increase production of Rambus' dynamic RAM (DRAM) chips bodes well for Rambus in the quarters and years to follow.

    Samsung, which is the world's largest manufacturer of Rambus DRAM chips, said it will increase its 128-megabit chip production to over 10 million units a month starting this month, up from the 7 million units it's currently cranking out. The South Korean firm expects to make more than 600 million units in 2002.

    "Total production could equal 300 million units for the year," Tate said of the of Rambus' DRAM chips. "These numbers are large and keep growing."

    Rambus licenses its technology to DRAM makers such as Samsung, Toshiba and NEC. Rambus DRAM chips are 10 times faster than 64-megabit DRAM chips in memory-chip performance. Sony uses the technology in its PlayStation 2 game consoles.

    "In an otherwise difficult environment for DRAM (prices), RDRAM (Rambus DRAM) sales are on the rise," Tate said.

    Memory chipmakers have recently scaled back sales and earnings estimates for the current quarter and fiscal year primarily because of slumping DRAM prices.

    By lowering the cost of manufacturing Rambus DRAM chips--which communicate with chipsets inside Intel's Pentium 4 microprocessors--PC makers hope to roll out Rambus-based Pentium 4 systems for less than $1,000 by year's end.

    Meanwhile Rambus earns a royalty of between 2 percent to 2.5 percent on each chip sold by chipmakers such as Samsung.

    It's this licensing issue--along with claims and counter-claims of patent infringement violations--that has Rambus tied up in courtrooms across the globe.

    Rambus in court
    While at least seven chipmakers have licensed Rambus' patented technology, Hyundai, Infineon and Micron Technology have taken the company to court, wrangling over patent infringement and royalties issues that will take months if not years to resolve.

    Earlier this month, a trial in Germany pitting Micron and Hyundai against Rambus was delayed for procedural reasons. Other trials pending in California, Delaware and Virginia are either in the early stages of discovery or have been delayed for a variety of reasons.

    In the interim, Rambus continues to rack up legal expenses that--combined with the slowing economy--lead executives to water down estimates for the second quarter.

    Tate said the stalling tactics and judicial gamesmanship are just delaying the inevitable.

    "The wheels of justice grind very slowly," he said. "If (Hyundai, Micron and Infineon) have a legitimate claim, they'd (make an effort to expedite) rather than delay the trials for reasons that will soon become apparent. They're simply trying to outspend and outlast us."

    Following Rambus' first-quarter earnings report, Tate said the legal costs to defend its patents against Micron Technology, Infineon Technologies and Hyundai would increase by $500,000 to $1 million in the second quarter.

    While most analysts and independent experts are confident that Rambus' patents will hold up in court, at least one analyst isn't taking anything for granted.

    "I can't be anything but cautious at this point," Peck said. "Every time I've tried to (predict how the courts will rule) in the past, I've gotten my head blown off. It's not easy to guess what a judge or a jury will do, especially when it's a technology issue. That's the scary part."

    Separately, Rambus announced that Chief Financial Officer Gary Harmon will resign sometime this year and that it has been searching for a replacement since December.