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Rambus earnings look good now, better later

The high-speed memory designer has been one of the hottest chip stocks, but analysts think today will pale in comparison to 1999's second half.

Rambus, a high-speed memory designer and one of the highest fliers among semiconductor stocks, will likely post a decent profit today, but analysts don't expect the company to really take off until the second half of 1999.

The trigger that will start Rambus' revenue stream flowing is Intel's Camino chipset, which will enable mainstream computers to take advantage of memory built around Rambus' designs, said Dean McCarron, an analyst with Mercury Research. Camino is due in the second half of 1999.

Still, analysts expect the company to announce a profit when the company reports first quarter fiscal 1999 earnings this afternoon. Analysts expect earnings of eight cents a share, an increase over the six cents a share Rambus reported during the same quarter a year ago, according to First Call.

"The company is doing quite well," said Morgan Stanley Dean Witter analyst Mark Edelstone. "The quarter should be on track, in line to maybe slightly better" compared to analysts' expectations.

Rambus stock has climbed up nearly to $110, nearly doubling in value during the last quarter. The increases have been justified based on Rambus' long-term potential, Edelstone said; 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 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.

Rambus, a Mountain View, California, company, doesn't actually make memory devices itself. Instead, it licenses its designs to companies that pay royalties as they ship goods with Rambus technology. Direct DRAM refers to the design for high-speed memory that Rambus developed.

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.

The reason to buy Rambus stock isn't related to current earnings, said Nathan Brookwood, a principal at Insight 64 in Saratoga, California. "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," Brookwood said.

The company's business model allows for two revenue streams, said Brookwood: Royalties from the sales of memory chip devices and royalties from the Rambus controllers computers must have to communicate with the memory system.

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.

But that royalty is a thorn in the sides of DRAM manufacturers. "The DRAM vendors would still like to find an alternative that doesn't involve royalty payments, so there's continued rumbling from the industry" about working with alternative technologies, Brookwood said.

If Rambus continues to meet its milestones, it will probably be the preferred choice. But if Intel announces support for one of those Rambus competitors, "then all hell would break loose" for Rambus, he observed.

Disloging the relationship, however, would be difficult. In October, Intel invested $500 million in DRAM manufacturer Micron to secure the supply of Rambus memory.

"My understanding is that Intel has made a commitment to DRAM manufacturers to stay with the Rambus interface or variants thereof for the next five years," said Jim Handy, an analyst with Dataquest.

That commitment is a great relief to the manufacturers, who have had to switch to new memory technologies once a year for the last five years. "These guys deserve a rest. It's been quite a treadmill ride," Handy said.

Handy also said royalties for manufacturers of the memory controllers are more expensive than the royalties for the DRAM manufacturers.

AMD will use Rambus controller technology to support its K7 chip, and Compaq will use it in the Alpha 21364 chip due in late 2000, Brookwood said.