Rambus plunges along with chip prices

Falling prices for memory chips translate into a falling share price for the memory-chip maker, after its third-quarter report.

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Falling prices for memory chips translated into a falling share price for Rambus Friday, after the memory-chip maker's third-quarter report.

Shares in the designer and licenser of Rambus Direct RAM (RDRAM) chips were down $1.03, or nearly 10 percent, to $9.85 at market close.

Thursday night, Rambus reported third-quarter net income of $3.7 million, or 4 cents per share, in line with First Call's estimates but below the $4.6 million, or 4 cents per diluted share, reported in the year-ago period.

Sales rose to $23.3 million from $17.76 million in the year-ago period but fell from $31.25 million in the second quarter. Management attributed the shortfall to lower royalties, caused by dropping prices and difficult legal battles.

The company, which gets revenue from royalty payments on the patents for its memory chips, has been troubled by litigation from competitors that insist its widely used memory chips shouldn't be under patent protection. Rambus said Thursday that expenses from the ongoing trials increased by $1.5 million to $8.8 million during the quarter.

But the real news in Thursday night's report was projections that sales would continue to drop in the current quarter from the past three months. Continued weakness in the PC market and price reductions for both RDRAMs and SDRAMs, a similar type of memory chip, are expected to bring total revenue down 20 percent sequentially in the September quarter, the company said.

Things have gone "from bad to worse" for the chipmaker, said SG Cowen Securities analyst Drew Peck, who maintained his "neutral" rating on the stock Friday.

Aside from increasing legal fees, the company is also having problems in the DRAM market, which is "experiencing the worst declines in the industry's history" with no signs of improvement, Peck said.

The analyst cut his revenue and earnings estimates for 2001 but cautioned the estimates could be too optimistic.

"Our lowest numbers still include" royalties from synchronous DRAM, Peck said, something that is "an increasingly speculative bet" considering the fact that at least one SDRAM licensee has renegotiated lower royalty payments.

Morgan Stanley analyst Mark Edelstone also lowered his estimates Friday, citing uncertainties in the DRAM market. Edelstone pointed out that other SDRAM licensees could renegotiate contracts, and legal news has not been encouraging.

"We do not expect significant favorable legal developments for the company over the next several months," Edelstone wrote.