Rambus soars on analyst upgrade, Toshiba deal

Morgan Stanley Dean Witter analyst Mark Edelstone upgrades the company's stock to "strong buy," and Toshiba agrees to pay a licensing fee and royalties for standard memory chips.

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Shares of memory chip company Rambus soared today after a brokerage upgraded the stock and Toshiba agreed to license the company's patents for use in standard memory.

At the close of regular trading, Rambus was up $26.69, or 46 percent, to $83.38 on a volume of 64 million shares. The stock shot up after Morgan Stanley Dean Witter analyst Mark Edelstone upgraded the stock to "strong buy." The company recently split its shares 4-for-1.

Under the deal announced late last night, Toshiba will pay a licensing fee and royalties for today's standard memory chips and double data rate (DDR) memory, a standard competing with Rambus' approach to become the next standard in the PC market.

The Toshiba deal is potentially significant in that it could lend credence to a theory proposed by Rambus that nearly the entire memory industry owes the company royalties. Rambus has alleged that patents it filed in 1990 give it a right to collect royalties from manufacturers of synchronous DRAM (SDRAM), which became the primary type of memory used in PCs during the past 10 years.

Earlier this year, Rambus sued Hitachi, saying its standard memory chips infringe on Rambus patents; it also indicated that more lawsuits could be filed.

Of particular note in the Toshiba deal is that Rambus is getting more in royalties for each DDR memory chip sold than for each chip that uses Rambus' design.

"We feel DDR was intended to compete with Rambus," Rambus vice president Avo Kanadjian said in an interview. "Since it utilizes our intellectual property, we should get compensated for that."

A high license fee for DDR could boost the cost of future high-end servers, many of which are being designed around DDR memory. Kanadjian said Rambus does have some server design wins but added that DDR has the widest support in that market.

The higher royalty could give incentives to memory makers to promote Rambus over DDR for desktops. Analysts estimate that Rambus receives a 1 to 2 percent cut from the sale of RDRAM chips. Most manufacturers don't pay royalties on DDR, one of the reasons they have found the memory attractive.

Rambus doesn't actually make chips, but rather licenses its technology to other semiconductor companies. Its primary business has been trying to drive its own approach, so-called R-DRAM, into the marketplace. That effort has run into a variety of hurdles, however.

Geoff Tate "We believe our Rambus memory interface is the best solution for the majority of the market," Rambus chief executive Geoff Tate said in a statement. "Developing and marketing the Rambus memory interface has been and remains our top priority. But we are willing to license our IP for other memory interface solutions as well."

UBS Warburg analyst Greg Mischou said the fact Toshiba is willing to license the technology strengthens the case against Hitachi and could increase the odds that other memory makers will license Rambus' patents.

"It greatly increases the likelihood that others will follow suit," Mischou said.

Rambus' Kanadjian said that other memory chip companies may follow Toshiba's lead, though he did not say which ones.

"There are other companies that have indicated an interest in licensing our intellectual property for non-Rambus memory," Kanadjian said. "We will negotiate with them."

Although exact financial details were not disclosed, Kanadjian indicated that cost will not make DDR cost-prohibitive. "We don't think it will prevent those applications that have decided to use DDR," he said.

Rambus' patents are strong, particularly with respect to DDR memory, said Rich Belgard, a Saratoga, Calif.-based consultant who specializes in patent issues.

"They look pretty good," Belgard said. "I don't think they're going to be invalidated."

Belgard said he doesn't think Rambus' patents will stand in the way of DDR adoption but said it means that memory makers will probably have to pay Rambus no matter which next-generation memory technology they use.

"I think they get you coming and going," he said.

Semico Research analyst Sherry Garber noted, however, that Rambus has yet to prove in court that its patents cover traditional SDRAM and DDR.

"I don't believe it is as conclusive as Rambus would like you to presume," Garber said. "Toshiba is one company and a company that's de-emphasizing its DRAM business."

Rambus plans to outline future directions for its own memory technology later today at an event in Santa Clara, Calif.