Rambus Dips on New Look at Settlement
A second look by investors at Rambus' (RMBS) - Get Report long-awaited settlement with Infineon (IFX) resulted in a sharp pullback in the stock Tuesday. Shares recently fell 8% to $15.59.
While the stock is now respectably up 19% from Friday's close of $13.12, it's a fairly paltry gain considering the expectations of what a nine-figure settlement might do for the company's stock.
Investors
plowed into the stock on Monday after Rambus said it would get up to $150 million from Infineon to settle all patent litigation. The case had been dragging for years and was seen as the linchpin in several cases Rambus is waging against the likes of
Micron Technology
(MU) - Get Report
and
Hynix Semiconductor
.
Rambus said on Monday that the terms that Infineon got would likely be more favorable than any terms that Hynix or Micron might be compelled to pay. That bravado aside, the fact that Rambus emerged with the Infineon settlement first means that others will be compelled to work from those terms.
Analyst Erach Desai with American Technology Research told clients Tuesday that Rambus gave Infineon too good a deal -- one that will have ramifications going forward. Amtech doesn't do investment banking.
"While Rambus may be unwilling to offer a similar bargain to Micron or Hynix, the reality is that the Infineon settlement will serve as a blueprint for any court to determine what a 'fair' royalty rate Rambus can charge," Desai says.
More disturbing for Desai is what this settlement could mean to Rambus' relationship with
Samsung
, the world's second-largest chip player and the dominant memory producer with DRAM memory-chip market share approaching 30%. Samsung is one of Rambus' three largest customers and an early licensee of Rambus' technology, the same technology that's at issue in its other court cases.
Rambus' licensing agreement with Samsung expires later this year and Desai said the company's standing as an existing Rambus customer and its market strength lead him to believe Samsung will "demand at least as good a deal as Infineon." Desai calculated that Infineon is paying a royalty rate of 0.55%, well shy of the 3.5% that optimistic observers predicted could result from litigation.
Hynix might want to put this issue behind it, as well. It stated in a filing with Korea's Financial Supervisory Service on Monday that it had set aside $346 million "in our 2004 financial books to settle indemnity claims by some U.S. clients and possible further claims and fines," according to a report by
Reuters
.
However, the portion of that which could be earmarked for Rambus remains unclear. Hynix is also involved in a grand jury price-fixing investigation by the U.S. government, to which Infineon agreed late last year to a fine of $160 million.
Analyst Daniel Amir with WR Hambrecht says Rambus would be unlikely to settle with Hynix before completion of a trial that's about to start next month in San Jose, Calif. He said Rambus' position in the Hynix trial is stronger than its position in the Infineon retrial, which Rambus lost at the month's start. This makes it less likely that Rambus would want to approach the bargaining table. Hambrecht doesn't do investment banking.
Also hitting Rambus shares Monday was its reduction in sales guidance for the current quarter. Rambus said sales will be between $37 million and $38 million, beneath its original projected range of $38 million to $42 million.
Rambus CEO Harold Hughes characterized the sales reduction as "not massive," and that it stems from "no particular issue."
However, Desai sees larger issues at work, citing his belief that an 18-month licensing contract for its XDR interface with
Sony
(SNE) - Get Report
and
Toshiba
for the PlayStation3 has expired. "This is likely the biggest reason for the sequential downtick in revenue and may prove to be just the tip of the iceberg."