No. of Recommendations: 46

RMBS KARB Analysis

See this post for NEW KARB criteria:
http://boards.fool.com/Message.asp?mid=13444144

A. Top dog, first mover, in an important, emerging industry that is currently in the Tornado (hypergrowth), or is in the early stages of Tornado/hypergrowth growth. (Most of the signs of Tornado formation/growth as laid out in the Gorilla Game FAQ must be met; refer to item #12 in this post:
http://boards.fool.com/Message.asp?id=1360002000838000


RMBS is a designer of random access memory, they hold key patents in RDRAM, SDRAM and DDR SDRAM essential to the manufacturing of these modules. They license their technology to the memory-makers gaining royalty income from their intellectual property.

From their Yahoo! Profile:
http://biz.yahoo.com/p/r/rmbs.html
Rambus Inc. designs, develops, licenses and markets high-speed chip-to-chip interface technology to enhance the performance and cost-effectiveness of computers, consumer electronics and other electronic systems. The Company licenses semiconductor companies to manufacture and sell memory and logic ICs incorporating Rambus interface technology, and markets its solution to systems companies to encourage them to design Rambus interface technology into their products. The Company's technology cost-effectively increases the data transfer rate, or memory bandwidth, allowing semiconductor memory devices to keep pace with faster generations of processors and controllers, and thus supports the accelerating data transfer requirements of multimedia and other high-bandwidth applications.

The thing that differentiates Rambus' designs over commodity RAM is the speed of their interfaces, controllers. It makes no sense to make faster and faster processors if the bottleneck of RAM speed prevents you from seeing any speed improvements in your real life applications. RDRAM aims to cure these bottlenecks.

This great post by überRMBSFool jasonxsmith expains the difference between RDRAM, SDRAM and DDR SDRAM, and how RMBS fits into all of it.
An excerpt from his post:
Rambus gets about 2% from every sale of an RDRAM chip. They make about 3% to 5% on the sale of every controller chip that interfaces to RDRAM (the cost of chipsets is a minor concern though). This is a given. The contracts are in place already.

Rambus also claims they have patents which apply to SDRAM and DDR. The royalties are about 1% for SDRAM and 3% for DDR (since that is considered to be a competing technology). This is still in dispute, although it looks very much like everyone is going to have to pay. Rambus appears to be very confident that they can win in court, and have already moved towards litigation in several instances. Hitachi, Toshiba, and OKI have agreed to pay the royalties, and Rambus is either suing or in talks with Infineon, though we are unclear on the progress there.

Rambus stands to make 1.5% to 2.5% of the revenues on 100% of the DRAM sold worldwide. If the industry grows as expected for the next 5 years, that number will be somewhere in the $60B to $100B range. Run the numbers, compare that to a $7B market cap, and rejoice my child, for you have found one of the most undervalued stocks in the market!

Remember, this is based on DRAM sales alone, and this information is pretty easy to quantify. Now add to that the other applications where Rambus technology is going to be necessary, and the picture gets even better. How much better? Nobody knows, except insiders, and they are not talking. Rambus is working deals now.


RMBS as a Rule Breaker

jasonxsmith makes a good case in this 3/4/00 post
http://boards.fool.com/Message.asp?id=1030064000599000

Tom Jacobs (TMFTom9) concludes that RMBS cannot be a Rule Breaker because it lacks a sustainable advantage:
http://www.fool.com/portfolios/rulebreaker/2000/rulebreaker001103.htm

I would dispute that, RMBS has the makings of a young Gorilla, and as such they don't always play nice. Yes, RMBS antagonizes its customers, but the thing is that those same customers need RMBS' technology to survive. As long as RMBS' patents hold they will continue to serve as toll collector in the industry.

Top Dog:
Rambus is the only DRAM licenser I can think of, they are the undisputed top dog in this area. Intel is basing their next architecture on RDRAM specs.

First Mover:
Rambus has been developing its RAM designs since the early 1990s. Rambus Inc. was founded in 1990 by Dr. Mike Farmwald and Dr. Mark Horowitz, foremost experts in electrical and computer engineering. It is the first mover in terms of RAM intellectual property and it is vigorously defending its patents to assure its dominance.

RMBS as a Gorilla:
See this RMBS Gorilla summary by rel4490
http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=12880620
also see this TMF post by nilocp that lays out the RMBS Gorilla characteristics:
http://boards.fool.com/Message.asp?mid=13147589


B. Sustainable advantage gained through business momentum, patents, visionary leadership, high barriers to entry, and high switching costs.


Business momentum:
RMBS is showing a great deal of business momentum as RAM makers capitulate and accept licensing agreements with RMBS.

Samsung was the latest one:
http://www.fool.com/news/2000/rmbs001101.htm

Samsung joins Toshiba, Oki, NEC (Nasdaq: NIPNY) and Hitachi (NYSE: HIT) as companies that have reached patent licensing agreements with Rambus. Those agreements came after Hitachi capitulated in a lawsuit filed by Rambus asserting its patent rights.
Samsung's addition to that list is huge. It is the world's leading DRAM supplier, with revenues of $4.8 billion and 20.7% market share in 1999. How much money does that mean for Rambus? The companies did not reveal precise terms of the deal, but Rambus typically seeks to collect about 1% of SDRAM revenue and 3% of DDR SDRAM.

From that article:

Global DRAM Sales | RDRAM, SDRAM
1999 ranked by % | and DDR deal
----------------- --------------------
1. Samsung 24% deal
2. Hyundai 20% no deal, lawsuits
3. Micron 17% no deal, lawsuits
4. NEC 10% deal
5. Infineon 8% no deal, lawsuit
6. Toshiba 8% deal
7. Mitsubishi 4% no deal, no lawsuit
8. Fujitsu 3% no deal, no lawsuit
9. Hitachi 3% deal
10. Oki 2% deal
-----
TOTAL 100%

Rambus now has license agreements for 47% of the sales among the top-10 DRAM makers. As Tom noted in his story on the Micron suit:
http://www.fool.com/news/2000/rmbs000829.htm
Companies that don't come to an agreement with Rambus run a grave risk: They could lose their ability to manufacture DRAM at all. With more manufacturers signing up and the downside so great, Hyundai, Micron and others are ever more compelled to play ball.

NEC capitulates:
http://www.fool.com/news/2000/rmbs000913.htm

The Fool duel for RMBS makes some great points in this regard, read TMFTom9's Bull argument (and if you must TMFOak's Bear argument):
http://www.fool.com/duelingfools/2000/duelingfools00082300.htm

How Rambus makes money
Rambus doesn't actually make RDRAM, though its engineers developed and patented the technology and are busily advancing it -- even for use in switches and routers for optical networking. Rambus's patents are key: They are legal 20-year monopolies on the invention backed by the U.S. Patent and Trademark Office.
-snip-
Rambus licenses its technology to memory makers. It even provides engineers to help a licensee implement it. The memory makers then sell to original equipment manufacturers. The company then earns a royalty payment generally based on unit sales of the product containing Rambus's stuff. You can check the earlier links for more information, but we're generally talking 2% to 5% per chip, in a DRAM market estimated to grow from $20-something billion today to between $60 billion and $100 billion in the next three to five years. Not peanuts. Rambus's success in this market depends on market acceptance of RDRAM versus SDRAM and any other DRAM competition.
-snip-
Rambus asserts that currently dominant SDRAM and the promised DDR SDRAM use technology that depends on Rambus's patents, and any failure to pay Rambus royalties on SDRAM and DDR is illegal patent infringement. Read it again.

This is a big, fat, hairy, monstrous deal: Rambus is negotiating with DRAM makers (and sometimes suing them) to receive a royalty on every SDRAM, DDR SDRAM, and RDRAM chip. It is claiming that its patents cover 99% of the DRAM produced today and likely to be produced in the next few years. If Rambus succeeds, then RDRAM's technical superiority, price disadvantage, or fashion awareness matter not because Rambus gets paid for practically everything DRAM. Do the numbers: Rambus is reported to charge a 1% royalty for SDRAM and 3% for DDR. Estimate 2% of a $60 billion to $100 billion DRAM annual market in three to five years, and you have $1.2 to $2.0 billion for Rambus. This is why debt-free, leanly staffed Rambus could be called undervalued at its current $7 billion market cap, without accounting for any Rambus advances in its technology for the computer market or any royalties for its technology used in networking products.


PATENTS
Patents are the life-blood of Rambus, without them the company would be worth nothing. I think the patent count now stands above 90.
From the latest 10-K (filed 12/23/99):
The Company has an active program to protect its proprietary technology through the filing of patents. At September 30, 1999, the Company held 62 United States patents on various aspects of its technology, with expiration dates ranging from 2010 to 2019 and had applications pending for an additional approximately 90 United States patents. The Company's United States patents do not prevent the manufacture or sale of Rambus-based ICs abroad. At September 30, 1999, the Company held ten foreign patents and had an additional 36 foreign patent applications pending in Taiwan, Korea, Japan and various other jurisdictions. In addition, the Company attempts to protect its trade secrets and other proprietary information through agreements with licensees and systems companies, proprietary information agreements with employees and consultants and other security measures. The Company also relies on trademarks and trade secret laws to protect its intellectual property.

"C. Excellent Growth Metrics"

RELATIVE STRENGTH:
RMBS' Relative Strength in the past 12 months, according to www.moneycentral.com, is 98 (as of 11/22/00). Makes it easily past this hurdle. According to IBD (as of 11/21/00) RMBS had a RS of 92.

2 points.

Here are some notes from Tom Jacobs on the latest quarterly earnings release:
http://www.fool.com/news/2000/rmbs001019.htm
For the fourth quarter of its FY 2000, the company earned $0.09 per share, a 113% increase over the third quarter, and an eye-popping 285% more than 1999's fourth quarter. Earnings for the year clocked in at $0.20 per share, or 147% over 1999. These numbers KO'd the consensus estimate of $0.06 per share for the quarter and $0.17 for the year
-snip-
Revenue numbers further show why investors have assigned a soaring valuation -- about 300 times year 2000 earnings -- to the Bus: Quarterly revenues added up to a record $26.9 million, 119% over last year and up 52% from last quarter. For the full year, revenues climbed 67% from 1999 to $72.3 million.
-snip-
CEO Geoff Tate noted on the conference call, with justified pride, that the company's cash balance increased $35 million to $132 million, deferred revenue from $31 million to $48 million, and that accounts receivable were a measly $68,000 -- yes, 68 thousand dollars. No debt, either.

RMBS has now officially entered into the tornado, with hypergrowth as memory-makers enter into agreements to license RDRAM, SDRAM and DDR SDRAM.

SALES GROWTH (numbers in thousands):
YoY (TTM):
Sep 1999 - Sep 2000: $72,311
Sep 1998 - Sep 1999: $43,370

That's a growth of 66.7%.

But, hold on, royalty revenue (not contract revenue) is the real driver of earnings and future growth, that went from $8,017 to $32,628, a whopping 407% growth yoy in royalty revenues (now that's hypergrowth!)

QoQ (3 mo):
Sep 2000: $26,908
Sep 1999: $12,305

This is growth of 118.7% for all revenue, for royalties the growth is even more dramatic from $1,675 to $19,921, for a growth of 1089% (yes the numbers are small, but the RAM market is about $20 billion and growing at a healthy clip).

2 points.

Sequential (TTM):
Jun 2000: $17,760
Sep 2000: $26,908

That's a sequential quarterly growth of 51.5%, for royalty revenue the sequential growth is more dramatic at 203%!!!! The best thing is that the royalty revenie carries gross margins of 100%.

2 points.

"D. Clear signs of solid execution by a strong management team; Value chain in place or shows clear signs of developing (eg. alliances, joint ventures, partnerships, signing up distributors, third party developers, and VAR's)"

RMBS is a pit bull, it is using its IP to extract its own terms of surrender from the memory makers, and it is succeeding. They are falling like dominoes. Their value chain runs deep and RMBS management is not afraid to defend vigorously its patents.

From the last 10K:
At September 30, 1999, Rambus had a total of 31 licensees for the newest generation of Rambus technology. Rambus licensees include fourteen DRAM manufacturers which collectively accounted for over 95% of worldwide DRAM sales in calendar 1998: Fujitsu, Hitachi, Hyundai Electronics, IBM, Micron Technology, Matsushita, Mitsubishi, NEC, Oki Electric Industry, Samsung Electronics, Siemens, Toshiba, Vanguard and Winbond. At September 30, 1999, five of these licensees were shipping RDRAMs. Rambus logic licensees include Advanced Micro Devices, Compaq, Hewlett-Packard, IBM, Intel,
LSI Logic, Matsushita, NEC, S3, Texas Instruments and Toshiba.


RMBS is quickly becoming a Gorilla, just ask Intel, once a solid sponsor of RMBS technology it is now trying to distance itself from its former partner. See this excerpt from Tom Jacobs' dueling Fools:
Semiconductor Rule Maker Intel (Nasdaq: INTC) has decreed that the market will accept Rambus. Intel signed a 1996 agreement with Rambus that commits the giant to use RDRAM in controller chips and to meet certain production and sales targets. The deal includes such carrots for Intel as 4% ownership of Rambus and a seat on the board. Since going public in 1997, Rambus watched its stock trade sideways -- especially during last year's delay of the first Intel product using RDRAM. When this glitch was resolved and Intel's support for Rambus reconfirmed, memory makers made RDRAM available, and Sony's (NYSE: SNE) PlayStation2 -- with Rambus inside -- sold gazillions in Japan earlier this year. (Watch for its U.S. invasion this fall.) When this happened, some FUD evaporated, shorts covered, and the stock zoomed from a split-adjusted $18.44 to $111.27 -- multiplying just under six times -- in 28 trading days! Takes your breath away, doesn't it?

Also see this article, Rambus, Intel, on the outs?
http://www.fool.com/news/2000/rmbs001019.htm
TinkerShaw puts it into perspective here:
http://boards.fool.com/Message.asp?mid=13743521
and also here analyzing the merits of the lawsuits against RMBS and how IP companies defend themselves:
http://boards.fool.com/Message.asp?mid=13602182
and ptnewell adds a message about the hypergrowth RMBS is experiencing:
http://boards.fool.com/Message.asp?mid=13760734

"E. Company products and brand name are well recognized and respected by its customers, peers, competitors and partners in the relevant industry."

RMBS RDRAM means more speed and bandwidth in PCs and other devices, their brand will in time be as well recognized as Intel's if they become the industry standard. RMBS is not liked at all in the RAM industry, fear and loathed is more like it, but then again MSFT has always been loathed and look where it got them (an antitrust trial!). RMBS is palying hardball with the memory makers, but then Gorillas are feared not really loved, and because of their privileged position in the value chain the status quo does its best to keep them in that position once they have been anointed Gorillas, in the meantime their competitors and customers fight like heck to usurp the Gorilla to be.

See this excellent post by HowlOnMoon that explains the facts of life for RMBS:
http://boards.fool.com/Message.asp?mid=13559404
and ptnewell gives an excellent overview of the prospects of RMBS even if RDRAM is not adopted as a standard:
http://boards.fool.com/Message.asp?mid=13745061

"F. Valuation metrics: "
(as of 11/22/00)
http://biz.yahoo.com/p/r/rmbs.html

MktCap: $4.86 B
P/E: 87.7 (based on FY01 $0.57 est.)
P/S: 72.12

I should also mention that RMBS has no debt, $122 Million in cash, equivalents and marketable securities, and a gross margin of 90% this last quarter!

Risk:

There is a lot of risk with RMBS, first and foremost its patents can be struck down in court. Without its patent protection RMBS is basically worthless. Intel may really decide to support another RAM standard, although so far none have materialized that can compete in terms of speed with RDRAM.
See this post on Bandwidth Utilization by rbnelson:
http://boards.fool.com/Message.asp?mid=13756790
and this post on the Pentium 4 situation at Comdex by DougK99:
http://boards.fool.com/Message.asp?mid=13724395

The main risk with RMBS is one of litigation. Once that is resolved and RMBS' patents are upheld the risks will go way down. We'll see how things go in the courts, but by the way memory makers have been caving in to Rambus I remain optimistic.

jasonxsmith describes the risks pretty well in this excellent post:
http://boards.fool.com/Message.asp?mid=13136758
Risk
There is a risk that Rambus could lose all its patents when it goes to court. This would make the company worth virtually nothing, but it would also call into question every patent issued in the last 17 years. If the patents are not invalidated, there seems to be virtually no risk that the memory makers will find a way around the patents. Their best attempt was DDR, and its design isn't really all that good to start with.

Intel is still stating publicly that RDRAM is the way of the future and the major memory 5 years out. There is a risk that this could change. If RDRAM suddenly becomes very difficult and expensive to make and no one can find a workaround, DDR may find a second wind. If we get 3% of DDR sales, who cares, right? But DDR is a stop-gap measure, and if RDRAM does not work as a mainstream solution, another will have to be found - and quickly. So far, I have seen absolutely no evidence that RDRAM will not be ready, and cheap, by the time it is needed for value systems. I am getting very worried about DDR however. :-)


SUMMARY:

RMBS is a young company, leading in licensing some critical technology. RDRAM has speed on its side and acceptance by Gorilla Intel (begrudgingly) for its Pentium 4 architecture, and also in Playstation2 consoles by Sony. I believe RMBS is emerging as a Gorilla and a force to be reckoned with. As far as I'm concerned, it is a Rule Breaking stock and deserves to be included in KARB.

-xerohype

(Disclaimer: I own shares of RMBS and may buy some more if the share price continues to drift down.)

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