Investors Bid Up Rambus on FTC Royalty Ruling

The FTC said in its decision that in order to restore competition in the computer memory market, it would allow Rambus to continue collecting royalty payments for its patented technologies that are included in SDRAM and DDR SDRAM, both of which are faster types of DRAM, or dynamic random access memory, used in computers and other devices such as digital cameras. The FTC ruling allows for these royalty rates, which range from 0.25% for SDRAM to 0.5% for DDR SDRAM, to be paid for three years. The rates are expected to go into effect in 60 days.

The news proved a huge relief to investors who were expecting the worse. Prior to the ruling, the fear had been that the FTC would declare Rambus's patents for SDRAM and DDR SDRAM memory technologies null and require the company to repay years' worth of royalties that it had received. Also lifting investor sentiment was the fact that the FTC didn't include Rambus's next-generation high-speed memory technologies.

At least for the meantime, the finding takes away some of the uncertainty surrounding Rambus since it was first charged with anticompetitive practices by the FTC in 2002. According to the FTC, Rambus patented two types of memory used in personal computers, but allegedly failed to inform the standard-setting agency for the industry, known as the Joint Electron Device Engineering Council, that it had done so. In 2004 that complaint was thrown out by a chief administrative law judge who ruled in Rambus's favor. However, the charges resurfaced last summer.

While the decision appears favorable for Rambus, the company's top ranks don't think it's enough and plan to appeal the decision. "We believe that a fair review of the underlying facts will restore the perspective of the Chief [Administrative Law Judge] who exonerated Rambus by dismissing the complaint," said Tom LaVelle, Rambus's general counsel, in a press release Monday.

Rambus has filed a series of patent-infringement lawsuits against chip makers, most notably Korea's Hynix Semiconductor, asking it to pay royalties for the same technologies that the FTC ruled on. Now that the FTC decided that Rambus should receive royalty payments for its SDRAM and DDR SDRAM technologies, the outcomes of those suits seem to be leaning toward Rambus's favor.

"This scenario will most likely lead to settlements across the globe," says Jeff Schreiner, an analyst at American Technology Research.

Hamed Khorsand, a principal at Tarzana, Calif.-based portfolio management firm BWS Financial, agrees. If a settlement isn't reached in the Hynix case, he believes that the judge will most likely rule in Rambus's favor. "[The FTC's decision] basically puts the ball back into Rambus's hands," he says.

Analysts also see the lack of limits on the company's DDR2 and DDR3 technologies as promising. In November, American Technology's Schreiner predicted that the FTC wouldn't set royalty caps on the company's next-generation memory technologies, providing what he believes is substantial upside to the shares. Schreiner, who has a Buy rating on Rambus's stock, boosted his price target to $32 from $28 at the time and sees even further upside to the shares given the FTC's recent decision.

Khorsand, who has a much tamer $22 price target, cautions that the company's shares will continue to be volatile as it wades through all of its legal entanglements.

Either way, the ruling by the FTC was more generous than investors expected and should provide upside to both Rambus's earnings and its shares as it continues to collect royalties on a large portion of the memory that's used in personal computers.

In addition, the Los Altos, Calif., company can continue to charge its own royalty rates for its next-generation technologies, although the FTC did say it would advise looking into the rates charged for those technologies as well.

Nevertheless, the FTC's decision not only provides Rambus with a recurring royalty revenue stream, but it also gives it a basis to fight chip makers like Hynix in court.