Commentary: Electronics IP Industry — A May 2006 Update

On April 19, 2005 Rambus Inc. reported results for the first quarter of 2006, the period ending March 31, 2006. Total revenue for the quarter was a record $47.2 million, up 19% over the $36.9 million in the first quarter last year and up 14% from the $41.6 million in the previous quarter. This was above the high end of guidance given a quarter ago. The revenue increase was due chiefly to royalty fees received as a result of the AMD and Fujitsu agreements, signed in the fourth quarter of 2005 and the first quarter of 2006, respectively. Contract revenue was $5.6 million, accounting for nearly 12% of total revenue. Contract revenue decreased 16% year-over-year and 19% sequentially due to the completion of certain XDR DRAM and FlexIO processor bus related contracts in the fourth quarter of 2005. Royalty revenue was $41.7 million accounting for 88% of total revenue. This was up 26% year-over-year and 20% sequentially.

In March 2006, Rambus announced it had signed a 5 year patent license agreement with Fujitsu Limited. Fujitsu's payment amounts will be based in part on the relative volume of DRAM that Fujitsu purchases from Rambus-licensed or unlicensed memory suppliers. Rambus estimates the value of this agreement in the range of $108 million to $198 million. In January 2006, Rambus also announced a similar five year patent license agreement with Advanced Micro Devices, Inc. The value of that agreement is around $75 million.

Net income for the quarter was $1.8 million, a drop of 81% from the $4.4 million a year earlier and a decrease of 81% from the $8.2 million in the prior quarter. This Q1 2006 figure included $5.2 million for after tax non-cash stock-based compensation, the first quarter tin which Rambus began recognizing stock-based compensation pursuant to the provisions of FAS 123. Litigation expenses in the quarter were $8.4 million, down form $11 million in the year ago quarter and essentially flat with the prior quarter.

Harold Hughes, president and chief executive officer at Rambus , said: "Achieving back to back record revenue is a great accomplishment and showcases the growing market appreciation of the value delivered by Rambus' innovations. We continue to make solid progress with our patent licensing efforts and are pleased with our results for the first quarter of 2006."

On April 24, 2006, Rambus announced that in its patent infringement suit against Hynix Semiconductor, a jury had awarded Rambus $306 million in damages. The award represents compensation only for that portion of Hynix's SDRAM, DDR SDRAM and DDR2 memory products sold in the United States. The damage award covered Hynix sales between June 2000 and the end of 2005. This award does not yet include any pre-judgment interest. Rambus has also asked for permanent injunctive relief against Hynix to stop the manufacture, use, sale, or import of infringing Hynix memory products. Rambus has other patent cases pending against Micron, Samsung and Nanya.

On April 12, 2006, Rambus announced the appointment of Satish Rishi to the position of senior vice president, finance and chief financial officer. Prior to joining Rambus, Mr. Rishi held the position of EVP of finance and CFO of Toppan Photomasks, Inc., one of the world's leading photomask providers. He has also served as vice president and assistant treasurer at Dell Inc. Previous to Dell, Mr. Rishi spent 13 years at Intel Corporation. The last position he held at Intel was assistant treasurer.

On May 3, 2006 Virage Logic Corporation reported results for its second quarter of fiscal 2006, the period ended March 31, 2006. Total revenue for the quarter was $15.2 million, compared with $12.8 million for the second quarter of fiscal 2005 and $13.7 million for the first quarter of fiscal 2006. License revenue was $10.4 million, compared with $10.1 million a year earlier and $10.4 million for the previous quarter. Royalty revenue was $4.8 million, up 81% year-over-year from $2.7 million and up 46% sequentially from $3.3 million.

Net income for the quarter was $176 thousand, compared with a net loss of $988 thousand for the same period a year ago and with a net loss of $242 thousand for the previous quarter. Net income for the Q1 2006 quarter included $1.9 million of stock-based compensation expense per the adoption of FAS123R. During the quarterly conference call, Jens Meyerhoff announced his resignation to pursue an opportunity outside of California.

Adam Kablanian, Virage CEO and President, said: "Our historical emphasis on developing semiconductor intellectual property for advanced process nodes allowed us to post strong, profitable royalty growth, moving us to the next level in royalty revenues as designs based on these nodes continued to ramp in volume. Our future success demands the efficient development of performance optimized semiconductor IP at the advanced process nodes. During the quarter, we have taken first steps toward the expansion of our engineering development capacity and the build out of scalable infrastructure around our business processes to further improve our ability to drive leadership at the advanced process nodes of 90-nanometer and below."

Stock Market Prices of the G7 Electronics IP Providers

As shown in Tables 4 and 5, and Figure 2 below, the combined stock prices for the G7 increased in absolute terms 37% year-over-year and 7% sequentially. The average percentage change was up over 19% year-over-year, but down nearly 3% sequentially. During the first quarter of 2006, the major stock indexes increased nearly 11% year-over-year and 6% sequentially.

Rambus had the largest year-over-year percentage increase at 161%. MoSys had a very healthy 52% growth. The largest decliners were Logic Vision and MIPS at 47% and 35%, respectively.

On a sequential basis, Rambus was again the leader at 71% and MoSys was again second at 42%. LogicVision, Virage Logic and Ceva suffered sequential declines.

ARMHY 5.96 6.14 6.89 12.2% 15.6%
CEVA 7.40 9.11 6.63 -27.2% -10.4%
LGVN 2.64 2.93 1.40 -52.2% -47.0%
MIPS 11.50 9.85 7.46 -24.3% -35.1%
MOSY 5.85 6.23 8.86 42.2% 51.5%
RMBS 15.07 23.00 39.34 71.0% 161.0%
VIRL 10.96 18.57 10.79 -41.9% -1.6%
Total 59.38 75.83 81.37 7.3% 37.0%
-2.9% 19.1%
Table 4 -- Stock Prices of G7

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