Rambus, NVIDIA Make a Deal – Analyst Blog

Despite a long-standing legal battle between the two companies related to patent infringements, the deal indicates a situation in favor of Rambus.

 

In July 2008, Rambus filed a suit in the U.S. District Court alleging that NVIDIA products such as chipsets, graphics processors, media communication processors and multimedia applications processors infringed upon its patents. Recently, Rambus received a notice of favorable ruling from the International Trade Commission (ITC), whereby NVIDIA’s products would be barred from entering U.S. markets. However, the final announcement on ITC’s website is still pending. 

 

However, NVIDIA expressed confidence regarding its ability to use a European Commission (EU) license, which would force Rambus to make certain patents available to it. Back in 2009, Rambus reached a settlement with the EU whereby the company was forced to license its technology to chip manufacturers for a healthy royalty.

 

In the NVIDIA deal, Rambus will be licensing its patents for certain memory controllers; the former will be able to sell its products in U.S. markets. As compensation, NVIDIA is called upon to pay royalty at the rate of 1% for the Single Data Rate (SDR) memory controllers and at 2% for other memory controllers.

 

The memory controller is a digital circuit, which manages the flow of data within the main memory. It can be used as a separate chip or integrated into the system chipset or motherboard. Memory controllers are crucial for chip manufacturers.

 

We believe the deal will boost revenue models of both the companies, as there would be steady flow of products to NVIDIA customers and Rambus will make a neat profit.

 

Rambus’ second quarter 2010 results were disappointing, with the loss per share of 19 cents (excluding gains from Samsung and cost of restatement and related legal activities, but including stock-based compensation expense) missing the Zacks Consensus Estimate.

 

Revenues were up 44% from the year-earlier period, but down 76% from the prior quarter. The significant sequential decline was due to the huge amount ($95.9 million) received as compensation for the settlement of a dispute with Samsung Electronics in the first quarter of 2010.

 

We believe that strong cash generation capabilities and diversification in the $100 billion LED market are positives for Rambus. However, a disappointing guidance for the third quarter, competitive pressure from Samsung Electronics and pending lawsuits against Hynix and Micron Technology Inc. (MU) are reasons of concern.

 

We have a short-term Strong Sell recommendation (Zacks #5 Rank) on Rambus shares.