Conference Call Transcript
Q1 2003 InterDigital Communications Corporation Earnings Conference Call
13 May 2003
07:00
FD (FAIR DISCLOSURE) WIRE
OPERATOR: Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience. Good morning. My name is Christy, and I will be your conference facilitator. At this time, I would like to welcome everyone to the InterDigital Communications Corporation first quarter 2003 financial performance conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number 1, on your telephone key pad. If you would like to withdraw your question, press star, then the number 2, on your telephone key pad. I would now like to turn the call over to Mr. Guy Hicks, Vice President of Communications and Investor Relations. Mr. Hicks, you may begin your conference.
GUY HICKS, VP OF IR, INTERDIGITAL COMMUNICATIONS CORP.: Thank you, Christy. And welcome to the InterDigital Communications Corporation financial performance conference call for the first quarter of 2003. As Christy indicated, my name is Guy Hicks, Vice President of Communications and Investor Relations. With me today are Howard Goldberg, President and Chief Executive Officer, Rich Fagan, our Chief Financial Officer, and Bill Merritt, Executive Vice President and general patent counsel of InterDigital and President of InterDigital Technology Corporation.
Before we begin, I need to remind you that in this call we will make forward-looking statements regarding our current beliefs and expectations as to our strategies, the resolutions of the Nokia and Samsung matters, expansion of our license base and existing relationships and challenges thereto, the acquisition and organic growth of intellectual property rights, the importance of smart technology, our development program, product efforts and the timings there of, revenues, cash flows, the expansion of business relationships, company growth and license projections, 3G markets opportunities and our portfolio, insurance matters and our licensees. Actual outcomes could differ materially from those expressed in such forward-looking statements due to a variety of factors, including those set forth in the company's recent filings on forms 10-K and 8-K and in this morning's press release. Now it is my pleasure to introduce our Chief Financial Officer, Rich Fagan.
RICH FAGAN, CFO, INTERDIGITAL COMMUNICATIONS CORP.: Good morning. Thank, everyone. We were pleased to get off with a good start to the year with a solid first quarter. Our cash position remains strong as we ended the quarter with about $95 million. This position was further strengthened early in the second quarter, after the receipt of approximately $25 million of scheduled payments from Ericsson and Sony Ericsson. Now, let's briefly review first quarter results. We reported revenues of $37.3 million and net income of $26.7 million or 45 cents per share. That compares with revenue of $20.9 million and break-even results in first quarter 2002. If you remove amounts associated with past infringement and litigation settlements in the first quarter of 2003 and 2002, our revenues grew in this year's first quarter by 31% over last year's first quarter, and we reduced our loss by $3.1 million during the period. In first quarter 2003, we recognized an ago aggregate total $30.8 million of before taxes associated with total expected payments of $34.3 million from Ericsson and Sony Ericsson net of insurance reimbursement obligation of $3.4 million related to the Ericsson litigation. $20.3million of this total related to past infringement from Sony Ericsson and was recorded as royalty revenue consistent with our accounting policy based upon Sony Ericsson not being a party to the litigation with Ericsson. The remaining $14 million of the $34.3 million resulted to the March 2003 settlement of our long standing litigation with Ericsson was recorded as other income net of the $3.4 million insurance reimbursement obligation.
This presentation of Ericsson's obligation is consistent with the SEC's position on recording proceeds from litigation settlements. We had previously indicated in our 10-K that both the $20.3 million and the $14 million would be recorded as other income. However, after further review, we concluded that classifying the amounts in revenue and other income respectively was appropriate. Our recurring royalty revenues were up 53% in first quarter 2003, as compared to first quarter 2002, due in large part to the addition of Ericsson and Sony Ericsson to the base of key contributors that included N.E.C. and Sharp. Our operating expenses were up a modest 2%, reflecting continued prudent cost management. Tax expenses decreased due in part to a lower level of revenues subject to non-U.S. withholding taxes.
Now, as we look forward, we're pleased to see many analysts projecting strong export growth for many of our Japanese licensees which we hopes bodes well for us throughout 2003. Sharp has indicated it is targeting nearly double its overseas hand shipments and has recently announced the supply agreement with GSN phones with Tang of China. As for second quarter 2003, we expect our revenues to be generated primarily from royalties from the same licensee base that existed in first quarter 2003. We will also continue to be aggressive in seeking to expand our licensee base. We anticipate that our operating expenses will gradually increase in coming quarters as we move toward creation of TDD field trial demonstration products and it goes without saying that our results could be materially affected in a positive way by the successful resolution of issues with Nokia and Samsung. This concludes my prepared remarks and I will now turn the call over to Howard Goldberg. Howard?
HOWARD GOLDBERG, CEO, INTERDIGITAL COMMUNICATIONS CORP.: Thanks, Rich. I'm very pleased with our performance in the first quarter. You can see the impact of increasing momentum in every area of our business. I'm particularly pleased with our financial performance in the quarter, as described by Rich. We've focused our efforts on creating a broad-based revenue stream that spans across multiple technologies, multiple standards, and multiple applications. We're now seeing the positive impact of those efforts. Our licensing program is fundamental to the company's success. All of you are aware of the licensing of Ericsson and Sony Ericsson during this year's first quarter and their importance in defining rates under a preexisting license agreements with Nokia and Samsung. These licenses were a pivotal event for the company and recognize the strength and essentiality of our second generation patents. Our heritage of invention, as embodied in our strong, deep, and broad patent portfolio, continues well beyond second generation technologies.
In the past year, our pace of invention has continued to accelerate. World wide patent applications increased 200% over 2002, while patents granted increased 260%. The many inventions represented by these statistics are foundational elements in our strategy to increase the value of our technology assets. These inventions also drive enterprise value through licensing and product development. I've asked Bill Merritt, who is responsible for our licensing and patent prosecution business, to spend a few minutes speaking to you this morning. He will give you additional insights into our licensing activities and the global environment in which his team operates. Bill?
BILL MERRITT, EVP AND PRESIDENT, INTERDIGITAL COMMUNICATIONS CORP.: Thank you, Howard. And good morning to everyone. I wanted to touch on just a few areas of our licensing business to give people a better feel for our we're managing that business. In particular, I wanted to provide some color as to how we view the current licensing landscape, as well as how we expect things to involve for InterDigital as we move forward. Obviously our top licensing priority for this year is the resolution of the Nokia and Samsung royalty issues under their existing license agreements. As we reported today, we have initiated the formal contractual resolution process with Nokia with regard to the determination of a royalty rate. This is not an initiation of arbitration; rather, it starts the time clock for an amicable resolution through senior executive meetings positions the matter for arbitration if necessary if the parties cannot amicably resolve the issue. We believe this formal step is important to accelerate the timing and secure an early resolution of this matter and at the same time our discussions with Samsung are continuing. Aside from these obviously important matters, we continue to pursue license agreements for the use of our 2G and 3G inventions. Those discussions continue in the normal course. I am confident we will expand our licensing base this year. Let me explain why. Rich and Howard have both said it, but it bears repeating. We have momentum, and I can tell you from years of licensing, momentum is very important. Putting aside all the technical and legal factors, prospective licensees are far more likely to enter into a license if they see others licensing with you. They are also more likely to agree to license if they know you have the financial strength and determination to pursue the matter through to conclusion. We have all those factors on our side, and they are very important in the current market. As we all know, there are many financially challenged companies out there. A financially challenged company is more likely to try to delay the resolution of a licensing obligation than deal with it, and this environment can be a significant problem for patent holders who are new to licensing. We are not in that category. The fact that we have licensed a significant portion of the 2G market and have a reputation as a determined licensing organization, makes a big difference. Companies know that they have to deal with us.
The current market holds other opportunities. Over the recent past, a number of companies patented excellent wireless telecom inventions and built proprietary know-how positions but these companies have failed to their investment. They are either in stressed financial condition or in need of assistance to maximize the return on that you their technology investment. Seeing this trend about a year ago, we made the decision to expand our licensing efforts to include the opportunistic acquisition of intellectual property assets. We see an opportunity to use this period of market downturn for concluding license agreements can be more difficult to broaden, deepen, extend, and diversify our patent portfolio.
We see this approach as having significant benefits. First, we can acquire patents at generally more favorable terms than in a hot market. Second, when the market turns around, we will be able to approach prospective licensees with a higher value portfolio. That plan has added to our momentum. As you know, we concluded two different deals last year, acquiring exclusive licensing rights to essential patents for (inaudible), as well as exclusive marketing rights for Smart antennae technology.
We held pat patents in all the 3G standards, these acquisitions deepened our coverage.. These acquisitions also provided us with a value added offering in the form of smart antennae technology which could be critical to, among other things, the optimized deployment of 3G. This creates a win-win situation for the licensee and for InterDigital. We continue to be involved in a number of other IPR acquisition discussions and it's our desire to conclude additional acquisitions this year, provided it makes sense. I wanted to make one other point here. In many cases companies have sought us out to assist them in fully monetizing their IPR investment. That did so based in our industry reputation and success it's nice to hear that recognition as it validates our hard work in building a strong licensing presence over the years. It also points to an important factor that will differentiate InterDigital from others as 3G licensing moves into full swing. Many would tell you that licensing is not a competitive business. In fact, though, you compete for a piece of the manufacturer's revenues, and in 3G there are many companies claiming to hold essential IPR and there will be many companies competing, in a sense, for a piece of the end product revenue stream. InterDigital fares very well in that competition. Unlike many companies we hold IPR applicable to both the 2G and 3G standards. Moreover, we are recognized as a major contributor to the global 3G standards. Our significant involvement in the standardizing process is critical in both properly positioning our IPR and, equally important, in creating the perception of InterDigital as a key innovator and contributor. Also, as a result of our licensing practices, we have built a reputation as being fair but firm.
We have a deep patent portfolio and are growing it both organically and through acquisition. We will be able to offer technology in addition to patent rights. Using these in combination, InterDigital can extend -- or can leverage our existing patenting licensing relationships and to extend the technology and product based business relationships. In summary, we are good at what we do. And unlike others that are just now attempting to enter into patent licensing, we've been doing it for a long time. These are the types of things, like momentum, that have contributed to our success and will help us create even greater successes in the future. Howard?
HOWARD GOLDBERG: Thanks, Bill. The licensing activities that Bill just spoke about reflect one means by which we can monetize the creative results from our strong engineering team. Productizing technology is a complementary activity directed towards further monetization. This year at the 3G congress in February, we distinguished ourselves by demonstrating with 100% uptime reliability complete standards-compliant WCDMA terminal platform solutions for the third generation wireless market. Our FDD and TDD technology platforms accomplished an industry first by transmitting and receiving live video at an impressive 384 K kilobits per second. Our demonstration of a complete WCDMA solution certainly stood above our competitors displaying at the time. Offering full solution creates a distinctive competitive advantage for us and is a strong validation in us in both WCDMA component technologies. Our FDD protocol stack was running in separate locations at the show on two different platforms, an important validation of its portability to multiple platforms, a key selling point. We're currently marketing the FDD software protocol stack to producers of mobile terminals around the world and targeting the first quarter of 2004 for its general market release.
At the same time, we were very pleased with the positive reaction to our TDD products at the show. During the 3GSM event we met almost nonstop with operators and manufacturers. They are realizing the competitive cost and revenue benefits created by deploying UMTS standards-compliant TDD technology. Joint discussions continue as we look forward to introducing TDD products into the market during the second half of 2004. Looking forward, we're a company on the move and committed to accelerating our momentum. Our license agreements now cover over 70% of all GFM and TDMA-based mobile phones sold world wide. Our revenues are growing and reflect the success of our global licensing program. We're making substantial progress and rapidly moving technology into product and targeting product to market. We continue to aggressively pursue new market and business relationships that would broaden our access to technology, diversify our future revenue streams, and create new avenues for accelerating growth. At the same time, we're focused on sustaining our financial strength, a competitive differentiator in our industry and an essential element of our strategy to build long-term enterprise value in the company. I am pleased with our performance to date and look forward to leveraging our successes as we continue to navigate a challenging wireless market. With that, let's open the call to questions.
OPERATOR: At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1, on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. One moment, please. Your first question comes from Tom Carpenter from Hilliard Lyons.
TOM CARPENTER, ANALYST, HILLIARD LYONS: Good morning, guys.
HOWARD GOLDBERG: How you doing?
TOM CARPENTER: I'm doing well. Thank you. Can you guys give us an update on the status of Sharp's license -- of the Sharp license that covers Japan? I believe it lapsed in mid-March.
BILL MERRITT: That's right, Tom. This is Bill Merritt. You're right, we have two agreements with Sharp, one is on 3GSM obviously contributing to our revenues. The update with respect to the 2G license in Japan, we anticipate that being renewed in the second quarter of this year.
TOM CARPENTER: Would there be -- I guess would it cover back or would it just be going forward? Would it cover the GAAP?
BILL MERRITT: We expect it to cover the GAAP.
TOM CARPENTER: All right, that would be great. I guess just, you know, I think Rich mentioned The Tang license, that you guys received royalties for The Tang no matter where they were sold?
BILL MERRITT: Rich's comments related to where they sold at the time. Wherever they sold, we would receive royalties.
TOM CARPENTER: You mentioned Nokia contractual resolution process. Could you quantify a time frame with that for us?
BILL MERRITT: I think what we've said before is that there are sort of the expected standard commercial time frames with respect to those things. We don't want to get into the detail of the time, but it's nothing unusual. The other thing with respect to the time frames, it allows for an appropriate resolution, but as we said, it also moves the thing along at the right pace, we believe, and that's why we thought it was good to start that process.
TOM CARPENTER: a standard commercial time frame would be by the end of 2003?
HOWARD GOLDBERG: Tom, this is Howard Goldberg. Good morning. I think on the last call, in response to similar questions, what I indicated was that if there is an amicable resolution, we would expect it to be fully contained within 2003. And if we cannot reach an amicable resolution, we would expect that there is potential that an arbitration would fall over into the 2004 time frame. Nothing has changed. There would be no need to further update that perspective except to say that by the action we took this morning -- or that we announced this morning, we are pushing the process and looking forward to a conclusion that is as timely and favorable to the company as possible.
TOM CARPENTER: That's good news. And it sounds like you guys had some pretty good feedback on the technology demonstrated in Cannes.
HOWARD GOLDBERG: We did. It was a wonderful show for us. I think I would say that it was the best show in the company's history by any criteria.
TOM CARPENTER: That's great. Right now, I guess you guys have a product relationship with Infinion (ph)for FDD which will be one of the initial roll outs of WCDMA and TDD, it sounds like you guys have strong technology there. You don't yet have any announced relationships there because with WD you guys have done relationships, should we expect you guys to partner with someone on the TDD side, or could you guys maybe more go the foundry route, like some of the other players?
HOWARD GOLDBERG: No, we are not really capitalized properly to go the foundry route. Our desires, our strategy going forward, are really along the partnership line. The differentiating FDD and TDD, FDD is a market call and TDD is a market push. In addition to having good technology, we are well into our MoorCom (ph) program. It is achieving its objectives very well in educating the market as to the capabilities of TDD as a technology that's complementary to FDD. We are in active discussions with a number of operators, and we have positioned ourselves very well within industry bodies. It is not the type of product, given the fact that it is a push, a product push, in today's market environment, in which we would have expected to announce meaningful relationships at this point in time. But we are hitting all of our key objectives, and the partnering relationships on which we will build our TDD momentum should come in time. |
