InterDigital Communications Corp. Annual Meeting -- 2000
Management Report to Shareholders
Chairman's Introduction and Chief Executive Officer's Remarks
June 1, 2000 Radisson Hotel - King of Prussia, PA
Harry Campagna's Introduction
(Slide-InterDigital Logo)
Thanks, Bill. With the formal portion of the meeting completed, we now move to the Management Report. Our new Chief Executive Officer, Mark Gercenstein, will present that report in just a moment. It is my pleasure to introduce him.
As you know, last year at this meeting, I made a commitment to you that we would search for, and select, a new CEO. We wanted a leader with deep roots in telecommunications, a track record of success, and the chemistry and drive that would fit well with our team. We were looking for a person who would provide the kind of focused energy that would take InterDigital into a period of sustained growth as the next generation wireless market emerges.
We found just such a man in Mark Gercenstein. He has excellent telecommunications credentials, with years of experience with Motorola and Iridium. He has built businesses and established important relationships all over the world. Most importantly, the people who have worked with Mark, and his customers and business partners, speak highly of him. They respect his dedication and determination to succeed, his insistance on accountability, his focus on his customers and his desire to beat his competitors.
I have observed all of those qualities as I have gotten to know Mark. My fellow Board members and I are pleased with the steps Mark has taken in his first six weeks on the job, and we are confident that his tenure as CEO will be very successful.
It is my pleasure to introduce InterDigital's Chief Executive Officer, Mark Gercenstein.
Management Report-Mark Gercenstein
Thanks, Harry. I am happy to be here. I told you when I arrived that I was excited about the opportunities which lie before InterDigital, and I want you to know that I am even more enthusiastic today, with a few weeks behind me. The more that I learn about our company, and the closer I look at the emerging market for advanced wireless services, the more convinced I become that we are positioned in the center of the Third Generation marketplace. The convergence of the Internet with wireless communications gives technology providers like us great opportunities to deliver our technology into a wide range of products during the next decade.
This afternoon, I am going to talk about the future, with special emphasis on the things we are working on this year to solidify our position and broaden our reach into the 3G market. To set the stage, let me take a moment to review the steps InterDigital has taken over the past year to position the company for attractive long-term growth in shareholder value. These accomplishments are, of course, the work of the management team that was in place when I arrived and I congratulate them for what they have done.
(Slide-Progress Over the Last Year)
The most significant strategic step the company has taken is its decision to complete the transition from a focus on the development and production of wireless local loop systems to the development of technology for the third generation marketplace. You are now very familiar with this shift in focus, driven by our recognition that the 3G marketplace is larger and offers far greater growth potential than the residential wireless local loop market.
We began work for our first significant 3G customer, Nokia, at the time we made our strategic shift. We are now 17 months into that relationship and we are making excellent progress in developing Wideband CDMA technology which Nokia will use in 3G applications. We are on schedule with the project and Nokia is a satisfied customer.
This is an important relationship which extends beyond the usual definition of customer and supplier. We are developing high data-rate technology, with Nokia's close involvement, that we believe will play an important role in a variety of advanced wireless products. Nokia's development team is represented on a full-time basis in our Melville, NY facility. Their engineers work alongside our team on this project. We have been working together in the standards body in Europe, making contributions which have become part of the 3G standard adopted by the International Telecommunications Union (or ITU). My goal is to keep Nokia as a satisfied customer and partner for many years.
I mentioned our involvement in the 3G standards bodies. This is a critical element of our strategy. By making technical contributions to standards groups around the world, we can inject our design ideas and intellectual property into the global standards that define the next generation of advanced wireless products. This helps to solidify our opportunities for product sales and licensing. We have been deeply involved in the 3G standards bodies in Europe and the United States during the past two years.
As we indicated last November, we have determined that some of our intellectual property is part of the 3G standard that has been formally adopted by the ITU'meaning it is essential to 3G products built to the standard. Our intellectual property crosses over all of the air interface protocols. Our technology development and our new contributions to the standard are focused on the Wideband CDMA air interface, which we expect to be the dominant protocol during this decade. We plan to be even more involved as the 3G standards are refined in the coming years.
Our move into the 3G market was accompanied last year by the completion of our B-CDMA ASIC, a full system-on-a-chip solution for high data-rate fixed wireless applications. We completed and validated the design of the chip last fall. This is an important stepping stone into the 3G market for us, because we can apply much of what we learned in designing that chip to our 3G ASIC designs.
(Slide-Progress Over Last Year - continued)
Even as we have put more emphasis into Wideband CDMA development, we have been benefiting from our years of work as a developer of core TDMA technology that is at the heart of most wireless systems in use around the world today. Six companies signed TDMA licensing agreements with InterDigital during the last year, increasing the number of our TDMA licensees to 22. Those licensees are contributing to our growth in recurring royalties and the overall improvement in our financial health.
Our patent portfolio is a key asset for us and we manage it with great care. We are constantly seeking new patents around the world to add to our portfolio and to strengthen our position as a developer of core technology for the wireless industry. Last year, we were granted 44 new patents worldwide, primarily for CDMA inventions, and we have been granted another 11 this year. Since January 1 of this year, we have also filed 25 new patent applications.
In March of this year, the Markman hearing was held in the Ericsson litigation. This was an important step in our patent infringement suit with Ericsson, which dates back to 1993. The special master who presided over the hearing will interpret the claims in the case and make a recommendation to the judge sometime this year. We expect the trial to be scheduled for sometime in the middle of next year.
Just after I arrived, InterDigital moved the trading of its stock to the Nasdaq National Market from the American Stock Exchange. We believe the Nasdaq is the right home for us as we participate in the technology-intensive wireless market in the coming years. Today, we are supported by 20 firms who are making a market in our stock on the Nasdaq.
At the same time, we have expanded our communications program by adding an international public relations firm and initiating an advertising program designed to build our corporate image.
Our licensing success, our work for Nokia, and prudent cash management have helped us dramatically improve our financial health since the beginning of 1999. In fact, as you can see here:
(Slide-Financial Performance)
We have been on an upward track with both cash and shareholders' equity since the end of 1997. This is a trend we plan to continue even as we increase our investment in 3G technology. Because of uneven cash flows associated with some licensing agreements, quarterly trends may fluctuate, but on an annualized basis we believe we can meet our commitment to be cash flow positive this year.
(Slide-InterDigital's Strengths)
Now let me switch gears to offer you some observations based upon my first few weeks as CEO. We have some important strengths that give us a solid base to pursue our growth plans. We also have some critical needs that we must address if we are to execute our strategy successfully. Let me start with the strengths.
Our technology and our people, which go hand-in-hand, are our most important strengths. InterDigital is a company that has been developing fundamental wireless technology for almost 30 years. We have played an important role in the development and adoption of TDMA technology, now the leading wireless technology in the world.
Early in the 90s, we began developing Wideband CDMA technology because we saw the demand for wireless data. Now, our inventions in both TDMA and CDMA and our experience in making great technology that works well in finished products, are helping position us in the center of the 3G market.
I cannot over-emphasize how impressed I am with our engineers and our staff. We are blessed with bright, creative, energetic people who are as excited about the new wireless market as you and I are. We need more of them, but I will address that in a minute.
We also have a heritage of relationships with leading telecommunications companies around the world that is unusual for a small technology developer. We have gained good experience from our work over the years with Siemens, Samsung, Alcatel, Texas Instruments, LSI Logic, VLSI, Nokia and others. Plus, we have established licensing relationships with more than 20 other equipment producers. This gives us a doorway into future relationships that can be focused on delivering value in the third generation market.
The 3G market opportunity itself is a strength for us, especially given our focus on core technology development. As we have explained to you in the past, we expect the market for 3G mobile devices and network equipment to grow rapidly as this decade unfolds. We are concentrating on securing partnerships and licensing agreements that will enable us to place our technology into millions of products and build our licensing revenues from the broad array of 3G product manufacturers who will serve this market.
We can pursue this growing market from a strong financial base. We are confident we will have the resources we need to hit the 3G market window with technology and products that give equipment producers competitively attractive solutions.
(Slide-InterDigital's Needs)
We are now concentrating on addressing several key needs in order to help us maximize the value we create in the wireless market. We are finalizing our detailed business strategy which will serve as our long-term plan. When it is completed, we plan to communicate it broadly to our employees, shareholders, partners, customers, licensees and our potential customers.
Together with our outside consultants, we have done a great deal of work on the overall strategy this year. That work has validated our focus on the 3G marketplace. Now, I want to take it to the next level of detail to refine our action plans and finalize the timetables and metrics we will use to define our progress. We plan to complete that work in the third quarter so that we can communicate it during the fourth quarter.
To generate the most value from the 3G market opportunity, we are also addressing our resource needs. We are accelerating the pace of our technology development programs, which will be made possible by expanding our already aggressive hiring goals for new engineers. At the same time, we must build a marketing department, refocus our business development program and add to our licensing and standards teams.
(Slide-InterDigital's Needs - continued)
Execution is a critical need for any company that plans to prosper, but it is especially important for us now. If we are to maximize our return on the investment we are making in advanced wireless technology, we must complete our technology development programs in time to sell 3G products and license our inventions to the broadest possible customer set. Our chance of success is enhanced if we put the right mix of relationships in place, including technology development partners, semiconductor producers and licensees. As we do so, we must also reach our financial performance targets to ensure that we can fund our growth.
We need greater visibility in the industry, in the standards bodies around the world, and in the investment community. We have made progress on all of these fronts in the last 3 years, but there is more work to do if we are to establish ourselves as a key player in the 3G marketplace.
Finally, we must put in place the right set of business processes so that we can manage our growth. We have robust processes in place in some key areas, but we are striving for superior process management skills across the board. That is a sign of a mature company and an essential ingredient for managing growth.
(Slide-InterDigital's Strategy)
We have concluded that InterDigital's fundamental strategy is sound. Our objective is to grow as one of the leading developers of advanced air interface and full system-on-a-chip technology for the wireless telecommunications industry. To accomplish that growth, we are leveraging our technology and intellectual property into wireless standards and products'providing specialized engineering services, software, ASICs which contain our technology, and licenses to equipment producers worldwide.
The InterDigital management team had adopted this strategy before I arrived and I am convinced it is the right one for this company.
(Slide-Implementing the Strategy)
In implementing the strategy, we will address the needs I just reviewed for you. We begin by focusing on our customers, competitors and the marketplace where we expect to grow. Our first priority is to meet our technology development targets, including offering system-on-a-chip design solutions next year. This will put us in position to compete for design wins on 3G products and to bring full 3G ASICs to our customers as those wins are secured.
Relationships are critical to our success. They can give us access to global markets, production capacity, distribution and complementary technologies to make our 3G offerings competitive on a worldwide scale. We have been in discussions with a number of the leading wireless semiconductor producers and we expect to establish strategic relationships with one or more of them this year. We will also pursue other technology contributors to broaden our product offerings.
At the same time, we will be working to expand our existing relationships, with Nokia and our licensees. We believe there are excellent opportunities to develop technology and build long-term relationships that bring value to these companies.
(Slide-Implementing the Strategy - continued)
We will explore new initiatives to generate additional growth. These may include new technologies, new products or other opportunities based upon our core competency as a wireless technology developer.
To address our need for increased resources, we have already expanded our hiring goal for new engineers this year. Our engineering team has grown by almost 30 percent year-to-date, but we will strive to reach 75 percent growth by year-end.
We are increasing the investment in our patent and technology licensing program, adding to our licensing team to increase our reach and accelerate the pace of new licensing agreements. We will also be adding people to our standards team, in marketing and business development and finance. Strength in each of these areas is important if we are to position InterDigital for long-term success in the 3G market.
(Slide-2000 Goals)
The goals we have established for this year reflect the steps I just outlined for you. They give you a clear indication of our focus today as we take aggressive steps toward our longer term objective of maximizing InterDigital's value in the wireless market.
We are targeting a third straight year of positive earnings and cash flow, excluding the impact of SAB 101. These results will be driven by licensing and technology development revenues that should be in the range of last year's results. This will include significant growth in recurring royalties along with increased spending in the critical resource areas. We plan to deliver those financial results while meeting our technology development milestones.
We will finalize our business strategy and communicate the long-term plan during the fourth quarter.
And we will introduce key business processes to strengthen our ability to manage our growth.
(Slide-InterDigital Logo)
That is our focus today. We are taking a series of steps designed to build substantial long term value for our investors, employees, customers, partners and licensees. It is exciting for me to serve you as InterDigital's Chief Executive Officer. I look forward to a long relationship with the company as we fulfill our potential and deliver value to all of you. Thank you for this opportunity.
Now, I will turn the microphone back to Harry Campagna, who will run the question and answer session. |
