From RB. The news of HRS' victory is useful to IDCC, but these bullish reports of handset sales from Sharp and NEC have a more direct impact on IDCC's earnings power. While Sharp and NEC have heretofore been minor players in the global handset market, both companies have invested heavily in LCD manufacturing, which provides them with crucial design and time-to-market advantages in a unit game like wireless handsets.
Also, IDCC and Nokia both use the calendar year as their fiscal years. With all the accounting controversies, I don't think IDCC and Nokia can afford to get too creative about the matching of revenues (IDCC) and expenses (Nokia). Everyone knows that Phase 2 of the 1999 agreement is based in some way on the resolution of IDCC vs ERICY, i.e., if IDCC loses, it collects only X percentage from Nokia but if IDCC wins, it can collect X++ percentage from Nokia with X++ being less than whatever X+++ percentage that Ericsson or any other company pays. In other words, there's a fairly good chance that IDCC and Nokia will soon start accruing some if not all of their pre-agreed X percentage under the 1999 agreement to adhere to the accounting principle of matching sales and costs to the right period that sales are earned and costs are incurred with a bias towards the more conservative method.
from investec
We anticipate material upside in September quarter Sharp royalty revenue versus our previous expectations. In reviewing the September quarter sales figures for Sharp's mobile phones/PHS segment, we have become decidedly optimistic that royalty revenue paid to InterDigital via Sharp will finish well ahead of the projections we modeled following the company's June quarter.
During the June quarter, we believe InterDigital received roughly $7.5 million in royalty revenue from Sharp. In looking at sales data tied to the September quarter, we
believe Sharp's quarter-over-quarter unit increase in mobile phone sales could approach 44%. While we have had to make some assumptions in calculating this unit growth, our methodology is as follows.
We know that through the first half of fiscal 2002 Sharp booked 116.4 billion yen in mobile phones/PHS revenue.
Using a blended conversion rate of 120.61/1 (June and September quarter), this equates to roughly $965.2 million. Then assuming an average selling price (ASP) of $238 across the six-moth time frame ($225 in the June quarter and $250 in the September quarter), we calculate that Sharp has sold roughly 4.06 million mobile phones through the first six months of the company's fiscal 2002.
Assuming an average selling price of $225 across Sharp's mobile phone portfolio in the June quarter and a 2% royalty rate payable to InterDigital (both of these figures are Investec estimates), we come up with a royalty payment of roughly $4.50 per mobile unit sold. We then take the $7.5 million June revenue total and divided that by $4.50, which gives us a total June mobile phone unit number of roughly 1.67 million. Thus, subtracting 1.67 June units from our first-half 2002 figure of 4.06 million units, we estimate that Sharp sold roughly 2.40 million mobile phone units in the September quarter, (up 44% on a sequential basis).
Accordingly, if we take our September quarter ASP assumption of $250, and multiply that by our 2% royalty rate assumption, and then multiply that number by our 2.40 million unit assumption, we arrive at roughly $12 million of potential Sharp revenue contribution for InterDigital in the September quarter, well above the $8.3 million we modeled following the June quarter. However, given the degree of subjectivity regarding several of the variables we used to generate the $3.7 million upside, to remain conservative and allow for a certain margin of error, we are trimming this number by 50% in regard to our new model
assumptions (see new model assumptions below).
Likewise, we anticipate NEC royalty revenue will also finish ahead of our prior expectations. While we previously anticipated NEC royalty revenue to finish in the $5-$6 million range versus $8 million in the June quarter, we now anticipate NEC revenue of roughly $7 million in the September quarter. This assumption is based on information we are hearing regarding better than anticipated mobile phone sales in Japan and Europe, as well as a marked move in infrastructure sales tied to Hutchinson's 3G build out in the UK and Italy.
About 3,500 cellular sites for data transmission in the UK are ready to support Hutchinson's 3G system, which can provide such services to about 50% of the population.
Coverage is anticipated to increase to 80% by the end of next year. In Italy, coverage will be about 45% by the end of 2002 and 80% two years later. We believe roughly half of the 3,500 base stations currently deployed in the UK
were manufactured by NEC, marking the first significant ramp of 3G infrastructure we have seen by that company to date. We would anticipate a similar percentage for NEC as Hutchinson continues to build its network in the UK and introduces similar 3G services in Italy. In fact, as far as we can tell, the NEC/Hutchinson relationship remains extremely tight and continues to grow.
Just last week Hutchinson announced an agreement with NEC to increase its November 2001 order of 3G video devices for Hutchison's 3G companies worldwide from one million to two million. We can only speculate that Hutchinson is gearing up for a large rollout of its 3G services and clearly has chosen NEC to be a large contributor to that effort. Accordingly, with an NEC licensing agreement in place, in our opinion, this will prove very beneficial to InterDigital.
Given a robust revenue scenario layered with potential upside catalysts, we believe clients interested in the mobile wireless sector would be remiss if they didn't examine shares of InterDigital carefully. InterDigital remains our top pick in the mobile wireless sector via its broad intellectual property, solid industry relationships with leading wireless OEMs, and strong balance sheet.
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