Conference Call Transcript (continued)
TOM CARPENTER: That's great. Now that we're two months into the post Ericsson world for you guys, and Bill talked a lot about the momentum, and that's, you know, fantastic, to hear that after, you know, two or three kind of slow years for the wireless industry, should we expect, you know, deals irrespective of, you know, time frame of Nokia and Samsung, or do you think -- are people waiting for that to happen, kind of like they were waiting for Ericsson?
BILL MERRITT: I don't see people that are unlicensed waiting for the Nokia and Samsung issues to resolve. That issue is defining a payment; it's not a question of whether they're licensed or not. They are licensed. It is just a question of defining those payments.
TOM CARPENTER: That's what I meant more, to see how the royalty rate shakes out.
BILL MERRITT: I don't see that. You know, frankly, the press release that we put out with respect to the projected revenues is helpful because it gives people a feel for what we feel the big guys would pay, and it's helpful in our negotiations because the rates we offer them, people can see, how do they match up those? I see it all as very positive, getting those deals done, getting visibility for the things. As I said we have very good momentum and I see it every day.
TOM CARPENTER: I look forward to getting the record of frequent flier miles, Bill. I've got one final question and I'll turn the Q&A over to someone else. Rich, any more catch coming in this year from Ericsson or Sony Ericsson?
RICH FAGAN: Absolutely, Tom. You saw our balance sheet picked up significant receivables for the next 12 months from Ericsson, Sony Ericsson, and we had indicated that we probably had another $15 million to $20 million coming in this year and then the rest early next year. So we've got about just over $60 million in receivables to come in.
TOM CARPENTER: Well, that's good news. Hey, guys, I appreciate it.
BILL MERRITT: Thanks, Tom.
TOM CARPENTER: Thanks.
OPERATOR: You have a question from Robert Seismon (ph) from Bentley Capital.
ROBERT SEISMON, ANALYST, BENTLEY CAPITAL: Good morning. Congratulations. As usual, you've done an outstanding job. I wanted to ask you, when you commented earlier about the action you have taken this morning with regard to Nokia, can you explain exactly what that means, (a). And (b), do you think a resolution with Samsung will await the Nokia resolution?
BILL MERRITT: Yeah. Let me go back. Both contracts define sort of a resolution process for items such as this where, you know, you've got to work through a number of issues. What we've done is sort of put this matter on a schedule, in essence, for resolution, so that -- and that schedule allows for a reasonable amount of back and forth between the companies, but it doesn't allow sort of for an infinite amount of time, it moves the process into arbitration if we haven't resolved it by then. I think it was important for us to do that so we could get the thing resolved within a reasonable period of time. Our discussions with Samsung are continuing, and Samsung has the same contractual rights as Nokia, and, you know, how they will go about resolving it, you know, all I can say is we're discussing it with them and how they approach it is sort of up to them. We can use the same process with them if we decide to.
HOWARD GOLDBERG: Let me add that it imports another element to the process, which it puts a focus on discussions between the senior executives to resolve issues at a business level, while any discussions between lawyers may be continuing. And that's important, because at the end of the day, this is really a business matter. The trimming around the edges that the lawyers may be arguing about should not be a distracter to the for focus of getting this matter concluded. That's what we've done. It's for everybody's interests for this matter to be expedited.
ROBERT SEISMON: Let me follow up. A number of people, in speaking to Nokia, and even looking at their financial statements, have gleaned that they have, meaning Nokia, acknowledged that they have a liability here, and on their balance sheet, provided substantial reserves for payments. So is there no question on their part that they are going to, you know, to have to pay you, so that the issue is only working out the precise terms, (a); and (b), how long can this back and forth go on before it would go to arbitration?
BILL MERRITT: You know, as far as the -- we remain confident in our position with respect to the payment. Second, I think if you looked at both our press release and what Nokia has reserved, these are significant amounts of money, and you would expect Nokia, you know, to want to do a good amount of due diligence to work through this. If I were on their side, I would do the same thing. I think Howard's already indicated that the process, if we work it on an amicable basis, which we have every hope of doing, it's something we expect to get resolved within 2003. If not, an arbitration would take us into 2004, but that means that's the end of that process. So it begins in 2003 and roll over to 2004. And if you look at our history, we have had some recent arbitrations with N.E.C. and Samsung, to give you a sense of the time frame for those things.
ROBERT SEISMON: Okay. Can I just -- can I ask one follow-up on that in the sense that how would you characterize the talks with Nokia so far? Are they amicable, or does it look like it's going to lead to a more -- you know, more hostile situation that will eventually wind up in arbitration? I know I'm putting you on the spot.
BILL MERRITT: We can't get into the back and forth, but we certainly have had a long-term good relationship with Nokia, but this involves a lot of money too, so you would expect to probe into certain areas, and we will be responsive as appropriate. That's about as good an answer as I can give you.
ROBERT SEISMON: Okay. I understand. Thanks very much.
BILL MERRITT: Thanks, Robert.
OPERATOR: You have a question from Mike Walkly (ph) with RBC Capital Markets.
MIKE WALKLY, ANALYST, RBC CAPITAL MARKETS: A follow-up for Rich. Are you expecting to add more headcount to support your aggressive licensing plans or maybe increased -- how would it play out in terms of headcount as the year plays out?
RICH FAGAN: We expect some gradual increases as we move our technology efforts in TDD toward productizing which is coming up with field products, so we'll have increased expenses as we move forward during the year for those type of things, which would include some focused increases in headcount, where we need to shore up some skills, some consulting aspects to fill in the blanks that need to be filled in as we move forward on those things, and things like R&D materials for some of the boards and things of that nature would be there. We've focused on increasing selectively our licensing team. While it's not a huge team, it's in the double digits now, and we continue to look for solid people to add to that team that will allow us to increase the number of licensees and move forward on some of the other fronts that Bill highlighted.
MIKE WALKLY: Okay. Great. A follow-up question. You mentioned a couple of times this morning the [inaudible] 2000. Could you mention more on the royalties or does this mean crossing some of our other key technology areas?
BILL MERRITT: We see it as a good opportunity on the same lines as FDD, and other things. There will be healthy deployment of CD-made (ph) 2000 There already has been. We believe we have a solid patent position. So we anticipate we will be able to derive some good revenues off of those products.
MIKE WALKLY: Great. On the licensing front, what are some of the main areas you focus on besides the obvious of Nokia and Samsung resolution. It is more of the Japanese players in maybe you can share with us some of the key areas you're targeting in the near term.
BILL MERRITT: Obviously there are a couple of areas we're looking at. One is to continue to move through the 2G licensing. We've got 70% of the market, so there's a piece of that left to go. So we've got to work on that. The 3G licensing, you know, as the market gets closer now and people are really starting to begin to deploy that, we're going to focus on licensing in that area. We've been doing that, but obviously we can balance that against the acquisition opportunities, the 2G opportunities, the other opportunities, so we will be moving -- or putting a lot of effort into 3G licensing as well. And I talked about this morning, the acquisition opportunities I think are very important still. I think there's a lot of stuff out there that we can look to, and so if I need to deploy some resources over there for a period of time to bring IPR, over the long haul if it's better for the company to do that, we will do that.
MIKE WALKLY: Thanks very much.
RICH FAGAN: Thanks, Mike.
OPERATOR: You have a question from John Bucher (ph) from Gerard Klauer Mattison.
JOHN BUCHER, ANALYST, GERARD KLAUER MATTISON: John Bucher.
BILL MERRITT: Good morning, John.
JOHN BUCHER: Good morning. A follow-up question for you on the R&D and anticipated R&D expense ramp. I understand that there will be an increase as you approach field trials and the like. I'm just wondering, beyond WTDD, are there other initiatives you have identified and expect to fill out in the way of internal R&D?
HOWARD GOLDBERG: John, this is Howard Goldberg. Yes, there are, and they are a part of our operating base that we've maintained. There are a number of initiatives that are being led through our CTL, our Chief Technology Office. These are designed to position InterDigital in generation-extending opportunities or opportunities that cross generations were and/or opportunities that cross base band palace forms. The one that we've held out as an illustration of those type of opportunities is our efforts in smart antennas, which meets all three criteria. But we believe positioning ourselves to benefit from those market dynamics is a healthy diversification for us, and there are other things -- other products and projects in which we are actively involved that, for competitive reasons, we have not delineated further.
JOHN BUCHER: So I understand that you're taking an opportunistic approach, given market conditions, to acquire intellectual property rights, such as you did with Pantivia (ph). Should we expect that R&D focused on new technology, and you spent some time this morning talking about innovation and bringing products to market, should we expect that R&D is going to stay as a rough percentage of revenues going forward, or would it be more appropriate to model it more flat in absolute dollar terms?
HOWARD GOLDBERG: John, at present, I would continue to model it on absolute dollar terms as opposed to a percentage of revenue. You're still dealing with a model that, you know, while we've been very, very successful in increasing our reoccurring royalty revenue over time, as part of our business it is seeking business -- and other opportunities that some may look at as non-reoccurring but we look it as a key thing, but it's tough to focus on the percentage when those things pop in there. We like to look at it and we advise people to look at it more in absolute dollar terms, and that's why I've indicated that, if you look at the trend from -- in the last quarter, I said look at the trend from last year and that we expect it to be -- the first quarter to be in that range and then I'm saying we're going to move off of that modestly as we productize.
JOHN BUCHER: And final question, do you expect that you'll sign up a top-tier handset manufacturer for CD-made 2000, 1-X in calendar year 2003?
BILL MERRITT: John, we intend to expand the licensing base in 2003, and those are a focus of our licensing efforts. Whether those are the ones that come in 2003, I can't predict that. But I can tell you that is one of our main focus.
JOHN BUCHER: Thank you very much for taking my questions.
BILL MERRITT: Thank you, John.
OPERATOR: You have a question from Andrew Schiff (ph) with Zurching Cutler Investments.
ANDREW SCHIFF, ANALYST, ZURCHING CUTLER INVESTMENTS: Sellers at various points in the last 12 months. Is that part of an options related program or can you give us some general color on the timing of the sales.
HOWARD GOLDBERG: This is Howard Goldberg. I'll respond to that question. I think if you look at the proxy statement, the compensation committee report, they talk in part about how employees are compensated and the motivation and how options have been successful in achieving their intended results. All of the employees of InterDigital, senior executives through the lowest-ranking person in InterDigital, are granted options, and they've been very successful in motivating employees and aiding us in having a very high retention percentage over the years. The executives -- there is a focus on executive selling because it's reported under section 16, and executives, because they are under section 16, have a very narrow window in which to sell.
Over the past couple years, executives have sometimes exercised options, in some cases options that were expiring within that year, and have sold their options. Executives have often on occasion sold other shares, and at other times executives have purchased shares, including under the employee stock purchase program. The reasons that executives or employees, as individuals, sell, are personal reasons. They have to do with liquidity, life needs, various other reasons that we don't get into. We have no right, as an entity, to limit the sales by employees or officers, other than under section 16, and the employees and officers -- or the officers faithfully abide by their section 16 block outs. I would just add in general the level of sales has been very small in relation to the total holdings by employees and has nothing whatsoever to do with confidence in the company's prospects, which is extraordinarily high.
ANDREW SCHIFF: Okay. Thank you very much.
HOWARD GOLDBERG: Sure.
ANDREW SCHIFF: Thank you.
OPERATOR: I would like to remind everyone, in order to ask a question, please press star, then the number 1, on your telephone key pad. You have a question from Frank Marcela (ph), Halpern (ph) Capital.
BILL MERRITT: Frank, good morning.
FRANK MARCELA, ANALYST, HALPERN CAPITAL: Good morning, everybody. How you doing?
BILL MERRITT: Great. Thank you.
FRANK MARCELA: The question I have, Ericsson appears to have a $4.4 million in the quarter. Is that reflective of a full quarter of Ericsson?
HOWARD GOLDBERG: Yes, it is. Frank, if you will recall, Ericsson -- this is Ericsson and Sony Ericsson.
FRANK MARCELA: Right.
HOWARD GOLDBERG: They agreed to pay us $6 million per year for infrastructure-related sales, and that's one and a half million dollars a quarter through the end of '06. That's a pretty easy one to model. And then Sony Ericsson, that is the portion of the prepayment obligation that they reported against, as exhaustion for the first quarter. So you see the -- as I mentioned, we collected about $25 million early in the second quarter, a portion of that was related to Sony Ericsson's prepayment.
FRANK MARCELA: Very good. Thank you. A question regarding the handset expectations for the year. It looks like Japan had a very, very solid first quarter. It looks like some analysts are out there expecting that prior estimates might have been somewhat conservative. What kind of growth number were you anticipating this year, and what kind of growth did you utilize when you put out your expectations let's say for Nokia, Samsung, and Ericsson for 2003?
HOWARD GOLDBERG: For 2003, as I mentioned in the last call, you know, we're using primarily projections out there from various sources. Some analysts and some industry analyst sources, you know, companies like Gartner and Strategy analytics, those were the companies we were using.
FRANK MARCELA: Do you remember if that number was about 10% or so?
HOWARD GOLDBERG: Anywhere from 5% to 10% is my recollection.
FRANK MARCELA: Then the last question I have -- I'm sorry, I have two more questions. There's a lot of five UMTS launches that have occurred right now. What can we infer with respect to infrastructure, build-outs, and how that impacts royalty revenues to you guys and how you might get paid for some of this stuff that is going on?
BILL MERRITT: Certainly N.E.C. is participating in the build-out. We would expect to see revenue coming from that. We have seen that both inside Japan and outside Japan. And, you know, and I think from a 3G licensing standpoint, that is the major infrastructure provider who is currently licensed. With respect to the other 3G infrastructure rollout, as we secure new licensees in that area, we would hope to get past sales as well as an ongoing royalty.
FRANK MARCELA: Timing is difficult for us to forecast, however.
BILL MERRITT: Yes. That's the difficult part about this business, is the timing of deals. It's hard to predict. I can tell you that we do log a lot of frequent flier models, we have a lot of customers so ...
FRANK MARCELA: Thank you. The last question I have, is are there penalties or issues associated with Nokia or Samsung going to arbitration?
BILL MERRITT: You know, I think the issue for everyone, frankly, within that process, is some level of uncertainty, and that's why we wanted to move it along because, you know, certainly from Nokia's perspective, they want to know what their obligation is going to be, and from our perspective we want to know for sure what the revenue is going to be, that's why we want to move it forward. Otherwise, I'm not going to get into the particulars of the contract and what it may or may not provide.
FRANK MARCELA: Thanks very much. Thanks, guys.
BILL MERRITT: Thanks, Frank.
OPERATOR: The final question it from Kevin Didy (ph) with Merryman (ph) and Company.
KEVIN DIDY, ANALYST, MERRYMAN AND COMPANY: Nice quarter. Did I understand you correctly that the FDD product rollout with Infinion will be available in 2004?
RICH FAGAN: We spoke this morning about the protocol stack. The product on which we are embedded content, which is the merchant market terminal chip, is something that has to be announced by Infinion. They are progressing well. We both displayed early prototypes of that product, transmitting and receiving at 384 K bits per second at the show. One was demonstrated on a (inaudible) platform, one was demonstrated on an Infinion platform. What we have said previously, either us or Infinion are targeting the main leading edge. We intend to be there in time, which I think would probably position Infinion in the 2004 time frame.
KEVIN DIDY: I apologize in advance for the remedial nature of this question, but would you mind just rolling through for me what you expect in base royalty revenues in the June quarter?
HOWARD GOLDBERG: Kevin, we didn't give specific guidance on that, but what we said was we expect that for the June quarter that the base revenues would come largely from the same base that existed in the first quarter. So it would be dependent on the seasonal pickup in the second quarter versus the first quarter of many of those licensees. Obviously, you heard Bill mention, we expect to renew on the PDC/PHS. That will impact as well. It was really largely the base that was there and any opportunities that present themselves as we add new licensees for both past infringement and any portions that might be current-related royalties.
KEVIN DIDY: Very well, gentlemen. Thank you very much.
HOWARD GOLDBERG: Thanks, Kevin.
OPERATOR: There are no further questions at this time. Mr. Hicks, are there any closing remarks?
GUY HICKS: No, thank you. Thank you, Christy, for moderating the call, and we want to extend our thanks to each of you for participating this morning. Thank you.
OPERATOR: This concludes today's InterDigital Communications Corporation first quarter 2003 financial performance results conference call. You may now disconnect. |
