Third Quarter 2000 Earnings Conference Call Script
Earnings Conference Call
Third Quarter 2000 - October 24, 2000
Introduction – Rip Tilden
Good morning and welcome to InterDigital’s third quarter 2000 conference call. Rich Fagan, our Chief Financial Officer, and Mark Gercenstein, our Chief Executive Officer, will comment this morning on the company’s third quarter performance, our outlook for the rest of the year and our progress on InterDigital’s growth initiatives.
Before we proceed with the content of the remarks, let me remind you that this presentation contains forward looking statements* regarding InterDigital’s current beliefs and expectations as to its strategic objectives, growth and amount of recurring revenues, its anticipated spending, sources and amounts of revenues and cash flow for 2000, the timing and its ability to secure additional licensing and other strategic business relationships, including semi-conductor relationships, timing, growth size of the 3G market, prospects for TDD technology, timing of TDD and FDD design schedules, usefulness of its technology, patents and patents pending in the 3G standards; expectation the number of essential patents held by IDC will grow, and the expansion of the patent licensing program. Such statements are subject to risks and uncertainties. Actual outcomes could differ materially from those expressed in any such froward-looking statement due to a variety of factors including but not limited to the risk factors provided in our strategy press release of October 23, 2000 and our earnings press release today. InterDigital undertakes no duty to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
For additional information please review the risks and uncertainties language printed in today’s press release.
Now it is my pleasure to introduce Rich Fagan.
Financial Review – Rich Fagan
Thank you Rip.
Well by now, you are probably aware that we announced breakeven earnings per share for the third quarter of 2000. We reported net income of $60,000, which equaled breakeven EPS. Further, we maintained our strong cash position, ending the quarter with $93.9 million, virtually unchanged from the end of the previous quarter.
We told you in our July 20, 2000 conference call that we may report a modest loss in the third quarter followed by a fourth quarter where our income level will depend on the type of license agreements that materialize. We were able to deliver slightly positive net income in the quarter primarily because our recurring royalties from TDMA licensees increased significantly versus last year’s third quarter. This revenue stream generated $7.1 million in the quarter, up significantly from last year’s $2.9 million. This is very encouraging and we expect this revenue base to continue to grow in the future. In addition, specialized engineering service revenues associated with technology development work for Nokia increased to $4.4 million, up from $3.3 million in last year’s third quarter.
The $60,000 net income and breakeven EPS were down versus the comparable quarter of 1999 when we reported net income of $2.6 million, or $.05 per share. The decrease in earnings versus 1999 was due primarily to higher operating expenses in 2000 due to a number of factors. First and foremost, we’ve expanded our resources and accelerated our investments to develop 3G W-CDMA technology. Higher staffing levels and corporate strategic planning initiatives also contributed to the rise in operating expenses. Also, patent administration and licensing costs in last year’s third quarter were lower than normal because we recorded a sizeable insurance recovery related to the costs of our ongoing Ericsson litigation.
Net interest income of $1.6 million was approximately $600,000 higher than last year’s third quarter due to an increase in the average invested balance during this year’s third quarter while taxes increased as a result of higher withholding tax expenses on royalties.
Looking to the fourth quarter, we expect revenues from recurring royalties and specialized engineering services to be in the range of those reported in the third quarter of 2000. Our fourth quarter 2000 spending levels will be higher than the most recent quarter as we continue to invest in additional resources for 3G technology and product development objectives. We are also targeting additional licensing and other business agreements, some of which may generate cash in 2000. However, it is important to note that earnings will depend upon our success in securing such agreements as well as the type of agreements that materialize. As we have mentioned in the past, while we are certainly striving to deliver consistent profitability, we are currently focused on near-term technical achievement and time to market priorities in our key 3G programs and maintaining a strong cash position support our strategy.
That concludes my prepared remarks and I will now turn the call over to Mark Gercenstein.
Chief Executive’s Remarks – Mark Gercenstein
Thanks Rich. Good morning everyone. I want to focus my remarks this morning on three subjects: the third quarter, participation in the recent UMTS Congress in Barcelona, and the strategy we outlined in our press release yesterday.
Several matters stand out for me as I reflect on the third quarter. First, I am very pleased to see the growth in recurring royalties from our current licensees. With $7 million recorded in the quarter, we have now generated almost $19 million in recurring royalties year-to-date. That is at the high end of the range we estimated at the beginning of the year and is a very encouraging sign for the future. We are making steady progress in establishing a more predictable business model.
At the same time, our engineering services revenue has grown as the TDD technology development project for Nokia has ramped up. Our TDD team is doing pioneering work in developing the core air interface technology. We are strengthening our position as a leader in this technology, adding to our patent portfolio and helping to define the 3G TDD standard. Nokia continues to express its confidence in our work.
We are also expanding our FDD development team as we develop the air interface technology for our FDD solution. We have very strong skills in FDD software development which are attracting interest from a number of the leading equipment manufacturers and semi-conductor producers in the wireless industry. By combining FDD and TDD into a full Wideband-CDMA suite, we believe we can establish a strong competitive position in the 3G market.
The opportunities available to us in the 3G market hinge on our ability to deliver great technology to leading equipment and components producers during the next couple of years. I have been very encouraged by the level of interest in our capabilities and I am convinced that our biggest near-term challenge is to put enough people in place to capture the growth available to us.
Because of that, during the third quarter, we significantly intensified our hiring programs. The Company had been actively pursuing top engineering talent for some time, but we concluded that we must establish much higher targets and put more resources into our hiring program. We have done so and the results are beginning to show. As we recently announced, our engineering headcount is up 60 percent through the third quarter and we expect to continue adding to our team at a fast pace this quarter and throughout next year. We are looking for talented people throughout North America, focusing on experienced engineers and a selected number of senior managers.
To increase our reach, we have decided to open a third design center in Montreal, with an initial hiring goal of about 30 people. We are in the process of finalizing the arrangements for that office and we will begin hiring people shortly.
Early in the month, we participated in the UMTS Congress in Barcelona. This is an annual gathering of technology developers, equipment producers, components producers and service providers who are focused on the 3G market in Europe. UMTS stands for Universal Mobile Telecommunications System…the European name for the 3G Wideband-CDMA standard. This will be the 3G standard in Europe and in most of the rest of the world.
This year’s Congress was significant for two reasons. First, it was very apparent that more and more companies are now focusing intensively on the 3G market. The level of interest in business deals and the intense focus of the companies with which we met made it clear to me that the 3G market has come a long way this year. When you combine that heightened interest with the amount of money being committed by carriers for 3G spectrum licenses, it is pretty obvious that the 3G market is real and will be huge. Remember that five UK operators spent $38 billion for their 3G licenses, about five or six times what most people in the industry thought they would spend. Four German operators spent about $46 billion for their 3G licenses, after most industry observers predicted they would spend less than in the UK. Spectrum auctions elsewhere in Asia and Europe are coming up.
There are a couple of important lessons from all of this—the operators clearly believe that they will be able to generate substantial revenue from advanced wireless services, most especially data services. Also, any doubts that may have existed that the 3G market might not emerge are unfounded. This market is real and will be a dominant force in the wireless industry throughout the decade.
The UMTS Congress was significant for another reason. There was more excitement about TDD technology than ever before. Precisely because data services will be so important in the 3G market, and because we are helping to pioneer this technology, we were greeted with enthusiasm by a number of leading companies in the industry. Our meetings in Barcelona were both promising and productive. I am encouraged about our potential for new business relationships going forward.
While I am on the subject, let me take a minute to comment on our status in putting strategic relationships in place. We have made no secret of our objective of establishing one or more partnerships with semi-conductor producers as part of our 3G strategy. We have been actively engaged in discussions with a number of the industry’s leaders for some time. Recently, those discussions have intensified because of the growing attention they are paying to their 3G strategies. I am quite pleased to see the level of interest in InterDigital and I remain very confident that we will put relationships in place that make strategic sense for us. In the summary of our strategy which we published yesterday, we indicated that we are targeting 2 semi-conductor relationships by 2002. Our objective is to put strong relationships in place that have long-term strategic value for us and for our partners. To do so requires that we manage the pace of discussions carefully to ensure that we reach agreements that reflect our growing strength as a provider of core technology for the 3G market, in particular TDD technology. We will finalize our relationships as quickly as possible, but not before we have defined winning agreements for us and our partners.
I want to turn to the strategic plan which we summarized yesterday. Let me encourage you to review the more detailed presentation on our website, but I will make some key points about this strategy.
This is a plan for growth—solid growth in the near term with accelerating growth in the long term. We have aimed our strategy squarely at the 3G market where we believe we are establishing a differentiated position as a developer of technology and products. Our strategy reflects our belief that we can prosper in the 3G market by investing aggressively in new technology development, by combining our strong intellectual property with innovative product offerings and by building partnerships with leading companies around the world.
From my perspective, this is the best way to build value for our shareholders. The market opportunity is very large, we have a tremendous base of patented technology underlying the new technology we are developing, we can differentiate ourselves in this market, and we have the financial resources we need to fund our growth.
Our strategy is designed to take great advantage of our strengths and the differentiated position we can establish. We expect to continue to build our intellectual property base, grow our licensing and technology transfer revenues and bring 3G products to market that contain our technology. We also intend to partner with leaders in the industry to extend our reach and we will incubate new products and technologies over time.
We are taking a long term approach to building the company, but not by sacrificing our position today. We expect licensing and engineering services to grow at an attractive rate during the next two years and then we expect product-related revenues to take our growth rate to a higher level after that. In short, everything we are doing today is designed to deliver significant long term value to our shareholders in the coming years.
Because we want you to be able to track our progress, we have laid out a series of milestones for the next three years. They reflect the confidence we have in our future and our recognition that you need to know where we are going and how we are going to get there. I am very excited about what we can achieve at InterDigital during the next several years and I am looking forward to reporting solid progress toward our growth objectives on an ongoing basis.
Thanks. Now, lets move to your questions.
interdigital.com
10/24 Conference Call Continued (Question & Answer session)
transcript courtesy of Whats4Dinner on Raging Bull
Mike Steinberg – Emerald Research: Good morning, nice quarter. Do you have any additional commentary on the Markman hearings?
Hi Mike, this is Rip. We really don’t. As you know, the SM published his recommendations to the court awhile ago and we just acknowledged that in a press release. We don’t really have any comment on the content of those recommendations. We can acknowledge that they’ve been published, that they’re public as you know, but at this stage we’re engaged in preparations for trial and proceeding with the ongoing litigation process. That’s about as much interpretation as we can offer, I’m afraid.
Mike: OK, as far as breaking out your projected revenue growth, you noted that you expect revenues to grow 20% or more for the next 2 years… as far as your licensing growth and the engineering growth, can you break that out a little bit and give us some quantification on that?
Fagan: Mike, I believe that for the next couple of years our revenues come primarily from our licensing and from our engineering services and that growth is reflective of those two revenue streams.
Rip: I’d like to add to that, Mike, that in our strategy release yesterday, as you pointed out, that we do expect growth in recurring royalties of 20% or better for the next 2 years and growth in engineering services revenues of 20% or better… if they both grow at about that rate the relevant mix is going to remain relatively the same.
Mike: OK, I got’cha. One other question now, you’ve got a lot of cash… you know, any plans for the use of that cash, you know your stock is obviously… seems to be an attractive valuation, do you have any plans for, you know, do you think this would be a good time to step in and give it some support… do you have any, what are you kicking around as far as what you’re going to do with the cash?
Fagan: Well, Mike, I think we’ve outlined a very aggressive growth plan and so certainly part of the cash could be used to fund some of the growth we’re anticipating. As you also know, the board has authorized a couple of years ago, certain stock repurchase… that may… we still need to finish that particular program, but at this point in time there are no aggressive plans to do anything in that respect.
Mike: Right, thanks.
Rip: And by the way, before we take the next questioner I’ll just add to that. The fundamental premise of this strategy is that the best use for our resources, and that certainly includes cash among our resources, is to invest to get great technology into the market as quickly as possible, because we are absolutely convinced, given this market opportunity that the best return for shareholders is going to come from us having technology in the marketplace.
William Nastovich(sp) – Heartland Advisors: Good morning, congratulations. Mark, you talked a little bit about Spain, the show, could you elaborate alittle bit in terms of the opportunity you see for the U.S., in the U.S. for Interdigital?
Mark: Yes, Bill, thank you. What was interesting in Barcelona at the UMTS show, there was a very large number of U.S. company’s present who were tracking the progress in 3G. Obviously, the big issue in the U.S. is the regulatory hurdle which needs to be overcome as soon as possible which would allocate spectrum for the 3G services. I believe even Bill Clinton went on record a week ago or so trying to nudge the FCC into doing something more aggressive in terms of timing. Until that occurs, we are going to be focused on the 3G market where it appeared which will be primarily Asia, Europe, Australia, and so forth, through discussions and potential partnering with some North American companies we will also be in position to take advantage of the 3G market as it develops in North America.
William: OK, just a second question if I could… your recurring royalty revenue is showing nice growth, am I hearing correct that it’s about $19 million YTD…
Rip: Yes, that’s right.
William: So that’s above expectations.. that’s great to see. You know last year there was some sequential growth, you know the 4th quarter over the 3rd quarter, you’ve indicated 20%+ growth going forward, is that something that we can look forward to in this quarter?
Fagan: Bill, this is Rich, as I mentioned I think we are currently projecting that we’re expecting that our revenues in the 4th quarter will be in the range of those that we experienced in the 3rd quarter.
William: Alright, Thank you.
Rip: Thanks, Bill, and Mark, I’m just going to tack on to one of the questions Bill had with regards to Interdigitals opportunity in North America. This is fully the ob… related, but I was wondering if you’d elaborate, part of the issue it seems to me in the 3G market, is spectrum allocation in the U.S.. We still anticipate participating with North American companies that sell product oversea… would this be true?
Mark: Most definitely, that’s what I was referring to is that North American companies participating in the wireless industry are all focusing on 3G. We are targeting them as potential partners, absolutely.
Rip: OK. |
