Thursday, November 13, 2003 4:30:02 PM
Here's today's CC transcript, enjoy.
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StreetEvents Transcript
F I N A L V E R S I O N
IDCC - InterDigital Communications Corporation
Q3 2003 InterDigital Communications Corporation Earnings Conference Call
Nov. 13. 2003 / 10:00AM ET
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Corporate Participants
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* Janet Point
InterDigital - Director of Investor Relations
* Richard Fagan
InterDigital - CFO & Exec. VP
* Howard Goldberg
InterDigital - President & CEO
* Bill Merritt
InterDigital - Exec. VP, General Patent Counsel
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Conference Call Participants
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* John Bucher
Harris Nesbitt - Analyst
* Amit Kapur
RBC Capital Markets - Analyst
* Tom Carpenter
JJB Hilliard Lyons - Analyst
* Mike Cody
Sidoti & Company - Analyst
* Frank Marsala
Helpern Capital - Analyst
* Elias Lucia
ARcher Capital Partners - Analyst
* Bill Meskavitz
Hartland Funds - Analyst
* Michael Belleny
Conseco Capital - Analyst
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Presentation
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Operator [1]
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Good morning. My name is Molly, and I will be your conference facilitator. At this time, I would like to welcome everyone to the InterDigital third-quarter financial conference call. (OPERATOR INSTRUCTIONS). At this point, you may begin your conference.
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Janet Point, InterDigital - Director of Investor Relations [2]
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Thanks, Molly. Good morning everyone and welcome to the InterDigital Communications Corporation's financial results conference call for the third quarter of 2003. My name is Janet Point, Director of Investor Relations. With me today are Howard Goldberg, our President and Chief Executive Officer; Rich Fagan, our Chief Financial Officer, and Bill Merritt, Executive Vice President and General Patent Counsel for InterDigital and President of InterDigital Technology Corporation.
Before we begin the call, I would like to remind you that during this call we will make some forward-looking statements regarding our current beliefs and expectations, as to our strategies, the resolutions of the Nokia and Samsung matters, including the timing of those matters, our ability to enter into new license agreements, our dependence on new license agreements, the acquisition and organic growth of intellectual property rights, the importance of our technologies, our development program, productization efforts and the timing of those efforts, our financial condition, revenues, expenses, cash flow, the expansion of business and marketing relationships, company growth, handset shipments, demand for handsets and sales, 3G markets opportunities, our patent portfolio, insurance matters and our licensees. Actual outcomes could differ materially from those expressed in any such forward-looking statements due to a variety of factors, including those set forth in the Company's most recent filings on Forms 10-K, 8-K and in this morning's press release and related 8-K filings.
Now, with that, it is my pleasure to introduce our Chief Financial Officer, Rich Fagan.
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Richard Fagan, InterDigital - CFO & Exec. VP [3]
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Thank you, Janice, and good morning to everyone. It gives me great pleasure to speak with you today about another impressive quarter for InterDigital. Let me briefly summarize third-quarter 2003 results. We announced revenues of $26.8 million and net income of $3.4 million or 6 cents per share. That compares very favorably against revenues of $14.7 million and a net loss of $5.8 million or 11 cents a share in the third quarter 2002.
Further, our balance sheet remained very strong. We ended the quarter with roughly $106 million in cash, $18 million higher than year-end 2002, even after expending $44 million on a 2 million share repurchase program and the acquisition of substantially all the assets of Tantivy.
The story continues to be impressive growth in recurring patent licensing royalties. Third-quarter 2003 royalties of 26.8 million improved 95 percent over the same period 2002. We have also had two quarters in a row of recurring royalties in excess of $25 million. That is a long way from total recurring royalties of $1 million for the entire year of 1998. The quantity, quality and predictability of our revenue and cash flow streams continue to improve.
The 95 percent improvement in recurring patent licensing royalty revenue was driven by both increases from NEC, Sharp and Sanyo, and the addition of royalties related to agreements signed with Ericsson and Sony-Ericsson in 2003. These five licensees contributed approximately 94 percent of our revenue in the third quarter 2003.
Let me give you some details. Royalties from NEC, which accounted for about 37 percent of the total, were up $4 million due to NEC's leading position in the growing 3G markets. NEC recently announced that it received a major increase in orders for handsets from the Hutcheson's 3G group that should bode well for us as shipments occur over the coming 12 to 18 months. Royalties from Sharp accounted for about 28 percent of revenues and were up a little over $2 million versus third quarter 2002. This reflects the continued demand for their camera equipped handsets both in Japan and Europe.
We are also pleased to see that Sharp has recently announced an upward projection of handsets sales outside Japan from 1.5 million units to 2.2 million units for their fiscal year which ends in March 2004. Sanyo became a greater than 10 percent customer in third quarter 2003, due mainly to royalties associated with PHS handset and infrastructure shipments into China. We did record a true-up in third quarter 2003 of $2.2 million related to Sanyo's actual reported royalties in excess of estimates for first-half 2003. And finally, Sony-Ericsson has generated royalties in line with our expectations and appears to have the potential to improve its market position going forward.
Moving on. Operating expenses increased 8 percent over third quarter 2002 and 2 percent over second quarter 2003. The increase in operating expenses over third quarter 2002 was due in large part to higher directors and officers' liability insurance premiums, patent licensing costs, royalty related commission costs and consulting costs associated with strategic planning update activities. Tax expense, which mainly consists of non-U.S. withholding taxes on patent licensing royalties, increased in third quarter 2003, due to the recognition of a higher level of royalties subject to withholding tax.
Looking forward, we expect to benefit from continued solid performances of our key licensees and to expand our licensee base over the next twelve months. We also will recognize the final $1 million of specialized engineering services revenue related to the Nokia WTDD agreement during fourth quarter 2003. We currently anticipate that fourth quarter 2003 operating expenses could increase 5 to 10 percent over the most recent quarter and contributing to this increase will be higher DNO liability insurance premiums. Additionally, as we continue to grow our business, we expect to increase our investment in marketing, patent licensing an employee development activities.
This concludes my prepared remarks, and I will now turn the call over to Howard Goldberg.
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Howard Goldberg, InterDigital - President & CEO [4]
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Good morning everyone. In addition to the financials that Rich just covered, I have asked Bill Merritt to join us today to provide an update on patent licensing matters, including the status of open issues with Nokia and Samsung. After Bill is finished, I will come back on and give you a few closing remarks.
As I have indicated in the past, our patent licensing program is fundamental to the Company's success as you are no doubt aware of the upside potential of open issues with Nokia and Samsung. In addition, there is a keen level of interest by many current and prospective investors in our ability to enter into new agreements, particularly for 3G products.
I would now like to turn the call over to over to Bill Merritt, who will provide some prospective on these and other aspects of our patent licensing program.
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [5]
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Thank you and good morning to everyone. As I have done in the past, let me bring people up-to-date on the Nokia arbitration and the discussions with Samsung. Also, I will give you some additional information as to ongoing license agreement discussions and how we view the licensing landscape over the next twelve months.
As regards Nokia, the arbitration is moving forward as expected, but we are awaiting the confirmation of the third arbitrator and expect that shortly. With regard to Nokia's document access motion in Texas, the court has scheduled oral argument on that matter for November 24. At this point my expectation as to the timeframe of the Nokia arbitration remains consistent with our past disclosures, namely that the process should probably take about a year to complete. As the arbitrators become engaged in the issue, we will begin to get a better prospective on how the case will be tried and how long we would expect the case to last absent any settlement. At the Samsung, we previously reported that Samsung had initiated the contractual dispute resolution process, though neither party had just filed an arbitration request.
While Samsung has indicated its belief that arbitration appears necessary to resolve the matter, the parties continue to meet regularly. Absent the change in this position, we expect that Samsung will file an arbitration -- will file demand for arbitration in the near future. Needless to say, as Howard said, we remain very confident about both the Samsung and Nokia matters.
While Nokia and Samsung have kept us busy, we have been very occupied in other areas as well. Let me talk to you about our other activities so far this year and how I see things unfolding in the licensing program over the near and mid-term. My staff and I spent most of the last few months on the road visiting a wide range of companies. Many of those discussions have progressed beyond the basic discussions about the patents to substantive economic negotiations. Based on the progress we have seen to date and our experience with the licensing process, we remain optimistic that we will conclude additional agreements this year.
Further, with more and more manufacturing activity moving to different parts of Asia, we have expanded our licensing activities into these new geographic areas. As you might expect, we establishing a new licensing front is time-consuming. You need to put in place local context, build licensing material for the local environment, and build company credibility in those countries. Much of our time for the middle third of this year has been spent doing just that, and we are now beginning to see the fruits of our efforts.
I are also involved in a significant number of discussions regarding acquiring new IPR. As I have indicated in the past, we see this as an appropriate time for enhancing our patent portfolio, and enhancing our portfolio can strengthen the position we already have for all forms of digital cellular products and extend our reach into different licensing areas.
It has been a busy year, and we are moving on a number of different fronts. To support these efforts, we have increased our staff this year, adding a new Director of Licensing to manage our worldwide licensing program. He comes to us from the semiconductor industry with extensive background in U.S. and non-U.S.-based licensing. We also added an additional engineer to our staff to provide technical support, and currently we have expanded our relationship with outside experts to support our growing worldwide licensing activity. All-in-all I am very happy with the performance of our group and the financial results we have delivered.
Despite our success, including signing five new deals this year, I know that our investors want to see more deals, especially more deals involving our 3G patent. I also know that some of you want assurance that the momentum we gained earlier this year is continuing. I can tell you my group lives and breathes patent licensing, and in the trenches, we see excellent momentum with deals moving in the right direction. Of course, I appreciate that nothing speaks better about our chances for long-term success than signed licensed agreements.
I can assure you that we are focused on delivering more (technical difficulty) -- creating an enduring perception of InterDigital as a premiere patent licensing company and driving revenue and cash flow even higher. The benefits from this fact are what the early stages of 3G buildout, and we have the financial strength to take the time to fashion deals that make sense for us. We are not dependent on the next deal, and that works to our advantage in licensing negotiations. We can be patient in seeking the right terms and we are.
Some of you have also asked whether we can secure additional CDMA2000 licensees. We're having excellent discussions with CDMA2000 manufacturers, relying both on InterDigital's pioneering patents covering all forms of wideband and CDMA systems and CDMA2000 specific inventions acquired from Tantivy. Based on the strength of our portfolio, we believe that we will conclude additional CDMA2000 deals.
Now why should you have confidence in us? Well, many of you previously asked whether I was confident we could get the Sharp agreement renewed. I told you I was, and we got that done. You also asked if we had momentum. I said we did and subsequently signed new deals with (inaudible) and Nakayo, both of which are now contributing to recurring royalties. Our effective execution in the past should give you confidence in our ability to deliver in the future.
With that, let me turn it back to Howard.
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Howard Goldberg, InterDigital - President & CEO [6]
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Let me reiterate what I hope is very obvious to all of you regarding our position on the topic of Nokia and Samsung. We and our Board remain committed to seeing these processes through to successful resolution. As we go through the respective processes, we will do so following the strength of our convictions to bring about the best results for the shareholders.
With that addressed, let me make a few additional comments. We really have achieved great success in 2003. We have nearly doubled recurring royalties in third quarter 2003 compared to the comparable quarter in 2002. In fact, recurring royalties to date in 2003 exceed those for the entire year 2002. We completed the first commercial release of the FDD protocol stack with our partner Infineon.
In September, they announced the first customer for the stack, Huawei, who has successfully tested it with our engineers playing a key role. We successfully completed our wideband TDD technology platform for Nokia, demonstrating our superior capability in developing highly complex air interface technology. We have also completed the acquisition of patents and technology from Tantivy and subsequently successfully integrated them into our business.
At the October ITU 2003 tradeshow in Geneva, Switzerland, we showcased our accomplishments, displaying a broader array of technologies and products than ever before in InterDigital's history. We demonstrated our extended WTDD solution, transmitting data including video at 2 megabits over the year. Further, we were the only company displaying complete solutions for both FDD and WTDD technologies.
Among the products we introduced was a subscriber-based Smart Antenna solution that covers wireless LAN and cellular applications. We also displayed a highly advanced digital radio solution. Our technology and product offerings generated substantial interest in Geneva. During this period, we repurchased 2 million shares of the company stock, which was an expression of our confidence in our future, and we continue to maintain a very strong balance sheet.
The entire team at InterDigital always believed that we could build a truly unique company delivering strong financial results. We have done so, and we expect to continue building on that success.
With that, Molly, let's open the call to questions.
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Questions and Answers
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Operator [1]
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(OPERATOR INSTRUCTIONS). John Bucher, Harris Nesbitt.
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John Bucher, Harris Nesbitt - Analyst [2]
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I was wondering if you could provide any outlook for your expectations for carrier trials of WTDD, and the second question if you could provide an update on your participation in the 80220 standards process and your expectations there?
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Howard Goldberg, InterDigital - President & CEO [3]
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This is Howard Goldberg. I will handle those questions. We are working with operators subsequent with respect to wideband TDD. Subsequent to Geneva, we had inquiries as to the placement of the units that were in Geneva, and they have not come back to us. There are with the operators; I can't go into more specifics.
We are going to closely follow the market. The timing of the market will be critical. The delayed impact, the delayed deployment of FDD has, of course, shifted the timing for TDD, and we are going to follow the market because there is no premium on being early. But we are very encouraged by the interest that the display of 2 megabits for the year generated in Geneva.
We are also very involved in the standards for all species of 802.11. In fact, we are represented at the chair function and leadership functions in some of the 802 species. 20 is one that we are monitoring very carefully at this point. It may be at inflection points over the next six months, and we are setting -- we are going to watch those inflection points to set our roadmap going forward.
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John Bucher, Harris Nesbitt - Analyst [4]
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At this point, do you expect 80220 to come up with multiple flavors as happened in the 80216, or is it too early to say yet?
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Howard Goldberg, InterDigital - President & CEO [5]
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I think it is too early to say we where 80220 is going to go. So there is an awful lot going on there, and as I said, we believe that we are probably right in front of the inflection point. So we will watch them closely.
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Operator [6]
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Mike Lockley, RBC Capital Markets.
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Amit Kapur, RBC Capital Markets - Analyst [7]
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It is actually Amit Kapur calling in for Mike Lockley. Just a couple of quick questions. First, just to clarify. I think Bill mentioned that the Nokia and Samsung obligation would take about a year to complete. Just to clarify, is that a year from now or consistent with what you mentioned or what you have indicated before?
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Howard Goldberg, InterDigital - President & CEO [8]
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Well, first, Samsung has not filed for arbitration yet. Typically it takes a year from the filing. That is the average time if you look at our prior arbitrations with Samsung and with NEC, that was the pace of those arbitrations. As I indicated, we need to get a little further in the process and see how the arbitrators are going to position things to give a better assessment of exactly how long it would take. But the nice thing about arbitration is it is an expedited process.
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Amit Kapur, RBC Capital Markets - Analyst [9]
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Also, I guess over the last couple of quarters, we know Sony-Ericsson has reported quite strong results, and if I do my math correctly, it looks like Sony-Ericsson and Ericsson royalties are flat sequentially. Has there been any adjustment to the royalty rates, or to what extent could there be true-up payments coming from Sony-Ericsson and Ericsson?
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Howard Goldberg, InterDigital - President & CEO [10]
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Thath is good question. There has not been any adjustment to the rates. The way the agreement works it obviously has a number of components that add up to get to the royalty rate, and that includes selling prices and other factors. So while the market could give you a reasonable barometer of where the revenues will go, it's not an exact barometer.
So I will give you an easy example. If their volumes were to go up significantly but their pricing were to go down greater than their increase in volumes, you would actually see a lower royalty from them because it is price-based.
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Amit Kapur, RBC Capital Markets - Analyst [11]
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Were there any true-up payments included this quarter for Sony-Ericsson and Ericsson?
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Howard Goldberg, InterDigital - President & CEO [12]
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No. There was not.
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Amit Kapur, RBC Capital Markets - Analyst [13]
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My last question given the strength that you're seeing from some of the Japanese licensees, maybe you could give us some color as to what might be driving that? Are the volumes stronger than expected or there are higher ASPs?
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Richard Fagan, InterDigital - CFO & Exec. VP [14]
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What you are seeing is across the board you're seeing higher demand for emergence of demand, particularly for accelerating growth in emerging markets, and camera phones are picking up speed in a big way across the spectrum. So by and large, we are seeing some of our licensees, Sharp, as you know, is a pioneer in camera phones and has been selling very well in terms of camera phones. NEC is making headway in terms of them being the leader for the early emergence of 3G, so we are seeing benefits there as well. So by and large, what you are seeing is sequential growth this year, and we hope that continues into the fourth quarter.
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Howard Goldberg, InterDigital - President & CEO [15]
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Let me just add to that. If you were to have gone to the electronics area in (inaudible), Japan a couple of years ago, you would have seen models that are proliferating in Europe and America at this point in time. The form factors, the strength in display technology, the experience with IMood (ph) in Japan, all bodes very well for the Japanese manufacturers. They are, in fact, driving very vibrant market share at this point.
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Operator [16]
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Tom Carpenter, Hilliard Lyons.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [17]
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Can we back up and you had said something in your remarks about you expect additional agreements this year, and you are seeing a lot of activity in Asia. Is that where you expect the additional agreements this year?
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Howard Goldberg, InterDigital - President & CEO [18]
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Just to clarify my remarks, we are moving on all fronts around the world. So whether it would be Asia first or other parts of the world first, I don't know because as you know we never try to predict the exact timing of these things. But we have really stepped up the activity in some new parts of Asia. We are there almost every month now, so which one happens to come through first, we will see.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [19]
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You also said agreements plural, not singular; correct?
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Howard Goldberg, InterDigital - President & CEO [20]
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I think that is the (inaudible). Obviously we are trying to get as many done as we can.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [21]
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Would you expect these new potential agreements to be significant revenue generating 10 percent or more of revenue, or are they potentially ones that are going to be more in the future?
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Howard Goldberg, InterDigital - President & CEO [22]
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I think it will be incremental.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [23]
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Will they be noticeable in your licensing revenue stream?
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Howard Goldberg, InterDigital - President & CEO [24]
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(multiple speakers) -- noticeable need. I think certainly it is going to move things up some more, as we said, the incremental. I think obviously we are doing two things with the licensing program; the most important is driving revenue and cash, but also building perception. I think the deals we will hopefully do both. One of the things we are trying to do in our discussions now is we are covering all technologies, so these are discussions around all types of cellular products. And in my view, both are very important, both the cash and revenue generated and the perception and momentum built.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [25]
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I guess my point is if it is names that people have heard of or something like that has noticeable marketshare? (multiple speakers) -- on your stock price.
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Howard Goldberg, InterDigital - President & CEO [26]
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The folks we're dealing with are people that are known.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [27]
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In late July, you guys went out and purchased the remaining assets of Tantivy. Can you talk about the impact that it has had in your licensing discussions and also based on the fact they had product, what that has meant to you especially on the 1X side in Asia?
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Richard Fagan, InterDigital - CFO & Exec. VP [28]
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Sure. I will handle part of it, and Howard might want to come in a little bit more on the product side. Certainly on the licensing side, they gave us a whole new range of patents. When I talk about their patents in conjunction with our patents, especially in the CDMA2000 environment, it's a great combination because InterDigital was a pioneer very early on in all types of wideband type systems. We have very fundamental patents in those areas. Those are very impressive in license negotiations, but I tell you equally impressive are inventions which get write-downs to the guts of the device. That is what the Tantivy patents bring to us are specific things that occur in the CDMA2000 system, so we are very encouraged by both the -- it is sort of a one two punch incrementally.
We have had excellent discussions around those patents, and we are very happy with having done that acquisition. I will mention a little bit of that product and flip over to Howard, (inaudible) label and licensing discussions to do when our business plans is (inaudible), we try to bundle them. So we can talk about Smart Antenna and other things with respect to licensees and try to share with you show a value-added. (inaudible).
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Howard Goldberg, InterDigital - President & CEO [29]
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Tom, we could not be happier than we are what this acquisition. It has brought to us a small but very talented group of engineers who have great backgrounds in cellular technology, as well as wireless LAN and Smart Antenna. It has positioned us in a very robust market in Melbourne, Florida for technology development. It has really filled in some gaps in our strike plan.
We have been working through the innovation process, putting together architectures that involved Smart Antenna and wireless LANs. What they brought to us was the technologies, that instead of growing organically, we were able to acquire technologies where the expenditure to develop the technologies was many times over what we ultimate paid for the assets, which also included the IPR. So it has been a seamless integration. It has happened faster internally than integration we could have hoped for. The way that our offices, our research and development centers work together has just been dramatic. It is a nascent -- they were nascent possessions in these technologies that we can drive with the resources that they did not have. It has wonderful upside potential.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [30]
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To date you guys have not signed a 1X deal with a major 1X manufacturer. To be fair, that was never part of your original business plan focus. Now you purchase the Tantivy assets and drop some product there, do you think that will change over the next year?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [31]
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That is one of our big focuses. We spend a lot of time on CDMA2000 because obviously there are significant volumes in the market right now, and we are addressing that. So those are my priorities. That would probably be behind Nokia and Samsung, that is probably number three.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [32]
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Two more questions and I will let someone else hop on the call. Can you guys lay out the business and financial implications of the completion of the WTDD work for Nokia? I know Rich talked about the revenue recognition, the remaining 1 million next quarter, and it sounds like you guys are pleased it was done and you got the Nokia stamp of approval on some of the work, but because of the marketplace and the delays in WCDMA, you might not see some additional benefits of the completion until down the road. Is that correct?
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Howard Goldberg, InterDigital - President & CEO [33]
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That is correct. It is all about timing at this point. We have shown the capabilities of wideband and TDD from a technological point of view. We have developed the economic cases as you have seen in white papers and elsewhere, and so we believe that there is some strong potential for it to occupy a place among the whole suite of telecommunications solutions that constitute the telecommunications universe.
There is also a wonderful map over to TTSCDMA (ph), very high degree of commonality, which if TTSCDMA is the first form of TDD to rollout into the marketplace, that would be wonderful. What ever triggers it, whatever its right place and the right time will be good for us.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [34]
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The last question here. In April of '01, you signed a licensing agreement with Matsushita Panasonic in Japan, and they gave you guys a decent prepayment. But so far there have not been any reoccurring royalties shown up on the balance sheet or income statement. I know you guys are waiting for the approval and patents in the Japanese Patent Office for JPO. Can you give us an update on how that is going and may be a timeframe on resolution of that process?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [35]
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Speaker: The process is going along fine in Japan. It is just taking longer than I would have hoped. They are like most of the patent offices around the world. They are swamped. But as far as all the indications as to are the patent holding up well in the patent office, we are doing fine. And remember that this is not all of sales since January of '02, the royalties is not over the dam as I told you. It is water behind the dam. We just have to get (inaudible).
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Tom Carpenter, JJB Hilliard Lyons - Analyst [36]
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Of my limited knowledge of the JPO -- I looked at their site a few times -- I know there are a couple of different types of comments that can go back and forth. Since you filed, have there been several rounds of comments back and forth, or are you still waiting the initial commentary?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [37]
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Speaker: There is no comment. These are in play.
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Operator [38]
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Michael Cody, Sidoti & Co.
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Mike Cody, Sidoti & Company - Analyst [39]
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I want to talk a little bit about the operating expenses and P&L. The consulting work that was done, is that over? Was that was that onetime, and will we see operating expenses drop sequentially? (multiple speakers) I know you mentioned in the comments they might be up 5 or 10 percent, but I guess in that area.
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Howard Goldberg, InterDigital - President & CEO [40]
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That is part of our investment in the third and fourth quarter this year. We are in the process of doing a very in-depth reexamination of what is typically a normal process for us of updating our strap (ph) plan, and periodically we go into a much deeper level, and this is one of those times. But it's really third and fourth quarter expenses. So there will be some in the fourth quarter as well.
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Mike Cody, Sidoti & Company - Analyst [41]
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And then development was down sequentially. I expected that to be one of the areas that might be up sequentially. How will that trend?
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Howard Goldberg, InterDigital - President & CEO [42]
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You may see some moderate upside there, but it should not be huge in the fourth quarter.
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Mike Cody, Sidoti & Company - Analyst [43]
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And so the 5 to 10 percent increase you talked about has a lot to do with the addition of some personnel that you mentioned?
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Howard Goldberg, InterDigital - President & CEO [44]
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It's a little bit of everything to be honest. You have some personnel. You have investments as we just talked about in terms of our strap (ph) plan, there are various long-term developments -- complete development efforts. Then you have got the switch of arbitration and the timings of arbitration and a level of activity around that that can have an impact on the size of the increase.
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Mike Cody, Sidoti & Company - Analyst [45]
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Okay. Looking at the topline, somebody mentioned Sony-Ericsson was flat to down, as were NEC and Sharp, which I would assume were flat from the pricing environment --
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Howard Goldberg, InterDigital - President & CEO [46]
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When you said NEC and Sharp --
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Mike Cody, Sidoti & Company - Analyst [47]
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On a sequential basis?
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Howard Goldberg, InterDigital - President & CEO [48]
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Go ahead and keep talking, I will check.
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Mike Cody, Sidoti & Company - Analyst [49]
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Could you characterize the pricing environment, and what do you see with South Korean manufacturers for LG taking over Sony-Ericsson with Spot (ph) and obviously being a lower-priced product? How do you expect that to impact your results going forward?
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Howard Goldberg, InterDigital - President & CEO [50]
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In terms of sequential, there was not much change versus last quarter. (multiple speakers)
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Mike Cody, Sidoti & Company - Analyst [51]
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Flat, I guess.
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Howard Goldberg, InterDigital - President & CEO [52]
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Yes. Basically that. From what we see out there, this is a follow-up I guess to what Amit asked earlier from RBC, what you're saying is a number of factors influencing average selling prices across the spectrum, and it depends on any particular vendors mix of products. I think probably overall we saw ASPs across the broad spectrum dropping in the range of maybe 3 to 5 percent quarter-over-quarter. That is a continuing trend that I think has been out there for the last four quarters. But what you are starting to see as you go forward is a different mix of handsets going out, and maybe that should hopefully stabilize as you go forward, as you get improved handsets and some 3G models going out there as well.
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [53]
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Just one other thing. It's one thing to look at where the average handset prices move. That is one factor we look at, but a lot of times the manufacture does not play across the entire spectrum of handsets. It may position itself either at the low-end, high-end, mid-end or some combination thereof.
So where the royalties will go will really be a combination of two things. It is a question of where the pricing goes across the board and then also where the particular licensees position themselves. For example, Sony-Ericsson, you go high-end, low-end mid-end; same thing for other folks. So, again, there are a lot of factors that we look at to try to predict, and it is as you expect sometimes hard to predict for people on the go.
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Mike Cody, Sidoti & Company - Analyst [54]
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Thanks. With the Huawei, when would you expect that to have some kind of impact? When do you expect the initial sales there?
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Howard Goldberg, InterDigital - President & CEO [55]
--------------------------------------------------------------------------------
At this point, it is a little difficult to say when that might occur in terms of when we would generate revenue off that. They are in the stages of testing in Huawei, and we have to assess when the reference designs and software will actually start generating revenue for and for Infineon and then in turn when it would generate for us. I think it's a little premature for us to comment on that.
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Operator [56]
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Frank Marsala, Helpern Capital.
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Frank Marsala, Helpern Capital - Analyst [57]
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I have got a couple of questions for Bill regarding the license stuff you talked about. You talked about new agreements this year, and you talked about looking to Asia and then taking some time to build, and you also mentioned having economic discussions.
Let me try and put a couple of thoughts together. Are you also saying that you are having economic discussions with respect to the Asian markets? Is that part of it, the economic discussions in Asia, or are those two separate thoughts?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [58]
--------------------------------------------------------------------------------
We are having economic discussions in the Asian market.
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Frank Marsala, Helpern Capital - Analyst [59]
--------------------------------------------------------------------------------
When you talk about Asia in economic discussions, are you having economic discussions with Chinese manufacturers or manufacturers that sell in China I should say?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [60]
--------------------------------------------------------------------------------
Yes. We are having discussions, the new markets we were looking at it happened to have been very active in Japan for a long time, and discussions are ongoing there. The new markets we were looking at were Taiwan because that is sort of where I think a lot of things are going to move to. So that is where we are at.
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Frank Marsala, Helpern Capital - Analyst [61]
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Would that also include U.S. manufactures that sell into China?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [62]
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Yes.
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Frank Marsala, Helpern Capital - Analyst [63]
--------------------------------------------------------------------------------
Okay. When we think about things like that, are we talking about CDMA2000, GSM, Smart Antenna stuff for Tantivy or all the above?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [64]
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All of the above.
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Frank Marsala, Helpern Capital - Analyst [65]
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This is a cleanup question for Rich. The Ericsson 4.4 just to confirm, Rich, is inclusive of the normal $1.5 million dollar item we should see every quarter?
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Richard Fagan, InterDigital - CFO & Exec. VP [66]
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Yes. It's not just Ericsson. It is Ericsson and Sony-Ericsson. Of that 4.4, 1.5 is Ericsson.
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Frank Marsala, Helpern Capital - Analyst [67]
--------------------------------------------------------------------------------
It is in that number?
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Richard Fagan, InterDigital - CFO & Exec. VP [68]
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Yes.
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Frank Marsala, Helpern Capital - Analyst [69]
--------------------------------------------------------------------------------
Okay. With respect to 3G, I heard what you're saying. You have got a lot of confidence about your 3G activities. I guess part of my thought process is the stuff that goes on like with Nokia trying to limit intellectual property payments to 5 percent and that type of thing. Where do you stand in that? Is that something that you are ignoring; is that something you're worried about; what are your thoughts on that?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [70]
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We don't ignore things like that because I think they do create perceptions with manufacturers that we have to deal with. This is their world. We don't buy into that cap, so the question is if someone is creating a perception of a certain royalty cap, how do we effectively deal in that environment?
We do it a number of different ways. This goes back to some comments I made before about how we compete for profit margin. And the way we do it is, one, I think we're better at patent licensing than a lot of other folks. So we leverage off of our experience and our contacts and existing agreements. Secondly, as Howard mentioned, we have acquired new assets from Tantivy, both patents and technology. So what you then begin to do is try to bundle and basically increase the value of the offering to move it outside of a pure patent things in both patent and technology. So we are keenly aware of this stuff. I have not really seen it affecting things a whole lot, but again we don't try to ignore things like this, instead we build a plan that will address it.
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Howard Goldberg, InterDigital - President & CEO [71]
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Let me just add a little bit of texture to Bill's comments. The discussions that you're referring to are discussions that are essentially around the manufacturers who hold essential IPR looking at crosslicensing frameworks with each other. They are not discussions that have drawn in in any significant technology developers who recover their costs and ultimately have the potential to profit on a noncompeting basis with the manufacturers of consumer goods.
Also, they only involve rates that are associated with essential IPR, and there is a lot of potential opportunities as Bill referred to for InterDigital, and we are examining how we compete. It is undeniable, but there are rent pressures that will come to bear in terms of the 3G marketplace, and we will respond to those in a positive way.
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Frank Marsala, Helpern Capital - Analyst [72]
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One last follow-up and I appreciate that. Priorities-wise, Bill, you said priorities earlier you said Nokia and Samsung would be first and then you're licensing efforts around I believe it was CDMA2000 Tantivy type stuff would be next. Is that would you indicated?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [73]
--------------------------------------------------------------------------------
Right. I think those that I am looking at were the highest value. For us, I think that is what it is.
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Operator [74]
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Elias Lucia (ph), Archer Capital Partners.
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Elias Lucia, ARcher Capital Partners - Analyst [75]
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I wanted to understand if you had any Panasonic revenue you recorded in your revenue from Panasonic in the quarter at all?
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Howard Goldberg, InterDigital - President & CEO [76]
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No, we did not. That is what an earlier question from Tom Carpenter and a follow-up to that us having relevant patents issued in Japan would have then get agreement from Panasonic that that triggers.
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Elias Lucia, ARcher Capital Partners - Analyst [77]
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94 percent of licensing, you mentioned a group of names. I did not catch all of them. Could you repeat that by any chance?
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Howard Goldberg, InterDigital - President & CEO [78]
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Sure. That was NEC, Sharp, Sanyo, Ericsson and Sony-Ericsson.
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Elias Lucia, ARcher Capital Partners - Analyst [79]
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On the seasonality front, can you help us understand what is the expectation for seasonality in Q4 and Q1? What shape does it generally take? Is there any (inaudible) that might change that shape? Just help us understand? I understand you cannot give guidance because you recognize things in arrears, but historical seasonality might help us gauge our own expectations.
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Howard Goldberg, InterDigital - President & CEO [80]
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Sure. I will try. Your question was directed a Q4 to Q1?
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Elias Lucia, ARcher Capital Partners - Analyst [81]
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Q3 to Q4 and then Q4 to Q1.
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Howard Goldberg, InterDigital - President & CEO [82]
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As you probably know, prior to the downturn over the past couple of years, there typically was seasonality drive was strong in the fourth quarter. Our fourth quarter, which in Japan is their third quarter, but our fourth quarter tends to be seasonally high, and then you get some fall-off in the first quarter because many people have replaced handsets or bought new handsets in the fourth quarter during the holiday season and are working off some mandatory. So typically that is what has been out there.
What we have been reading from various sources that are available to you as well out there, is that the seasonality is going to drive strong sequential growth in handsets and infrastructure in the fourth quarter. How much that seasonality is, we are not sure. We have read -- from a broad stroke, we have read some sell-through, not sell-in, and there is a difference. We benefit from the sell-in, not the sell-through. But we are reading sell-through increases sequentially from some people of 10 to 15 percent for the fourth quarter.
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Elias Lucia, ARcher Capital Partners - Analyst [83]
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Understood. Maybe you can also help me put the picture together on the revenue recognition front. For instance, taking Sony-Ericsson as an example, the revenues that you recorded this quarter that you just reported, those would have been from shipments they made over what timeframe? Does it fall over two distinct autos?
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Howard Goldberg, InterDigital - President & CEO [84]
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No. That would have been over the most recent quarter, so that would have been for the quarter that we reported, the third quarter.
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Elias Lucia, ARcher Capital Partners - Analyst [85]
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I understand. Okay.
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Howard Goldberg, InterDigital - President & CEO [86]
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That is why we report so late because a lot of our reports come in subsequent to our licensees completing their quarter.
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Elias Lucia, ARcher Capital Partners - Analyst [87]
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Okay. On the NEC front -- just the last question I am sorry -- on the NEC front, any reason other then just greater demand for the 3G products for the big step-up in licensing from them in the last two quarters? And just to follow-on to that, is there any reason to believe that moderates a little bit, or was there some kind of an initial build that we should put into our expectations not to have anticipated the same level?
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Howard Goldberg, InterDigital - President & CEO [88]
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As to looking forward again, the information that we have in terms of looking forward, particularly on NEC and 3G, is what was generally available from various sources in the marketplace. But we are cautiously optimistic that there is emerging evidence of that long-awaited 3G upgrade cycle entering the early stages with early ramp likely in 2004 and then some end of 2004/2005, hopefully some meaningful pickup. So we are hopeful that that continues, and given that NEC is the leader out there right now or one of the main contributors, that will benefit from that.
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Richard Fagan, InterDigital - CFO & Exec. VP [89]
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NEC has extended their market success beyond Japan. They have been very successful in Europe thus far.
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Elias Lucia, ARcher Capital Partners - Analyst [90]
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Great. Thanks a lot.
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Operator [91]
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Bill Meskavitz (ph), Hartland Funds.
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Bill Meskavitz, Hartland Funds - Analyst [92]
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Congratulations on a great quarter. Maybe I missed this, but -- and also I guess the timely repurchase of, what was it 2 million shares?
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Howard Goldberg, InterDigital - President & CEO [93]
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Yes.
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Bill Meskavitz, Hartland Funds - Analyst [94]
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What are you going to be doing on that end?
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Howard Goldberg, InterDigital - President & CEO [95]
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You mean in terms of potential for additional share repurchase?
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Bill Meskavitz, Hartland Funds - Analyst [96]
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Correct.
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Howard Goldberg, InterDigital - President & CEO [97]
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That is really part of a larger issue. As you know, Bill, one of the range of the investments which are most attractive to us. It is always a consideration and continually being evaluated in light of the alternatives, and it is always under consideration for our Board. But that is where we are right now.
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Bill Meskavitz, Hartland Funds - Analyst [98]
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So are you saying you are going to review another authorization?
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Howard Goldberg, InterDigital - President & CEO [99]
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What I am saying is those things are always under evaluation. Whether or not you do it, depends on the attractiveness of alternatives and where you are relative to other things in your business.
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Bill Meskavitz, Hartland Funds - Analyst [100]
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Thank you. Congratulations.
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Operator [101]
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Tom Carpenter.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [102]
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Just a quick follow-up. On the 11/24 meeting, I belive they have put Judge Lynde (ph) to go over the sealing or unsealing of some of the documents between you guys and Ericsson? Do you expect a ruling that day or that week?
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Howard Goldberg, InterDigital - President & CEO [103]
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We have you back. Keep going.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [104]
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Did you hear the question?
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Howard Goldberg, InterDigital - President & CEO [105]
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I think (multiple speakers).
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Tom Carpenter, JJB Hilliard Lyons - Analyst [106]
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On 11/24, there is a hearing with Judge Lynde to hear your Nokia's notions on whether she should seal or keep sealed or unseal some of the documents from the Ericsson (inaudible). Do you expect a ruling that day or that week or just by the end of the year?
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Richard Fagan, InterDigital - CFO & Exec. VP [107]
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It is hard to predict. She does rule from the bench at times, and other times she issues orders promptly and other times it takes a little bit longer. So you never know.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [108]
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Based on the fact that you and Howard are lawyers, maybe you guys can give us some insight into this. Would it have any material impact on the arbitration if Judge Lynde would rule that those documents remain sealed?
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Richard Fagan, InterDigital - CFO & Exec. VP [109]
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I will tell you in my view there is nothing there that affects my view of our case.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [110]
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Okay. I was just curious --
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Richard Fagan, InterDigital - CFO & Exec. VP [111]
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Good question.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [112]
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If a ruling comes out one way or the other, if that could potentially mean something to the arbitration case, hence your stock price?
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Richard Fagan, InterDigital - CFO & Exec. VP [113]
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As I say, it does not change my view of the case.
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Operator [114]
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Michael Belleny (ph), Conseco Capital.
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Michael Belleny, Conseco Capital - Analyst [115]
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I just had a quick question on deferred revenues, down 15 million sequentially. If you could just give some color on that and where we would expect that to trend next quarter?
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Howard Goldberg, InterDigital - President & CEO [116]
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Well, the deferred revenue is made up of a number of things, and as you know, it is based on -- the recognition of that deferred revenue is based on the exhaustion primarily of prepayments from licensees. You can look at the trend through the first three quarters by simply looking at the cash flow in terms of deferred revenue recognized and see what we have recognized (inaudible) throughout the quarters.
Our hope is that, quite frankly, we continue to keep producing (inaudible) because that means you are closer to either licensees becoming current and paying additional cash or being eligible to make additional prepayments. So that is where we are with that line.
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Michael Belleny, Conseco Capital - Analyst [117]
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Should I expect that to go up or down sequentially?
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Howard Goldberg, InterDigital - President & CEO [118]
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It depends. If you don't sign any new licensees or have licensees that have prepayments -- the ability to make additional prepayments, then it should go down as licensees sell product and exhaust credits that they have, as well as the reduction associated with paid off licenses that we have given in the past.
So, for example NEC, when we gave them a paid up for sales in Japan, they paid us 53 million. That is going down ratably about $3 million a quarter. You had some SAB 101 related deferred revenue that is about $1 million a quarter, so you've got a little over 4 million right there, and then you've got the reduction from prepayments. So absent any prepayments or other mechanisms from new licensees, you should expect it to go down, which is good news for this company because that means you are closer to more cash.
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Operator [119]
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There are no further questions at this time.
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Howard Goldberg, InterDigital - President & CEO [120]
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Well, thank you everyone for participating, and we look forward to talking to you and updating you at the next conference call. Have a nice day.
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Operator [121]
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Thank you for participating in today's teleconference. You may disconnect at this time.
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+===============================================================================+
StreetEvents Transcript
F I N A L V E R S I O N
IDCC - InterDigital Communications Corporation
Q3 2003 InterDigital Communications Corporation Earnings Conference Call
Nov. 13. 2003 / 10:00AM ET
================================================================================
Corporate Participants
================================================================================
* Janet Point
InterDigital - Director of Investor Relations
* Richard Fagan
InterDigital - CFO & Exec. VP
* Howard Goldberg
InterDigital - President & CEO
* Bill Merritt
InterDigital - Exec. VP, General Patent Counsel
================================================================================
Conference Call Participants
================================================================================
* John Bucher
Harris Nesbitt - Analyst
* Amit Kapur
RBC Capital Markets - Analyst
* Tom Carpenter
JJB Hilliard Lyons - Analyst
* Mike Cody
Sidoti & Company - Analyst
* Frank Marsala
Helpern Capital - Analyst
* Elias Lucia
ARcher Capital Partners - Analyst
* Bill Meskavitz
Hartland Funds - Analyst
* Michael Belleny
Conseco Capital - Analyst
================================================================================
Presentation
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Operator [1]
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Good morning. My name is Molly, and I will be your conference facilitator. At this time, I would like to welcome everyone to the InterDigital third-quarter financial conference call. (OPERATOR INSTRUCTIONS). At this point, you may begin your conference.
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Janet Point, InterDigital - Director of Investor Relations [2]
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Thanks, Molly. Good morning everyone and welcome to the InterDigital Communications Corporation's financial results conference call for the third quarter of 2003. My name is Janet Point, Director of Investor Relations. With me today are Howard Goldberg, our President and Chief Executive Officer; Rich Fagan, our Chief Financial Officer, and Bill Merritt, Executive Vice President and General Patent Counsel for InterDigital and President of InterDigital Technology Corporation.
Before we begin the call, I would like to remind you that during this call we will make some forward-looking statements regarding our current beliefs and expectations, as to our strategies, the resolutions of the Nokia and Samsung matters, including the timing of those matters, our ability to enter into new license agreements, our dependence on new license agreements, the acquisition and organic growth of intellectual property rights, the importance of our technologies, our development program, productization efforts and the timing of those efforts, our financial condition, revenues, expenses, cash flow, the expansion of business and marketing relationships, company growth, handset shipments, demand for handsets and sales, 3G markets opportunities, our patent portfolio, insurance matters and our licensees. Actual outcomes could differ materially from those expressed in any such forward-looking statements due to a variety of factors, including those set forth in the Company's most recent filings on Forms 10-K, 8-K and in this morning's press release and related 8-K filings.
Now, with that, it is my pleasure to introduce our Chief Financial Officer, Rich Fagan.
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Richard Fagan, InterDigital - CFO & Exec. VP [3]
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Thank you, Janice, and good morning to everyone. It gives me great pleasure to speak with you today about another impressive quarter for InterDigital. Let me briefly summarize third-quarter 2003 results. We announced revenues of $26.8 million and net income of $3.4 million or 6 cents per share. That compares very favorably against revenues of $14.7 million and a net loss of $5.8 million or 11 cents a share in the third quarter 2002.
Further, our balance sheet remained very strong. We ended the quarter with roughly $106 million in cash, $18 million higher than year-end 2002, even after expending $44 million on a 2 million share repurchase program and the acquisition of substantially all the assets of Tantivy.
The story continues to be impressive growth in recurring patent licensing royalties. Third-quarter 2003 royalties of 26.8 million improved 95 percent over the same period 2002. We have also had two quarters in a row of recurring royalties in excess of $25 million. That is a long way from total recurring royalties of $1 million for the entire year of 1998. The quantity, quality and predictability of our revenue and cash flow streams continue to improve.
The 95 percent improvement in recurring patent licensing royalty revenue was driven by both increases from NEC, Sharp and Sanyo, and the addition of royalties related to agreements signed with Ericsson and Sony-Ericsson in 2003. These five licensees contributed approximately 94 percent of our revenue in the third quarter 2003.
Let me give you some details. Royalties from NEC, which accounted for about 37 percent of the total, were up $4 million due to NEC's leading position in the growing 3G markets. NEC recently announced that it received a major increase in orders for handsets from the Hutcheson's 3G group that should bode well for us as shipments occur over the coming 12 to 18 months. Royalties from Sharp accounted for about 28 percent of revenues and were up a little over $2 million versus third quarter 2002. This reflects the continued demand for their camera equipped handsets both in Japan and Europe.
We are also pleased to see that Sharp has recently announced an upward projection of handsets sales outside Japan from 1.5 million units to 2.2 million units for their fiscal year which ends in March 2004. Sanyo became a greater than 10 percent customer in third quarter 2003, due mainly to royalties associated with PHS handset and infrastructure shipments into China. We did record a true-up in third quarter 2003 of $2.2 million related to Sanyo's actual reported royalties in excess of estimates for first-half 2003. And finally, Sony-Ericsson has generated royalties in line with our expectations and appears to have the potential to improve its market position going forward.
Moving on. Operating expenses increased 8 percent over third quarter 2002 and 2 percent over second quarter 2003. The increase in operating expenses over third quarter 2002 was due in large part to higher directors and officers' liability insurance premiums, patent licensing costs, royalty related commission costs and consulting costs associated with strategic planning update activities. Tax expense, which mainly consists of non-U.S. withholding taxes on patent licensing royalties, increased in third quarter 2003, due to the recognition of a higher level of royalties subject to withholding tax.
Looking forward, we expect to benefit from continued solid performances of our key licensees and to expand our licensee base over the next twelve months. We also will recognize the final $1 million of specialized engineering services revenue related to the Nokia WTDD agreement during fourth quarter 2003. We currently anticipate that fourth quarter 2003 operating expenses could increase 5 to 10 percent over the most recent quarter and contributing to this increase will be higher DNO liability insurance premiums. Additionally, as we continue to grow our business, we expect to increase our investment in marketing, patent licensing an employee development activities.
This concludes my prepared remarks, and I will now turn the call over to Howard Goldberg.
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Howard Goldberg, InterDigital - President & CEO [4]
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Good morning everyone. In addition to the financials that Rich just covered, I have asked Bill Merritt to join us today to provide an update on patent licensing matters, including the status of open issues with Nokia and Samsung. After Bill is finished, I will come back on and give you a few closing remarks.
As I have indicated in the past, our patent licensing program is fundamental to the Company's success as you are no doubt aware of the upside potential of open issues with Nokia and Samsung. In addition, there is a keen level of interest by many current and prospective investors in our ability to enter into new agreements, particularly for 3G products.
I would now like to turn the call over to over to Bill Merritt, who will provide some prospective on these and other aspects of our patent licensing program.
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [5]
--------------------------------------------------------------------------------
Thank you and good morning to everyone. As I have done in the past, let me bring people up-to-date on the Nokia arbitration and the discussions with Samsung. Also, I will give you some additional information as to ongoing license agreement discussions and how we view the licensing landscape over the next twelve months.
As regards Nokia, the arbitration is moving forward as expected, but we are awaiting the confirmation of the third arbitrator and expect that shortly. With regard to Nokia's document access motion in Texas, the court has scheduled oral argument on that matter for November 24. At this point my expectation as to the timeframe of the Nokia arbitration remains consistent with our past disclosures, namely that the process should probably take about a year to complete. As the arbitrators become engaged in the issue, we will begin to get a better prospective on how the case will be tried and how long we would expect the case to last absent any settlement. At the Samsung, we previously reported that Samsung had initiated the contractual dispute resolution process, though neither party had just filed an arbitration request.
While Samsung has indicated its belief that arbitration appears necessary to resolve the matter, the parties continue to meet regularly. Absent the change in this position, we expect that Samsung will file an arbitration -- will file demand for arbitration in the near future. Needless to say, as Howard said, we remain very confident about both the Samsung and Nokia matters.
While Nokia and Samsung have kept us busy, we have been very occupied in other areas as well. Let me talk to you about our other activities so far this year and how I see things unfolding in the licensing program over the near and mid-term. My staff and I spent most of the last few months on the road visiting a wide range of companies. Many of those discussions have progressed beyond the basic discussions about the patents to substantive economic negotiations. Based on the progress we have seen to date and our experience with the licensing process, we remain optimistic that we will conclude additional agreements this year.
Further, with more and more manufacturing activity moving to different parts of Asia, we have expanded our licensing activities into these new geographic areas. As you might expect, we establishing a new licensing front is time-consuming. You need to put in place local context, build licensing material for the local environment, and build company credibility in those countries. Much of our time for the middle third of this year has been spent doing just that, and we are now beginning to see the fruits of our efforts.
I are also involved in a significant number of discussions regarding acquiring new IPR. As I have indicated in the past, we see this as an appropriate time for enhancing our patent portfolio, and enhancing our portfolio can strengthen the position we already have for all forms of digital cellular products and extend our reach into different licensing areas.
It has been a busy year, and we are moving on a number of different fronts. To support these efforts, we have increased our staff this year, adding a new Director of Licensing to manage our worldwide licensing program. He comes to us from the semiconductor industry with extensive background in U.S. and non-U.S.-based licensing. We also added an additional engineer to our staff to provide technical support, and currently we have expanded our relationship with outside experts to support our growing worldwide licensing activity. All-in-all I am very happy with the performance of our group and the financial results we have delivered.
Despite our success, including signing five new deals this year, I know that our investors want to see more deals, especially more deals involving our 3G patent. I also know that some of you want assurance that the momentum we gained earlier this year is continuing. I can tell you my group lives and breathes patent licensing, and in the trenches, we see excellent momentum with deals moving in the right direction. Of course, I appreciate that nothing speaks better about our chances for long-term success than signed licensed agreements.
I can assure you that we are focused on delivering more (technical difficulty) -- creating an enduring perception of InterDigital as a premiere patent licensing company and driving revenue and cash flow even higher. The benefits from this fact are what the early stages of 3G buildout, and we have the financial strength to take the time to fashion deals that make sense for us. We are not dependent on the next deal, and that works to our advantage in licensing negotiations. We can be patient in seeking the right terms and we are.
Some of you have also asked whether we can secure additional CDMA2000 licensees. We're having excellent discussions with CDMA2000 manufacturers, relying both on InterDigital's pioneering patents covering all forms of wideband and CDMA systems and CDMA2000 specific inventions acquired from Tantivy. Based on the strength of our portfolio, we believe that we will conclude additional CDMA2000 deals.
Now why should you have confidence in us? Well, many of you previously asked whether I was confident we could get the Sharp agreement renewed. I told you I was, and we got that done. You also asked if we had momentum. I said we did and subsequently signed new deals with (inaudible) and Nakayo, both of which are now contributing to recurring royalties. Our effective execution in the past should give you confidence in our ability to deliver in the future.
With that, let me turn it back to Howard.
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Howard Goldberg, InterDigital - President & CEO [6]
--------------------------------------------------------------------------------
Let me reiterate what I hope is very obvious to all of you regarding our position on the topic of Nokia and Samsung. We and our Board remain committed to seeing these processes through to successful resolution. As we go through the respective processes, we will do so following the strength of our convictions to bring about the best results for the shareholders.
With that addressed, let me make a few additional comments. We really have achieved great success in 2003. We have nearly doubled recurring royalties in third quarter 2003 compared to the comparable quarter in 2002. In fact, recurring royalties to date in 2003 exceed those for the entire year 2002. We completed the first commercial release of the FDD protocol stack with our partner Infineon.
In September, they announced the first customer for the stack, Huawei, who has successfully tested it with our engineers playing a key role. We successfully completed our wideband TDD technology platform for Nokia, demonstrating our superior capability in developing highly complex air interface technology. We have also completed the acquisition of patents and technology from Tantivy and subsequently successfully integrated them into our business.
At the October ITU 2003 tradeshow in Geneva, Switzerland, we showcased our accomplishments, displaying a broader array of technologies and products than ever before in InterDigital's history. We demonstrated our extended WTDD solution, transmitting data including video at 2 megabits over the year. Further, we were the only company displaying complete solutions for both FDD and WTDD technologies.
Among the products we introduced was a subscriber-based Smart Antenna solution that covers wireless LAN and cellular applications. We also displayed a highly advanced digital radio solution. Our technology and product offerings generated substantial interest in Geneva. During this period, we repurchased 2 million shares of the company stock, which was an expression of our confidence in our future, and we continue to maintain a very strong balance sheet.
The entire team at InterDigital always believed that we could build a truly unique company delivering strong financial results. We have done so, and we expect to continue building on that success.
With that, Molly, let's open the call to questions.
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Questions and Answers
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Operator [1]
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(OPERATOR INSTRUCTIONS). John Bucher, Harris Nesbitt.
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John Bucher, Harris Nesbitt - Analyst [2]
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I was wondering if you could provide any outlook for your expectations for carrier trials of WTDD, and the second question if you could provide an update on your participation in the 80220 standards process and your expectations there?
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Howard Goldberg, InterDigital - President & CEO [3]
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This is Howard Goldberg. I will handle those questions. We are working with operators subsequent with respect to wideband TDD. Subsequent to Geneva, we had inquiries as to the placement of the units that were in Geneva, and they have not come back to us. There are with the operators; I can't go into more specifics.
We are going to closely follow the market. The timing of the market will be critical. The delayed impact, the delayed deployment of FDD has, of course, shifted the timing for TDD, and we are going to follow the market because there is no premium on being early. But we are very encouraged by the interest that the display of 2 megabits for the year generated in Geneva.
We are also very involved in the standards for all species of 802.11. In fact, we are represented at the chair function and leadership functions in some of the 802 species. 20 is one that we are monitoring very carefully at this point. It may be at inflection points over the next six months, and we are setting -- we are going to watch those inflection points to set our roadmap going forward.
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John Bucher, Harris Nesbitt - Analyst [4]
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At this point, do you expect 80220 to come up with multiple flavors as happened in the 80216, or is it too early to say yet?
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Howard Goldberg, InterDigital - President & CEO [5]
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I think it is too early to say we where 80220 is going to go. So there is an awful lot going on there, and as I said, we believe that we are probably right in front of the inflection point. So we will watch them closely.
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Operator [6]
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Mike Lockley, RBC Capital Markets.
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Amit Kapur, RBC Capital Markets - Analyst [7]
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It is actually Amit Kapur calling in for Mike Lockley. Just a couple of quick questions. First, just to clarify. I think Bill mentioned that the Nokia and Samsung obligation would take about a year to complete. Just to clarify, is that a year from now or consistent with what you mentioned or what you have indicated before?
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Howard Goldberg, InterDigital - President & CEO [8]
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Well, first, Samsung has not filed for arbitration yet. Typically it takes a year from the filing. That is the average time if you look at our prior arbitrations with Samsung and with NEC, that was the pace of those arbitrations. As I indicated, we need to get a little further in the process and see how the arbitrators are going to position things to give a better assessment of exactly how long it would take. But the nice thing about arbitration is it is an expedited process.
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Amit Kapur, RBC Capital Markets - Analyst [9]
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Also, I guess over the last couple of quarters, we know Sony-Ericsson has reported quite strong results, and if I do my math correctly, it looks like Sony-Ericsson and Ericsson royalties are flat sequentially. Has there been any adjustment to the royalty rates, or to what extent could there be true-up payments coming from Sony-Ericsson and Ericsson?
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Howard Goldberg, InterDigital - President & CEO [10]
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Thath is good question. There has not been any adjustment to the rates. The way the agreement works it obviously has a number of components that add up to get to the royalty rate, and that includes selling prices and other factors. So while the market could give you a reasonable barometer of where the revenues will go, it's not an exact barometer.
So I will give you an easy example. If their volumes were to go up significantly but their pricing were to go down greater than their increase in volumes, you would actually see a lower royalty from them because it is price-based.
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Amit Kapur, RBC Capital Markets - Analyst [11]
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Were there any true-up payments included this quarter for Sony-Ericsson and Ericsson?
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Howard Goldberg, InterDigital - President & CEO [12]
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No. There was not.
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Amit Kapur, RBC Capital Markets - Analyst [13]
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My last question given the strength that you're seeing from some of the Japanese licensees, maybe you could give us some color as to what might be driving that? Are the volumes stronger than expected or there are higher ASPs?
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Richard Fagan, InterDigital - CFO & Exec. VP [14]
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What you are seeing is across the board you're seeing higher demand for emergence of demand, particularly for accelerating growth in emerging markets, and camera phones are picking up speed in a big way across the spectrum. So by and large, we are seeing some of our licensees, Sharp, as you know, is a pioneer in camera phones and has been selling very well in terms of camera phones. NEC is making headway in terms of them being the leader for the early emergence of 3G, so we are seeing benefits there as well. So by and large, what you are seeing is sequential growth this year, and we hope that continues into the fourth quarter.
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Howard Goldberg, InterDigital - President & CEO [15]
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Let me just add to that. If you were to have gone to the electronics area in (inaudible), Japan a couple of years ago, you would have seen models that are proliferating in Europe and America at this point in time. The form factors, the strength in display technology, the experience with IMood (ph) in Japan, all bodes very well for the Japanese manufacturers. They are, in fact, driving very vibrant market share at this point.
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Operator [16]
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Tom Carpenter, Hilliard Lyons.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [17]
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Can we back up and you had said something in your remarks about you expect additional agreements this year, and you are seeing a lot of activity in Asia. Is that where you expect the additional agreements this year?
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Howard Goldberg, InterDigital - President & CEO [18]
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Just to clarify my remarks, we are moving on all fronts around the world. So whether it would be Asia first or other parts of the world first, I don't know because as you know we never try to predict the exact timing of these things. But we have really stepped up the activity in some new parts of Asia. We are there almost every month now, so which one happens to come through first, we will see.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [19]
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You also said agreements plural, not singular; correct?
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Howard Goldberg, InterDigital - President & CEO [20]
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I think that is the (inaudible). Obviously we are trying to get as many done as we can.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [21]
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Would you expect these new potential agreements to be significant revenue generating 10 percent or more of revenue, or are they potentially ones that are going to be more in the future?
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Howard Goldberg, InterDigital - President & CEO [22]
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I think it will be incremental.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [23]
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Will they be noticeable in your licensing revenue stream?
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Howard Goldberg, InterDigital - President & CEO [24]
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(multiple speakers) -- noticeable need. I think certainly it is going to move things up some more, as we said, the incremental. I think obviously we are doing two things with the licensing program; the most important is driving revenue and cash, but also building perception. I think the deals we will hopefully do both. One of the things we are trying to do in our discussions now is we are covering all technologies, so these are discussions around all types of cellular products. And in my view, both are very important, both the cash and revenue generated and the perception and momentum built.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [25]
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I guess my point is if it is names that people have heard of or something like that has noticeable marketshare? (multiple speakers) -- on your stock price.
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Howard Goldberg, InterDigital - President & CEO [26]
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The folks we're dealing with are people that are known.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [27]
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In late July, you guys went out and purchased the remaining assets of Tantivy. Can you talk about the impact that it has had in your licensing discussions and also based on the fact they had product, what that has meant to you especially on the 1X side in Asia?
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Richard Fagan, InterDigital - CFO & Exec. VP [28]
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Sure. I will handle part of it, and Howard might want to come in a little bit more on the product side. Certainly on the licensing side, they gave us a whole new range of patents. When I talk about their patents in conjunction with our patents, especially in the CDMA2000 environment, it's a great combination because InterDigital was a pioneer very early on in all types of wideband type systems. We have very fundamental patents in those areas. Those are very impressive in license negotiations, but I tell you equally impressive are inventions which get write-downs to the guts of the device. That is what the Tantivy patents bring to us are specific things that occur in the CDMA2000 system, so we are very encouraged by both the -- it is sort of a one two punch incrementally.
We have had excellent discussions around those patents, and we are very happy with having done that acquisition. I will mention a little bit of that product and flip over to Howard, (inaudible) label and licensing discussions to do when our business plans is (inaudible), we try to bundle them. So we can talk about Smart Antenna and other things with respect to licensees and try to share with you show a value-added. (inaudible).
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Howard Goldberg, InterDigital - President & CEO [29]
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Tom, we could not be happier than we are what this acquisition. It has brought to us a small but very talented group of engineers who have great backgrounds in cellular technology, as well as wireless LAN and Smart Antenna. It has positioned us in a very robust market in Melbourne, Florida for technology development. It has really filled in some gaps in our strike plan.
We have been working through the innovation process, putting together architectures that involved Smart Antenna and wireless LANs. What they brought to us was the technologies, that instead of growing organically, we were able to acquire technologies where the expenditure to develop the technologies was many times over what we ultimate paid for the assets, which also included the IPR. So it has been a seamless integration. It has happened faster internally than integration we could have hoped for. The way that our offices, our research and development centers work together has just been dramatic. It is a nascent -- they were nascent possessions in these technologies that we can drive with the resources that they did not have. It has wonderful upside potential.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [30]
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To date you guys have not signed a 1X deal with a major 1X manufacturer. To be fair, that was never part of your original business plan focus. Now you purchase the Tantivy assets and drop some product there, do you think that will change over the next year?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [31]
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That is one of our big focuses. We spend a lot of time on CDMA2000 because obviously there are significant volumes in the market right now, and we are addressing that. So those are my priorities. That would probably be behind Nokia and Samsung, that is probably number three.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [32]
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Two more questions and I will let someone else hop on the call. Can you guys lay out the business and financial implications of the completion of the WTDD work for Nokia? I know Rich talked about the revenue recognition, the remaining 1 million next quarter, and it sounds like you guys are pleased it was done and you got the Nokia stamp of approval on some of the work, but because of the marketplace and the delays in WCDMA, you might not see some additional benefits of the completion until down the road. Is that correct?
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Howard Goldberg, InterDigital - President & CEO [33]
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That is correct. It is all about timing at this point. We have shown the capabilities of wideband and TDD from a technological point of view. We have developed the economic cases as you have seen in white papers and elsewhere, and so we believe that there is some strong potential for it to occupy a place among the whole suite of telecommunications solutions that constitute the telecommunications universe.
There is also a wonderful map over to TTSCDMA (ph), very high degree of commonality, which if TTSCDMA is the first form of TDD to rollout into the marketplace, that would be wonderful. What ever triggers it, whatever its right place and the right time will be good for us.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [34]
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The last question here. In April of '01, you signed a licensing agreement with Matsushita Panasonic in Japan, and they gave you guys a decent prepayment. But so far there have not been any reoccurring royalties shown up on the balance sheet or income statement. I know you guys are waiting for the approval and patents in the Japanese Patent Office for JPO. Can you give us an update on how that is going and may be a timeframe on resolution of that process?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [35]
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Speaker: The process is going along fine in Japan. It is just taking longer than I would have hoped. They are like most of the patent offices around the world. They are swamped. But as far as all the indications as to are the patent holding up well in the patent office, we are doing fine. And remember that this is not all of sales since January of '02, the royalties is not over the dam as I told you. It is water behind the dam. We just have to get (inaudible).
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Tom Carpenter, JJB Hilliard Lyons - Analyst [36]
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Of my limited knowledge of the JPO -- I looked at their site a few times -- I know there are a couple of different types of comments that can go back and forth. Since you filed, have there been several rounds of comments back and forth, or are you still waiting the initial commentary?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [37]
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Speaker: There is no comment. These are in play.
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Operator [38]
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Michael Cody, Sidoti & Co.
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Mike Cody, Sidoti & Company - Analyst [39]
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I want to talk a little bit about the operating expenses and P&L. The consulting work that was done, is that over? Was that was that onetime, and will we see operating expenses drop sequentially? (multiple speakers) I know you mentioned in the comments they might be up 5 or 10 percent, but I guess in that area.
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Howard Goldberg, InterDigital - President & CEO [40]
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That is part of our investment in the third and fourth quarter this year. We are in the process of doing a very in-depth reexamination of what is typically a normal process for us of updating our strap (ph) plan, and periodically we go into a much deeper level, and this is one of those times. But it's really third and fourth quarter expenses. So there will be some in the fourth quarter as well.
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Mike Cody, Sidoti & Company - Analyst [41]
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And then development was down sequentially. I expected that to be one of the areas that might be up sequentially. How will that trend?
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Howard Goldberg, InterDigital - President & CEO [42]
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You may see some moderate upside there, but it should not be huge in the fourth quarter.
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Mike Cody, Sidoti & Company - Analyst [43]
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And so the 5 to 10 percent increase you talked about has a lot to do with the addition of some personnel that you mentioned?
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Howard Goldberg, InterDigital - President & CEO [44]
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It's a little bit of everything to be honest. You have some personnel. You have investments as we just talked about in terms of our strap (ph) plan, there are various long-term developments -- complete development efforts. Then you have got the switch of arbitration and the timings of arbitration and a level of activity around that that can have an impact on the size of the increase.
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Mike Cody, Sidoti & Company - Analyst [45]
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Okay. Looking at the topline, somebody mentioned Sony-Ericsson was flat to down, as were NEC and Sharp, which I would assume were flat from the pricing environment --
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Howard Goldberg, InterDigital - President & CEO [46]
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When you said NEC and Sharp --
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Mike Cody, Sidoti & Company - Analyst [47]
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On a sequential basis?
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Howard Goldberg, InterDigital - President & CEO [48]
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Go ahead and keep talking, I will check.
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Mike Cody, Sidoti & Company - Analyst [49]
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Could you characterize the pricing environment, and what do you see with South Korean manufacturers for LG taking over Sony-Ericsson with Spot (ph) and obviously being a lower-priced product? How do you expect that to impact your results going forward?
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Howard Goldberg, InterDigital - President & CEO [50]
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In terms of sequential, there was not much change versus last quarter. (multiple speakers)
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Mike Cody, Sidoti & Company - Analyst [51]
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Flat, I guess.
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Howard Goldberg, InterDigital - President & CEO [52]
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Yes. Basically that. From what we see out there, this is a follow-up I guess to what Amit asked earlier from RBC, what you're saying is a number of factors influencing average selling prices across the spectrum, and it depends on any particular vendors mix of products. I think probably overall we saw ASPs across the broad spectrum dropping in the range of maybe 3 to 5 percent quarter-over-quarter. That is a continuing trend that I think has been out there for the last four quarters. But what you are starting to see as you go forward is a different mix of handsets going out, and maybe that should hopefully stabilize as you go forward, as you get improved handsets and some 3G models going out there as well.
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [53]
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Just one other thing. It's one thing to look at where the average handset prices move. That is one factor we look at, but a lot of times the manufacture does not play across the entire spectrum of handsets. It may position itself either at the low-end, high-end, mid-end or some combination thereof.
So where the royalties will go will really be a combination of two things. It is a question of where the pricing goes across the board and then also where the particular licensees position themselves. For example, Sony-Ericsson, you go high-end, low-end mid-end; same thing for other folks. So, again, there are a lot of factors that we look at to try to predict, and it is as you expect sometimes hard to predict for people on the go.
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Mike Cody, Sidoti & Company - Analyst [54]
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Thanks. With the Huawei, when would you expect that to have some kind of impact? When do you expect the initial sales there?
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Howard Goldberg, InterDigital - President & CEO [55]
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At this point, it is a little difficult to say when that might occur in terms of when we would generate revenue off that. They are in the stages of testing in Huawei, and we have to assess when the reference designs and software will actually start generating revenue for and for Infineon and then in turn when it would generate for us. I think it's a little premature for us to comment on that.
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Operator [56]
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Frank Marsala, Helpern Capital.
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Frank Marsala, Helpern Capital - Analyst [57]
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I have got a couple of questions for Bill regarding the license stuff you talked about. You talked about new agreements this year, and you talked about looking to Asia and then taking some time to build, and you also mentioned having economic discussions.
Let me try and put a couple of thoughts together. Are you also saying that you are having economic discussions with respect to the Asian markets? Is that part of it, the economic discussions in Asia, or are those two separate thoughts?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [58]
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We are having economic discussions in the Asian market.
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Frank Marsala, Helpern Capital - Analyst [59]
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When you talk about Asia in economic discussions, are you having economic discussions with Chinese manufacturers or manufacturers that sell in China I should say?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [60]
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Yes. We are having discussions, the new markets we were looking at it happened to have been very active in Japan for a long time, and discussions are ongoing there. The new markets we were looking at were Taiwan because that is sort of where I think a lot of things are going to move to. So that is where we are at.
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Frank Marsala, Helpern Capital - Analyst [61]
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Would that also include U.S. manufactures that sell into China?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [62]
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Yes.
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Frank Marsala, Helpern Capital - Analyst [63]
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Okay. When we think about things like that, are we talking about CDMA2000, GSM, Smart Antenna stuff for Tantivy or all the above?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [64]
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All of the above.
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Frank Marsala, Helpern Capital - Analyst [65]
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This is a cleanup question for Rich. The Ericsson 4.4 just to confirm, Rich, is inclusive of the normal $1.5 million dollar item we should see every quarter?
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Richard Fagan, InterDigital - CFO & Exec. VP [66]
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Yes. It's not just Ericsson. It is Ericsson and Sony-Ericsson. Of that 4.4, 1.5 is Ericsson.
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Frank Marsala, Helpern Capital - Analyst [67]
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It is in that number?
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Richard Fagan, InterDigital - CFO & Exec. VP [68]
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Yes.
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Frank Marsala, Helpern Capital - Analyst [69]
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Okay. With respect to 3G, I heard what you're saying. You have got a lot of confidence about your 3G activities. I guess part of my thought process is the stuff that goes on like with Nokia trying to limit intellectual property payments to 5 percent and that type of thing. Where do you stand in that? Is that something that you are ignoring; is that something you're worried about; what are your thoughts on that?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [70]
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We don't ignore things like that because I think they do create perceptions with manufacturers that we have to deal with. This is their world. We don't buy into that cap, so the question is if someone is creating a perception of a certain royalty cap, how do we effectively deal in that environment?
We do it a number of different ways. This goes back to some comments I made before about how we compete for profit margin. And the way we do it is, one, I think we're better at patent licensing than a lot of other folks. So we leverage off of our experience and our contacts and existing agreements. Secondly, as Howard mentioned, we have acquired new assets from Tantivy, both patents and technology. So what you then begin to do is try to bundle and basically increase the value of the offering to move it outside of a pure patent things in both patent and technology. So we are keenly aware of this stuff. I have not really seen it affecting things a whole lot, but again we don't try to ignore things like this, instead we build a plan that will address it.
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Howard Goldberg, InterDigital - President & CEO [71]
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Let me just add a little bit of texture to Bill's comments. The discussions that you're referring to are discussions that are essentially around the manufacturers who hold essential IPR looking at crosslicensing frameworks with each other. They are not discussions that have drawn in in any significant technology developers who recover their costs and ultimately have the potential to profit on a noncompeting basis with the manufacturers of consumer goods.
Also, they only involve rates that are associated with essential IPR, and there is a lot of potential opportunities as Bill referred to for InterDigital, and we are examining how we compete. It is undeniable, but there are rent pressures that will come to bear in terms of the 3G marketplace, and we will respond to those in a positive way.
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Frank Marsala, Helpern Capital - Analyst [72]
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One last follow-up and I appreciate that. Priorities-wise, Bill, you said priorities earlier you said Nokia and Samsung would be first and then you're licensing efforts around I believe it was CDMA2000 Tantivy type stuff would be next. Is that would you indicated?
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Bill Merritt, InterDigital - Exec. VP, General Patent Counsel [73]
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Right. I think those that I am looking at were the highest value. For us, I think that is what it is.
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Operator [74]
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Elias Lucia (ph), Archer Capital Partners.
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Elias Lucia, ARcher Capital Partners - Analyst [75]
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I wanted to understand if you had any Panasonic revenue you recorded in your revenue from Panasonic in the quarter at all?
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Howard Goldberg, InterDigital - President & CEO [76]
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No, we did not. That is what an earlier question from Tom Carpenter and a follow-up to that us having relevant patents issued in Japan would have then get agreement from Panasonic that that triggers.
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Elias Lucia, ARcher Capital Partners - Analyst [77]
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94 percent of licensing, you mentioned a group of names. I did not catch all of them. Could you repeat that by any chance?
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Howard Goldberg, InterDigital - President & CEO [78]
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Sure. That was NEC, Sharp, Sanyo, Ericsson and Sony-Ericsson.
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Elias Lucia, ARcher Capital Partners - Analyst [79]
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On the seasonality front, can you help us understand what is the expectation for seasonality in Q4 and Q1? What shape does it generally take? Is there any (inaudible) that might change that shape? Just help us understand? I understand you cannot give guidance because you recognize things in arrears, but historical seasonality might help us gauge our own expectations.
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Howard Goldberg, InterDigital - President & CEO [80]
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Sure. I will try. Your question was directed a Q4 to Q1?
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Elias Lucia, ARcher Capital Partners - Analyst [81]
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Q3 to Q4 and then Q4 to Q1.
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Howard Goldberg, InterDigital - President & CEO [82]
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As you probably know, prior to the downturn over the past couple of years, there typically was seasonality drive was strong in the fourth quarter. Our fourth quarter, which in Japan is their third quarter, but our fourth quarter tends to be seasonally high, and then you get some fall-off in the first quarter because many people have replaced handsets or bought new handsets in the fourth quarter during the holiday season and are working off some mandatory. So typically that is what has been out there.
What we have been reading from various sources that are available to you as well out there, is that the seasonality is going to drive strong sequential growth in handsets and infrastructure in the fourth quarter. How much that seasonality is, we are not sure. We have read -- from a broad stroke, we have read some sell-through, not sell-in, and there is a difference. We benefit from the sell-in, not the sell-through. But we are reading sell-through increases sequentially from some people of 10 to 15 percent for the fourth quarter.
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Elias Lucia, ARcher Capital Partners - Analyst [83]
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Understood. Maybe you can also help me put the picture together on the revenue recognition front. For instance, taking Sony-Ericsson as an example, the revenues that you recorded this quarter that you just reported, those would have been from shipments they made over what timeframe? Does it fall over two distinct autos?
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Howard Goldberg, InterDigital - President & CEO [84]
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No. That would have been over the most recent quarter, so that would have been for the quarter that we reported, the third quarter.
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Elias Lucia, ARcher Capital Partners - Analyst [85]
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I understand. Okay.
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Howard Goldberg, InterDigital - President & CEO [86]
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That is why we report so late because a lot of our reports come in subsequent to our licensees completing their quarter.
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Elias Lucia, ARcher Capital Partners - Analyst [87]
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Okay. On the NEC front -- just the last question I am sorry -- on the NEC front, any reason other then just greater demand for the 3G products for the big step-up in licensing from them in the last two quarters? And just to follow-on to that, is there any reason to believe that moderates a little bit, or was there some kind of an initial build that we should put into our expectations not to have anticipated the same level?
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Howard Goldberg, InterDigital - President & CEO [88]
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As to looking forward again, the information that we have in terms of looking forward, particularly on NEC and 3G, is what was generally available from various sources in the marketplace. But we are cautiously optimistic that there is emerging evidence of that long-awaited 3G upgrade cycle entering the early stages with early ramp likely in 2004 and then some end of 2004/2005, hopefully some meaningful pickup. So we are hopeful that that continues, and given that NEC is the leader out there right now or one of the main contributors, that will benefit from that.
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Richard Fagan, InterDigital - CFO & Exec. VP [89]
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NEC has extended their market success beyond Japan. They have been very successful in Europe thus far.
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Elias Lucia, ARcher Capital Partners - Analyst [90]
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Great. Thanks a lot.
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Operator [91]
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Bill Meskavitz (ph), Hartland Funds.
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Bill Meskavitz, Hartland Funds - Analyst [92]
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Congratulations on a great quarter. Maybe I missed this, but -- and also I guess the timely repurchase of, what was it 2 million shares?
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Howard Goldberg, InterDigital - President & CEO [93]
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Yes.
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Bill Meskavitz, Hartland Funds - Analyst [94]
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What are you going to be doing on that end?
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Howard Goldberg, InterDigital - President & CEO [95]
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You mean in terms of potential for additional share repurchase?
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Bill Meskavitz, Hartland Funds - Analyst [96]
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Correct.
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Howard Goldberg, InterDigital - President & CEO [97]
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That is really part of a larger issue. As you know, Bill, one of the range of the investments which are most attractive to us. It is always a consideration and continually being evaluated in light of the alternatives, and it is always under consideration for our Board. But that is where we are right now.
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Bill Meskavitz, Hartland Funds - Analyst [98]
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So are you saying you are going to review another authorization?
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Howard Goldberg, InterDigital - President & CEO [99]
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What I am saying is those things are always under evaluation. Whether or not you do it, depends on the attractiveness of alternatives and where you are relative to other things in your business.
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Bill Meskavitz, Hartland Funds - Analyst [100]
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Thank you. Congratulations.
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Operator [101]
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Tom Carpenter.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [102]
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Just a quick follow-up. On the 11/24 meeting, I belive they have put Judge Lynde (ph) to go over the sealing or unsealing of some of the documents between you guys and Ericsson? Do you expect a ruling that day or that week?
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Howard Goldberg, InterDigital - President & CEO [103]
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We have you back. Keep going.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [104]
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Did you hear the question?
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Howard Goldberg, InterDigital - President & CEO [105]
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I think (multiple speakers).
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Tom Carpenter, JJB Hilliard Lyons - Analyst [106]
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On 11/24, there is a hearing with Judge Lynde to hear your Nokia's notions on whether she should seal or keep sealed or unseal some of the documents from the Ericsson (inaudible). Do you expect a ruling that day or that week or just by the end of the year?
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Richard Fagan, InterDigital - CFO & Exec. VP [107]
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It is hard to predict. She does rule from the bench at times, and other times she issues orders promptly and other times it takes a little bit longer. So you never know.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [108]
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Based on the fact that you and Howard are lawyers, maybe you guys can give us some insight into this. Would it have any material impact on the arbitration if Judge Lynde would rule that those documents remain sealed?
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Richard Fagan, InterDigital - CFO & Exec. VP [109]
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I will tell you in my view there is nothing there that affects my view of our case.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [110]
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Okay. I was just curious --
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Richard Fagan, InterDigital - CFO & Exec. VP [111]
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Good question.
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Tom Carpenter, JJB Hilliard Lyons - Analyst [112]
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If a ruling comes out one way or the other, if that could potentially mean something to the arbitration case, hence your stock price?
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Richard Fagan, InterDigital - CFO & Exec. VP [113]
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As I say, it does not change my view of the case.
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Operator [114]
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Michael Belleny (ph), Conseco Capital.
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Michael Belleny, Conseco Capital - Analyst [115]
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I just had a quick question on deferred revenues, down 15 million sequentially. If you could just give some color on that and where we would expect that to trend next quarter?
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Howard Goldberg, InterDigital - President & CEO [116]
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Well, the deferred revenue is made up of a number of things, and as you know, it is based on -- the recognition of that deferred revenue is based on the exhaustion primarily of prepayments from licensees. You can look at the trend through the first three quarters by simply looking at the cash flow in terms of deferred revenue recognized and see what we have recognized (inaudible) throughout the quarters.
Our hope is that, quite frankly, we continue to keep producing (inaudible) because that means you are closer to either licensees becoming current and paying additional cash or being eligible to make additional prepayments. So that is where we are with that line.
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Michael Belleny, Conseco Capital - Analyst [117]
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Should I expect that to go up or down sequentially?
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Howard Goldberg, InterDigital - President & CEO [118]
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It depends. If you don't sign any new licensees or have licensees that have prepayments -- the ability to make additional prepayments, then it should go down as licensees sell product and exhaust credits that they have, as well as the reduction associated with paid off licenses that we have given in the past.
So, for example NEC, when we gave them a paid up for sales in Japan, they paid us 53 million. That is going down ratably about $3 million a quarter. You had some SAB 101 related deferred revenue that is about $1 million a quarter, so you've got a little over 4 million right there, and then you've got the reduction from prepayments. So absent any prepayments or other mechanisms from new licensees, you should expect it to go down, which is good news for this company because that means you are closer to more cash.
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Operator [119]
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There are no further questions at this time.
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Howard Goldberg, InterDigital - President & CEO [120]
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Well, thank you everyone for participating, and we look forward to talking to you and updating you at the next conference call. Have a nice day.
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Operator [121]
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Thank you for participating in today's teleconference. You may disconnect at this time.
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