Mschere re revised financials, taxes, and earnings
You are on to something looking at the change in receivables ($1.7m) and the change in the deferred revenue ($.2m) between the original and revised financials. The $1.9m increase in revenue would be much easier to explain, if all of the corresponding increase would have been to either the receivables or to the deferred account, but not both.
Had all of the increase been to the deferred account, then the increase in revenue would be attributable to a licensee who was earning some more of their deferred advance. Had all the increase been to accounts receivable, then the increase in revenue would be attributable to a licensee who had no remaining advance balance and is paying ongoing royalty each quarter. Even if IDCC received the $1.9m in cash in March '03, it would still have to be recorded as a receivable as of 12/31/02, the date of the financial statements.
If the $1.9m increase in revenue came from just one licensee, then it gets rather unusual. That would mean that a licensee had only a small $200,000 remaining deferred balance, and it was the fourth quarter sales that used-up their remaining deferred balance and also triggered an ongoing royalty payment of $1.7m. The other possibility is that there is more than one licensee involved in this $1.9m increase in revenue. One licensee had a deferred balance and there was a minor $200,000 adjustment to their balance based upon a subsequent report. A second licensee who had no unused deferred balance all of a sudden submits a late, and probably unexpected report, showing rather nice sales and a royalty due of $1.7m.
As for your other question of why all of the $1.9m increase in revenue did not drop to the bottom-line net income of $1.7m increase, your assumption is correct. It is due to the 10% foreign withholding tax, which equals the $200,000 difference as foreign tax expense. US income tax will begin to kick in once all of IDCC’s NOL carryforward is used-up. The following is some of my previous incremental revenue and income projections, including the US and foreign income tax interplay:
The following is a recap of my projected additional annual normalized revenues and earnings for 2003 based upon a very conservative .5% royalty rate for Nokia, Ericy, and Samsung. I personally feel that the royalty rate could be close to 1% for all three. However, let’s stay with the ultra conservative .5% royalty rate for the following projected incremental revenue amounts per year from my previous calculations:
Nokia $130 million
Ericy $100 million
Samsung $30 million
Total Annual Increased Revenues $260 million
Additional Operating Expenses -0-
Projected Net Income before Nokia, Ericy, and Samsung -0- Breakeven
Projected Net Income after Nokia, Ericy, and Samsung, but before income tax = $260m
Projected federal and state income tax at 38% (after all $150m of NOL carryforwards are fully utilized) = $260m –150m NOL carryforward = $110m taxable at 38% = $42m
(Note: IDCC does pay a 10% foreign withholding income tax on revenues. However this foreign income tax can be taken as a direct credit reduction from the US income tax owed. Therefore I estimate that of the total $42m projected income tax expense, that $26m will be paid as foreign income tax and the remaining $16m would be paid to the US tax authorities).
Projected Net Income = $218m ($260m pretax - $42m income tax)
Projected Earnings per Share (at 54 million outstanding shares) = $4.04 per share
The detailed calculations and assumptions as to how I got my projected annualized numbers for Nokia, Samsung, and Ericy as follows:
IDCC’s future cash flows and earnings are extremely difficult to project at this time due to major uncertainties regarding the Nokia royalty rate, the Ericy litigation, and the Samsung rate and updated license. Once these three major financial events are resolved, then the future projections will be easier. I think that all three of these disputes could be resolved fairly quickly, possibly within the next three to six months. Allow me to try and project just one year of normalized ongoing earnings once these three major uncertainties get resolved.
First let’s begin by assuming that IDCC is very near breakeven just based on what is already on the books. This is predicated upon the assumption that our current two major revenue-producing licensees NEC and Sharp will continue to do extremely well. IDCC did operate in the black during the first, second, and fourth quarters of 2002. Let’s also assume that our personnel and expense structure have been sufficiently ramped-up already in anticipation of increased business. Therefore, there should be very little additional increases in operating expenses associated with very significant increases in revenues.
Nokia’s recurring royalty obligation to IDCC began on Jan. 1 ’02 for virtually all of their wireless products under all standards. Samsung’s royalty obligation also began on Jan. 1, ’02 for their TDMA-based product sales, which now compose one half of Samsung’s sales and growing. Hopefully Samsung will update their license very soon to cover all standards pending resolutions with Ericy and Nokia. Never forget these facts as you evaluate IDCC’s current stock price, because the market has not really factored that fact in yet. The following are excerpts from Hilliard Lyons analyst, Tom Carpenter’s report on IDCC dated April 1, ‘02, and reaffirmed in his updated report dated Aug. 7, ‘02:
…”We believe IDCC's targeted royalty rate for 2G was 1-3% and the target for 3G was slightly below that range. In the following table we perform a sensitivity analysis on what the NOK royalty rate could mean for IDCC. Compared to IDCC's 2001 revenue of $58 million, the inclusion of licensing revenue from Nokia significantly impacts IDCC's revenue and earnings stream. As the exact royalty rate is the great unknown and the impact so large, we choose to be conservative in our projections. Therefore we bold what we view is a reasonable, and hopefully conservative estimate. We estimate that if Nokia pays IDCC one half of one percent royalty on the handsets that it manufactures and NOK maintains its current 35%-37% market share then IDCC could generate between $110 and $117 million in handset royalty revenue from Nokia during 2002. Any infrastructure revenue would be icing on the cake.
Royalty Nokia’s market share
Rate 33% 35% 37% 40%
0.25% $52 $55 $58 $63
0.50% $104 $110 $117 $126
0.75% $156 $165 $175 $189
1.00% $208 $221 $233 $252
1.25% $260 $276 $291 $315
1.50% $312 $331 $350 $378
$ in millions”
I have always used a 1% estimated royalty rate from Nokia in all my previous projections. However, let’s use Tom Carpenter’s very conservative .5% royalty rate and $110 million of recurring royalty from Nokia handset sales. Nokia has agreed in contract that they will pay recurring royalty on basestation infrastructure sales also. Nokia network sales were a third of their handset sales last year. However let’s again be conservative and only project less than a fifth of the handset royalty or $20 million for basestation royalty. This does not seem to be unreasonable based upon NEC’s $7 million pre-2002 3G infrastructure royalty to IDCC in the first quarter, and another $11m for 2002, for a total of $18m recorded from NEC in 2002. This would give us a very conservative $130 million of additional normalized earning stream from Nokia per year.
Ericy and Samsung are much more difficult to project. Let’s use the most recent NEC agreement as a possible precedent for Ericy. NEC will wind up paying IDCC $80 million for TDMA-based 2G technologies ($53m settlement + $27m initial prepaid). This $80m amount does not include anything for CDMA-based technologies or 3G technologies.
I think that Ericy owes IDCC well over $1 billion for 2G TDMA-based technology. But I am conservatively expecting that we will settle with them for around 3 times the NEC’s 2G TDMA-based total royalties of $80m = $240 million settlement amount + ongoing recurring royalty on all 2G TDMA-based and CDMA-based technologies + a 3G contract. The $240m projected settlement amount will probably be recorded into revenue over the next four years at $60 million per year, similar to NEC. The recurring royalty from Ericy’s handsets should be about a sixth of Nokia’s $110 million recurring royalties (35% Nokia’s handset market share versus 6% market share for Ericy), = $18 million projected handset royalty. Ericy’s basestation recurring royalty should be a little larger than Nokia’s, since Ericy leads Nokia in infrastructure sales. So let’s go with $22 million ongoing royalty for basestation infrastructure from Ericy, compared to $20m projected infrastructure royalty from Nokia. Therefore, I conservatively project Ericy’s additional normalized earnings stream to be $100 million ($60m settlement + $18m handsets + $22m infrastructure) per year for at least four years.
The Nov. 21 updated report of Hilliard Lyons analyst Tom Carpenter supports my above calculations as follows:
“We note that the following table does not include infrastructure revenue. Due to Ericsson’s and Nokia’s leading infrastructure market share positions (ERICY #1 and Nokia – top 3), infrastructure revenue for Nokia could be 20-25% of the total handset revenue while given ERICY’s infrastructure share it could easily be equal to or greater than ERICY’s potential handset revenue licensing revenue.”
The Samsung arbitration just involved 2G TDMA-based technologies and not narrowband CDMA technologies, since arbitration involves a contract disagreement over licensed technologies. However, Samsung will still need an updated license with IDCC. After Ericy is resolved, let’s assume IDCC negotiates an updated license with Samsung for ongoing recurring royalty on all 2G TDMA-based and CDMA-based technologies + a 3G contract. Samsung is currently capturing almost 10% of the handset market. Samsung’s recurring handset royalty should be about 27.5% of Nokia’s $110 million recurring royalty (35% Nokia’s handset market share versus 10% for Samsung) or about $30 million per year.
AI
