InterDigital Inc (IDCC)

[blueskywaves]

Here are some interesting numbers derived from the market share numbers:

1) IDCC estimates that Nokia owes $100M-$120M for 2002 handset royalties. Nokia sold 151M handsets in 2002 so that means that the IDCC estimate is based on approximately $0.66 to $0.79 in royalty per handset before any prepayment discounts.

2) IDCC also estimates that Samsung owes $22M-$27M for 2002 handset royalties. Samsung sold 41.7M handsets in 2002 so that means that the IDCC estimate is based on on approximately $0.53 to $0.65 in royalty per handset before any prepayment discounts.

3) While Samsung and Nokia can be expected to have similar royalties rates because of their respective MFL rights, keep in mind that Nokia's 36% market share is heavily skewed towards TDMA/GSM where it has 45%-50% of the global market compared to its CDMA market share of around 10%. As many here know, TDMA/GSM accounts for 80%-85% of the global market while CDMA accounts for 15%-20%.

Samsung's 10% market share is heavily skewed towards CDMA where it has 25%-30% of the CDMA market compared to less than 10% of the GSM market. Note, however, that 2002 was the first year that Samsung's GSM business became just as large as its CDMA business, clearly indicating that its GSM business is growing much faster than its CDMA business. Samsung's current market is also skewed towards the mid-range and high-end indicating higher ASPs than Nokia. For example, Samsung claims to have 45%-50% share of the US mid-range to high-end market in 2002.

4) Nokia, Samsung and Sony/Ericsson sold a combined 216M handsets in 2002 representing 52% of the total market. Going forward, I think it's fair to use a range of $0.53 to $0.79 in gross royalty per handset as an estimation tool. Net of assumed 20% prepayment discount, that would mean a range of $0.42 to $0.63 in net royalty per handset applied to approximately 52% of the total global market.
....
....

 
 PROJECTED ROYALTIES from 2002-2007 
 Nokia, Samsung and Sony/Ericsson ONLY 
 (assumption: global market grows 5%/year) 
 .... 
 YEAR          5%         $0.42/handset    $0.63/handset 
 .... 
 2002         216M              -                - 
 2003         227M          $  95M           $ 143M 
 2004         238M            100M             150M 
 2005         250M            105M             158M 
 2006         263M            110M             166M 
 2007         276M            116M             174M 
 .... 
 PROJECTED ROYALTIES from 2002-2007 
 Nokia, Samsung and Sony/Ericsson ONLY 
 (assumption: global market grows 10%/year) 
 .... 
 YEAR          10%        $0.42/handset    $0.63/handset 
 .... 
 2002         216M              -                - 
 2003         238M          $ 100M           $ 150M 
 2004         261M            110M             164M 
 2005         287M            121M             181M 
 2006         316M            133M             199M 
 2007         347M            146M             219M 
 

....
For a company with only 56M shares and an operating expense structure of $20M-$22M per quarter, these are heady numbers with plausible upside from the Japanese manufacturers like NEC, Sharp and Matsushita AND even after excluding Motorola and Siemens.

IDCC's current strategy of encouraging prepayments also means that it will be able to bank most of its future sales in DEFERRED REVENUES every 24 to 36 months, creating a fairly unique and high quality revenue stream.

GSM/TDMA will still be around by the end of the decade so it's possible that it will continue to generate royalties for IDCC on a declining basis from a very large base.