Gamco a later version of the Compelling Reasons document, which I believe was my very last version, as follows:
Compelling Reasons for Owning IDCC Stock (Summary) June 13, 2003
1. IDCC has “essential” and “commercially important” patents in all modes of the 3G standards including DECT, EDGE (IS-136), CDMA2000, WCDMA-FDD, WCDMA-TDD, and TD-SCDMA. InterDigital also has essential IPR in all the 2G (GSM, TDMA, TETRA, PDC/PHS, CDMAOne/IS-95), 2.5G (GPRS, EDGE, CDMA2000 1X), and the wireless LAN 802 standards. Therefore, any company that makes a standard-compliant wireless phone/device should owe royalty to IDCC.
2. The Phase 2 part of the Nokia partnership began on Jan. 1, 2002. Phase 2 will eventually involve ongoing/recurring royalties payments to IDCC on all handsets/devices and infrastructure sold by Nokia, the world’s leading wireless phone manufacturer (over 35% market share), and also a leader in wireless infrastructure equipment. The finalized royalty rate for 2G/2.5G GSM/GPRS and other TDMA-based standards will be based upon the royalty framework established in the recent Ericy license. IDCC has publicly estimated Nokia’s royalty for these standards alone to be $100m to $120m for 2002, and $80m to $90m per year for 2003 and 2004. These projected amounts do not include a yet to be determined 3G rate or 2G/2.5G CDMA rate for Nokia for which they have already licensed.
3. Samsung is licensed for 2G/2.5G TDMA-based standards and will probably pay whatever the finalized royalty rate that Nokia pays by virtue of their MFL clause effective Jan. 1, 2002. IDCC has publicly estimated that this should amount to $22m to $27m for 2002, and $20m to $24m per year for 2003 and 2004.
4. Ericsson litigation is finally resolved. Ericy agreed to a $34m settlement for prior usage of 2G/2.5G TDMA-based standards through 2002. Ericy also agreed to pay $6m per year for the next four years for 2G/2.5G TDMA-based infrastructure. Sony/Ericy paid a $26m two-year advance for 2G/2.5G TDMA-based handsets. These amounts do not include a possible future 3G contract or a 2G/2.5G CDMA license.
5. Almost $100 million in cash (about $2 per share) at 3/31/03, virtually no debt, and significantly increased the engineering staff since 2000. IDCC has publicly stated that they expect to receive between $360m to $430m of additional cash within the next 12 months from Nokia, Samsung, Ericy, and Sony/Ericy.
6. More 3G contracts should be following Matsushita with their $19.5 million advance royalty, and Sharp with their $11 million advance fairly soon. NEC with their $19.5 million royalty advance, Japan Radio, Tantivy, and Hop-On all signed 3G licenses in 2002. NEC settled the arbitration dispute over past 2G royalties for $53 million, and in addition to the settlement amount, signed a new 3G contract with a royalty advance of $19.5 million.
7. More 2G licensing momentum should be following the Ericy resolution in 2003 led by Sony/Ericy with their $26m 2G advance. Many other 2G infringers should be licensing with IDCC fairly soon. The triggers for signing these other companies will be the Ericy 2G resolution, and/or the need for 3G licenses. In June 2003, IDCC renewed the 2G PDC/PHS license with Sharp, entered into a new 2G license with Research In Motion, and entered into a new 2G license for PHS with Nakayo Telecom.
8. Recurring royalties are improving dramatically. The year 2002 marked the first time in which IDCC recorded earned revenue from some of the 3G prepaid advance royalties, in addition to having a significant increase in 2G recurring royalties. The Ericy resolution in 2003 has produced another 2G ongoing revenue stream of approximately $4m to $5m per quarter. Rate finalizations for 2G with Nokia and Samsung should generate at least $25m per quarter in additional ongoing revenue streams beginning in 2003 according to IDCC’s public projections.
9. Unprecedented 10 year chip agreement with Infineon, a world leader in wireless chips. IDCC and Infineon expect to complete the full multi-mode 3G FDD protocol stack no later than the first quarter of 2004. The dual-mode 2G GSM/GPRS and 3G FDD chip should be ready for the commercial market in 2004. IDCC is also developing other TDD-based products for the emerging 3G market.
10. The WTDD mode, used in conjunction with FDD, is most likely to be the dominant 3G technology according to most industry experts and wireless companies. The benefits of WTDD include superior asymmetrical data-handling capabilities, spectrum efficiencies of 20% - 35% that will significantly allow for more system users, and more/richer 3G applications at lower incremental cost savings of 25% to 50%. IDCC owns substantial essential IPR in WCDMA and has partnered with Nokia and Infineon to further develop this technology.
11. IDCC is very actively involved in the various standard bodies and worldwide organizations, such as, the UMTS Forum, the GSM Association, the TD-SCDMA Forum, and the TDD Coalition, which promote and inform the wireless industry. These organizations are composed of the leading equipment manufacturers, chip producers, telecom operators, software developers, wireless IPR owners, and other interested suppliers and parties. This active involvement further enhances IDCC’s growing reputation as a leading company within, and a major supplier of enabling technologies to the wireless industry.
12. Four new analysts have initiated coverage of IDCC since 2001 with probably others to follow. IDCC is getting more press in the mass media, including Inc magazine’s new “Innovation 50” ranking and a recent article in the Wall Street Journal. Additionally institutional ownership in IDCC has recently increased significantly from under 20% to over 30%.
13. IDCC is strategically positioned within a dynamic industry, which is projected to generate astronomical future revenues, and offers superior value based upon a highly probable near-term and long-term earnings explosion.
Disclaimer: The following supporting detail for the Compelling Reasons for Owning IDCC Stock is based upon objective information as much as possible including press releases, SEC filings, analysts' reports, Conference Calls, published articles, and my personal conversations with IDCC's Investor Relations (IR) personnel. However, the following information is not entirely objective or totally unbiased, because a very significant portion of my personal investment portfolio is in InterDigital stock. I have been an individual shareholder of IDCC since the early 1990s, but I am not an employee, agent, or official representative of InterDigital whatsoever.
In addition, I have included some material from analysts’ reports in this document. Since analysts are continually updating their reports, the included analyst material might become dated in the future and not necessarily reflect their ongoing views or opinions.
Ronny Marchman, CPA
Compelling Reasons for Owning IDCC Stock (Detail) June 13, 2003
1. IDCC has “essential” and “commercially important” patents in all modes of the 3G standards including DECT, EDGE (IS-136), CDMA2000, WCDMA-FDD, WCDMA-TDD, and TD-SCDMA. InterDigital also has essential IPR in all the 2G (GSM, TDMA, TETRA, PDC/PHS, CDMAOne/IS-95), 2.5G (GPRS, EDGE, CDMA2000 1X), and the wireless LAN 802 standards. Therefore, any company that makes a standard-compliant wireless phone/device should owe royalty to IDCC. .
InterDigital Communications (IDCC) is a wireless company, which has over 2,500 issued and pending US and foreign patents in both TDMA/GSM and CDMA. In fact, IDCC is publicly claiming to own both “essential” and "commercially important" patents in ALL modes of the 2G and 3G standards. IDCC officials have been saying that they have “essential” and “commercially important” patents in ALL 3G modes since November 1999 when Howard Goldberg, attorney and current CEO first made this claim in an official press release. IDCC officials have repeatedly reiterated this claim in the 10-Q quarterly reports and 10-K Annual Reports filed with the SEC, and also in conference calls and annual shareholder meetings. With the resolution of the Ericy litigation in March 2003, IDCC now includes all the 2G standards in their claims to essential IPR as well. Only a very few companies, at most, can make this particular claim. From the latest 10K:
"We believe that we have a number of patents or patents applied for that are essential to the implementation of all the technology specifications incorporated in the current 2G and 3G standards. Those standards include, but are not limited to, TIA/EIA-54/136, narrowband CDMA (TIA/EIA-95 and similar standards), WCDMA (both FDD and TDD), CDMA2000, GSM, PDC, PHS and DECT. We also expect that many of our patents or patents that issue from existing applications will be commercially important in the actual 2G and 3G product implementations…We also believe that our patents have application beyond the digital cellular environment, including wireless LAN.”
InterDigital has been instrumental in developing the 3G wireless standards for the ITU and the 3GPP. At the end of 2002, IDCC had submitted more than I,000 separate contributions to the 3G standards, and over 60% of those contributions have already been accepted into the actual standards. Howard Goldberg, CEO of InterDigital and an attorney, was quoted in an April 2002 article from the Philadelphia Business Journal as follows: “Anyone implementing 3G would be utilizing our inventions.” At the 2002 annual stockholder meeting, Mr. Goldberg responded to a question about Qualcomm’s claims to the WCDMA market by stating, “we’re essential also and we’ll receive royalty payments on 100% of all WCDMA 3G phones, which are expected to comprise 75% to 80% of the 3G market.”
IDCC also has substantial IPR even in a TDD standard option, TD-SCDMA, advocated by the Chinese. IDCC was elected as a member at large of the TDS-CDMA forum, and then immediately selected into the highest echelon of this organization as a Council Member. The following excerpts are from an IDCC press release dated 01/17/02:
“The TD-SCDMA Forum, organized in September 2000 by the China Mobile Communications Association, was created to promote the development and advancement of TD-SCDMA technology and applications within China and throughout the world. The Forum, with more than 300 members, provides a platform for worldwide exchange to communicate ideas or developments that impact TD-SCDMA technology.
Our selection as a Council Member reflects industry recognition of InterDigital's strong position as a pioneer of Time Division Duplex (TDD) technology. With almost 500 contributions to Third Generation (3G) standards to date, InterDigital is one of the wireless industry's leaders in defining the TDD standard for the 3G wireless market….The 3G WCDMA standard incorporates both TD-SCDMA and WTDD, along with FDD technology. The two forms of TDD technology have strengths in different deployment scenarios for different market needs.….TD-SCDMA complements and fits the evolution of GSM networks….InterDigital, with its strong TDD technology focus, is well positioned to deliver TDD solutions worldwide. At least 75% of the core TDD technology we are developing can be employed in either TD-SCDMA or WTDD applications. Much of this core TDD technology is incorporated into contributions accepted by worldwide standards organizations.”
In November ’02 the Chinese government announced that they would allocate twice as much spectrum for TD-SCDMA than for any other of the 3G standards.
Who else says that IDCC has what they claim in 3G? Answer: Irwin Jacobs of Qualcomm, PA consulting, and Sam Omatseye, investment research journalist.
Irwin Jacobs of Qualcomm included InterDigital as one of the specific WCDMA contributors that would impact their IPR claims:
…”Jacobs allowed that there are contributions to the WCDMA spec from other manufactures that will impact their IPR claims include DoCoMo, Ericsson, Matsushita, Oki, Siemens and Interdigital.”
PA Consulting, a premier consulting firm from the United Kingdom, also specifically mentioned InterDigital as a major IPR owner of WCDMA patents:
…"The W-CDMA IPR owners such as Qualcomm, InterDigital, Ericsson, Motorola and Lucent among others claim to have the majority of essential 3G patents and PA estimates they claim royalties of about 10% of the 3G BTS factory gate price compared to about 5% royalty rates for GSM BTS." (www.paconsulting.com/innovation/mag/articles/3gbts.asp).
Sam Omatseye, renowned investment journalist, stated the following in his article on 3G patents: Patent count doesn't add up by SAM OMATSEYE • May 27, 2002
”Truth may be the chief casualty in the claims by three wireless titans as to which holds the most essential patents for wideband CDMA, the air-interface technology that provides speed for multimedia services like picture and music downloads and video on demand…..San Diego-based Qualcomm Inc., Helsinki, Finland-based Nokia Corp. and Stockholm, Sweden-based L.M. Ericsson each claim to have the most patents. A fourth company, InterDigital Corp., is the only other player with a healthy number of patents in this area, but it said it has no interest in entering the fray.” http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=95142
Who else says that IDCC has what they claim in 3G? Answer: Nokia, Infineon, Matsushita, Sharp, NEC, Japan Radio, Tantivy, and Hop-On have all licensed with IDCC for 3G standards thus far.
What about 2G/2.5G licensing? With the resolution of the Ericy litigation in March 2003, IDCC states that they have now licensed 70% of the current TDMA/GSM/GPRS 2G/2.5G handset market and 50% of the infrastructure market. The Ericy resolution should also be extremely helpful in licensing the remainder of the 2G market, who have not yet licensed.
EDGE is now being listed as another 2.5G standard that IDCC has important IPR in as evidenced by the following statement from a Feb. 21, ‘02 press release: “InterDigital has a strong portfolio of patented TDMA inventions, including GSM/GPRS/EDGE, and CDMA inventions, which it licenses worldwide.” RIMM, maker of the popular Blackberry handheld device, just licensed with IDCC in June 2003 and included the EDGE standard in addition to the GSM and GPRS standards.
InterDigital is not only very active in the 3G standard bodies, but is also very active in other standard groups. IDCC’s IPR applies to the fixed arena as well as mobile. Brian Kiernan of InterDigital was the Vice-Chairman of the IEEE 802.16 fixed wireless standards group. He was elected in November of '00 and served as Vice-Chairman until March '02. Another IDCC employee is the current Chair of an IEEE 802.16e Task Group. InterDigital also has representatives on various working groups and committees within the IEEE 802.11 unlicensed spectrum standards group, which includes wireless LANs and Bluetooth.
2. The Phase 2 part of the Nokia partnership began on Jan. 1, 2002. Phase 2 will eventually involve ongoing/recurring royalties payments to IDCC on all handsets/devices and infrastructure sold by Nokia, the world’s leading wireless phone manufacturer (over 35% market share), and also a leader in wireless infrastructure equipment. The finalized royalty rate for 2G/2.5G GSM/GPRS and other TDMA-based standards will be based upon the royalty framework established in the recent Ericy license. IDCC has publicly estimated Nokia’s royalty for these standards alone to be $100m to $120m for 2002, and $80m to $90m per year for 2003 and 2004. These projected amounts do not include a yet to be determined 3G rate or 2G/2.5G CDMA rate for Nokia for which they have already licensed.
Nokia, the undisputed king in wireless phones and fast becoming the leader in network equipment, signed a multi-year partnership contract in Feb. 1999 with IDCC involving different phases. InterDigital is the only company Nokia has partnered with to help them develop their 3G systems and phones (Nokia’s complete WCDMA-TDD suite). Doesn't that say volumes about what IDCC has to offer in 3G?
Nokia paid $31.5m to IDCC in 1999 for paid-up rights to virtually all of IDCC's patents through 2001. Nokia is no longer paid-up as of Jan. 1, 2002, except for certain TDD technology. An additional $58m paid to IDCC for engineering services will give Nokia virtually paid-up rights to InterDigital’s 3G TDD IPR. However, IDCC actually owns all the TDD IPR jointly developed with Nokia, and InterDigital can license it to others on a royalty-bearing basis. The total phase 1 licensing revenues from Nokia amount to almost $90m.
The second part of the contract, phase 2, began on Jan. 1, 2002. During phase 2 IDCC will receive significant ongoing/recurring royalty from Nokia. Nokia will pay ongoing/recurring royalty on all products containing IDCC IPR, whether 2G (TDMA, GSM, PDC/PHS, TETRA), 2.5G (GPRS, EDGE, CDMA2000 1X and 2X), or 3G (WCDMA-FDD, CDMA2000 3X, DECT, EDGE), excluding TDD. These products would include handsets, PDAs, laptops, and basestations.
Nokia needs to agree to a royalty rate for phase 2, but the royalty calculation will go back to Jan.1 '02 whenever a rate gets finalized. The Ericy resolution now provides the framework for establishing Nokia’s royalty rate for the 2G/2.5G TDMA-based standards including GSM, GPRS, and TDMA. The companies are in formal negotiation to finalize the royalty rate for these standards based upon the Ericy framework, and one of IDCC’s analysts thinks that it will be finalized this summer. If an agreement cannot be reached, then arbitration would be the next step to establish the royalty rate.
Nokia sold 152 million handsets in 2002. Nokia’s revenue from networks and infrastructure was 28% of its revenue from handsets in 2002. IDCC conservatively projects in the 10K that Nokia’s royalty amount for 2002 on the 2G/2.5G TDMA-based standards should be between $100m to $120m, and that royalties for these same standards on a prepaid discounted basis for 2003 should be between $80m to $90m. I estimate that Nokia’s undiscounted royalty rate for these standards to be about .5% (.005), and their prepaid discounted rate to be a little above .4% (.004).
Nokia is licensed for and will need to agree to a 3G royalty rate excluding single-mode TDD products, which will be paid-up. However dual–mode products that include TDD should be royalty-bearing to IDCC. Also Nokia is licensed for and will need to agree to a 2G/2.5G CDMA royalty rate. These rates may be established by agreement between the parties. Another royalty framework with Nokia could also be triggered by a future 3G and CDMA agreement with Sony/Ericy, or by some other specified leading manufacturer.
3. Samsung is licensed for 2G/2.5G TDMA-based standards and will probably pay whatever the finalized royalty rate that Nokia pays by virtue of their MFL clause effective Jan. 1, 2002. IDCC has publicly estimated that this should amount to $22m to $27m for 2002, and $20m to $24m per year for 2003 and 2004.
Samsung entered into the BCDMA alliance with IDCC in 1996, with a total payment of $35m. That license covered BCDMA products, and some of the royalty was an upfront advance on 2G TDMA-based standards. Samsung quit reporting their sales of TDMA-based products to IDCC in 2001, and they still had $7m of prepaid advance remaining at the end of ’01. In February of ’02, IDCC entered into arbitration against Samsung, claiming that Samsung could possibly owe over $100m royalty from unreported sales, if Samsung’s MFL provision did not apply to the Nokia contract. The arbitration did not encompass narrowband CDMA products, because Samsung was not licensed for these standards.
The arbitration panel ruled in Dec. ’02 that Samsung did have an MFL rights in their license to use Nokia’s P1 royalty rate. The arbitrators decided that Samsung owed a half million dollars more for the period through Dec. 31, 2001, which IDCC recorded in the fourth quarter of ’02. That leaves Samsung with a prepaid balance of $6.5m beginning Jan. 1, 2002 that will apply to all 2G/2.5G TDMA-based standards, such as GSM, GPRS, and TDMA.
There is now a definite connection between a Nokia royalty rate and a Samsung royalty rate. The arbitration ruling also tied Samsung’s royalty rate to the yet to be determined Nokia P2 royalty rate, which in turn is tied to the Ericy resolution. Both Nokia and Samsung are legally accruing royalty to IDCC as of Jan. 1, 2002 at a rate that might be finalized this summer. The Ericy resolution now provides the framework for establishing Nokia’s and Samsung’s royalty rate for all the 2G/2.5G TDMA-based standards including GSM, GPRS, and TDMA. The companies are in formal negotiation to finalize the royalty rate for these standards, and one of IDCC’s analysts thinks that it will be finalized this summer. If an agreement cannot be reached, then arbitration would be the next step to establish the TDMA-based 2G/2.5G royalty rate with Samsung. From IDCC’s SEC form 8K filed on Dec. 26:
“Also, pursuant to Samsung's election regarding the Nokia patent license agreement under its MFL rights, Samsung's royalty obligations for sales of 2G and 2.5G TDMA wireless communications products commencing January 1, 2002 will be determined in accordance with the terms of the Nokia patent license agreement...When a royalty rate is determined, the starting point for calculating Samsung’s royalty obligation will be January 1, 2002.”
Samsung is reported to have sold about 20 million GSM/GPRS handsets in 2002 to which the royalty to IDCC will apply. IDCC publicly and conservatively estimates that Samsung’s royalty amount for 2002 on the 2G/2.5G TDMA-based standards should be between $22m to $27m, and that royalties for these same standards on a prepaid discounted basis for 2003 should be $20m to $24m, or about $5m to $6m ongoing royalty per Quarter. I estimate that Samsung’s undiscounted royalty rate for these standards to be about .5% (.005), and their prepaid discounted rate to be slightly above .45% (.0045), approximately the same as Nokia.
The above amounts do not include CDMA standards or 3G standards. Samsung will need to license for these standards in the future. Nokia is already licensed for these standards, but Samsung is not.
4. Ericsson litigation is finally resolved. Ericy agreed to a $34m settlement for prior usage of 2G/2.5G TDMA-based standards through 2002. Ericy also agreed to pay $6m per year for the next four years for 2G/2.5G TDMA-based infrastructure. Sony/Ericy paid a $26m two-year advance for 2G/2.5G TDMA-based handsets. These amounts do not include a possible future 3G contract or a 2G/2.5G CDMA license.
Ericy and Sony/Ericy just licensed for 2G/2.5G TDMA-based standards including GSM, GPRS, and TDMA in March 2003. This finally resolved a ten-year litigation suit between IDCC and Ericy. The royalty rate established in this agreement provides the framework for Nokia and Samsung’s royalty rate for these standards also, according to MFL provisions in the Nokia and Samsung licenses.
Ericy agreed to pay $6m per year for the next four years on 2G/2.5G infrastructure. This amount will be earned on a straight-line basis at the rate of $1.5m per Quarter. Sony/Ericy agreed to a settlement of $34m, net of 10% insurance reimbursement, for past handset royalties through 12/31/02. All of this settlement amount was recorded as revenue in the first quarter of 2003, and is to be received in cash installments within twelve months.
Sony/Ericy also prepaid a two–year advance of $26m for 2003 and 2004 to cover anticipated sales of 2G/2.5G TDMA-based handset sales. IDCC will earn the advance as the applicable handsets are sold. IDCC recorded $2.9m of earned revenue from this advance in the first quarter of 2003. The infrastructure royalty of $1.5m per quarter coupled with $3m to $3.5m handset royalty per quarter should produce an ongoing revenue stream of $4.5m to $5m per Quarter from Sony/Ericy.
The preceding amounts do not include CDMA standards or 3G standards. Sony/Ericy will need to license for these standards in the future. IDCC was granted an option by Ericy for a reference design license and support for Ericy’s 2G/2.5G/3G GSM, GPRS, and WCDMA platforms. A CDMA or 3G license with Sony/Ericy would again trigger a royalty rate framework for Nokia on these standards.
There is now a definite connection between the Ericy royalty rate, and the yet to be finalized Nokia royalty rate and a Samsung royalty rate. On Dec. 26 the arbitration with Samsung was finalized, and the ruling tied Samsung’s royalty rate to the yet to be determined Nokia rate, which is in turn tied to the Ericy litigation. Both Nokia and Samsung are legally accruing royalty to IDCC as of Jan. 1, 2002 at a rate that will be determined based upon the Ericy resolution. When the royalty rate is finally determined the calculation of royalty due from both Nokia and Samsung will be calculated retroactively back from the beginning of 2002. From the March 2003 Ericy press release:
“The license agreements with Ericsson and Sony Ericsson establish the financial terms necessary to define the royalty obligations of Nokia Corporation (Nokia) and Samsung Electronics Co. Ltd. (Samsung) on 2G GSM/TDMA and 2.5G GSM/GPRS/TDMA products under their existing patent licensing agreements with ITC. Under the most favored licensee (MFL) provision applicable to their respective patent licenses, both companies are obligated to pay royalties on sales of covered products from January 1, 2002 by reference to the terms of the Ericsson and Sony Ericsson licenses. The MFL terms include provisions for a period of review, negotiation, and dispute resolution with regard to the determination of royalty obligations of Nokia and Samsung.”
The Ericy litigation could have even more repercussions than just upon the Nokia and Samsung royalty rates. It was reported that an IDCC official said at the Annual Shareholder Meeting in 2002 that an Ericy resolution would provide the framework for Motorola to license. I have speculated that IDCC might have many memos of understanding with other significant infringers predicated upon an Ericy resolution. Why else has IDCC not sued other infringers, such as Phillips, when they got the favorable German ruling upholding IDCC’s patent validity against Phillips charges of invalidity? It would also seem inconceivable to me that IDCC has not properly protected itself from statute of limitations running out by not having memos of understanding with other infringers. However, it is IDCC’s stated policy not to disclose memos of understanding. Finally some of our existing licensees might have contingent-type license provisions tied to the Ericy litigation. Possibly some existing licensees might even be paying reduced royalty to IDCC until Ericy gets resolved. This paragraph does involve a good bit of speculation on my part.
5. Almost $100 million in cash (about $2 per share) at 3/31/03, virtually no debt, and significantly increased the engineering staff since 2000. IDCC has publicly stated that they expect to receive between $360m to $430m of additional cash within the next 12 months from Nokia, Samsung, Ericy, and Sony/Ericy.
Nokia has helped fund, through an engineering service contract, InterDigital’s 3G ramp-up expenses. Engineering personnel were increased 120% over the last three years from 100 at the start of 2000 to about 220 engineers at the end of 2002. IDCC engineers are working jointly with Nokia engineers to develop Nokia’s complete TDD suite, which should be finished during the second half of 2003. Also InterDigital engineers are working jointly with Infineon engineers in the development of the 3G FDD system on a chip, which should be finished during the first half of 2004. IDCC engineers are working independently on several other 3G projects and products. InterDigital expects that engineering services will provide another important source of current and future revenues in addition to chip/product sales and licensing royalties.
IDCC has been able to maintain a cash balance of approximately $100m for a couple of years, while significantly increasing the engineering staff and incurring other 3G related expenses. The cash balance of $95m as of 03/31/03 does not even include NEC’s third 2G settlement installment of $13m, or a Sony/Ericy prepaid handset advance for 2003 and 2004 of $26m, both of which were received in the second quarter of 2003. Nor does the March 31 cash balance include any of the $34m Ericy 2G settlement, which IDCC began receiving in the second quarter and expects to receive a total of $16m of the settlement amount in cash during the remainder of 2003. Therefore, I estimate that IDCC’s current cash balance is now significantly over $100m. In addition, IDCC should receive a 2G PDC/PHS renewal from Sharp of $17.5m in the third quarter of 2003, and the fourth and final $13m 2G settlement from NEC at the end of the fourth quarter.
However, the tremendous cash inflows will begin when Nokia and Samsung 2G/2.5G TDMA-based royalty rates are finalized. Both will need to pay royalty at undiscounted rates for 2002, and then prepaid discounted advances for 2003 and 2004. The following are quotes from Rich Fagan, CFO, from the Ericy resolution conference call of March 17, 2003:
“By our estimates the initial cash that we expect to receive from Ericy and Sony/Ericy within 12 months is $60 to $65 million…So, from a cash standpoint, we estimate we could receive $300 million to nearly $370 million dollars from Nokia and Samsung, if we just combine the 2002 royalty obligations and initial royalty prepayments for 2003 and 2004. If you take what I’ve just covered, the potential aggregate cash flow from Ericy, Sony/Ericy, Nokia, and Samsung in the next twelve months could conceivably be $360 to $430 million dollars with additional upside potential. Those are impressive numbers.”
6. More 3G contracts should be following Matsushita with their $19.5 million advance royalty, and Sharp with their $11 million advance fairly soon. NEC with their $19.5 million royalty advance, Japan Radio, Tantivy, and Hop-On all signed 3G licenses in 2002. NEC settled the arbitration dispute over past 2G royalties for $53 million, and in addition to the settlement amount, signed a new 3G contract with a royalty advance of $19.5 million.
IDCC has “essential” and “commercially important” patents in ALL modes of the 3G standard. Therefore, anyone and everyone who makes a 3G standard-compliant phone or other wireless device will need to obtain a license from IDCC. 3G is rapidly approaching; CDMA 2000 IX and GPRS are already out and true 3G network infrastructure is beginning to be shipped, tested, and implemented. Docomo’s 3G FOMA (WCDMA) network is up and running in Japan. Hutchison’s 3G WCDMA network is now operational in the United Kingdom and in Italy. Other WCDMA networks are scheduled to be operational with available 3G handsets in Europe and other Asian countries by the end of 2003.
InterDigital signed two 3G licenses in 2001 with Matsushita and Sharp. Excerpts from the press releases announcing these two 3G licenses as follows:
From a press release on April 4, 2001 announcing the updated license of Matsushita, who manufactures the Panasonic brand: “Matsushita signed a worldwide royalty-bearing TDMA patent license with ITC in 1994 and is now licensed under both ITC's CDMA and TDMA patents for equipment compliant with the following TDMA and CDMA-based standards: IS- 54/136, PDC, PHS, GSM, EDGE, IS-95, W-CDMA, and CDMA-2000, and all other IMT-2000 standards.”
“INTERDIGITAL ENTERS INTO WORLDWIDE PATENT LICENSE WITH SHARP; Agreement Covers 2G, 2.5G and All Modes of 3G Products
King of Prussia, PA, September 4, 2001 . . . InterDigital Communications Corporation (Nasdaq: IDCC) today announced that its subsidiary, InterDigital Technology Corporation (ITC), has entered into a worldwide royalty-bearing patent license with Sharp Corporation. The agreement covers wireless handsets, modules and communications cards built to GSM, GPRS, IS-95 (including the CDMAOne and HDR technology specifications) and 3G standards, including both CDMA and TDMA based specifications. Under the agreement, ITC will receive a royalty on each licensed product sold by Sharp.”
IDCC signed four new 3G licenses in 2002 with NEC, Japan Radio, Tantivy, and Hop-On. During Jan. ’02 Japan Radio Company signed a new 3G contract. Also in January, NEC signed a new 3G contract as part of the arbitration settlement. The NEC settlement involves $53 million for past disputed amounts. More importantly a new 3G contract was signed with NEC, with an upfront royalty advance of $19.5 million received in the second quarter of 2002. This advance is in addition to the $53 million 2G settlement. Once the advance is used-up, NEC will pay recurring royalty as it sales licensed products. Through the fourth quarter of 2002, NEC had already used and IDCC had earned $18.3m of the $19.5m advance. The remainder of the advance should be easily used-up/earned in the first quarter of 2003. The NEC contract now encompasses all the various wireless standards and all types of wireless products. NEC is Japan's largest wireless company, and is rapidly becoming a world leader for 3G in partnership with Siemens. From the press release announcing the NEC updated license as follows:
“1/16/2002 9:22:00 AM - InterDigital and NEC Sign Global 3G Patent License Agreement and Settle Outstanding 2G Patent Licensing Dispute
KING OF PRUSSIA, Pa., Jan 16, 2002 (BUSINESS WIRE) -- InterDigital Communications Corporation (NASDAQ:IDCC), a leading developer and enabler of advanced wireless technologies and product platforms, today announced that its subsidiary, InterDigital Technology Corporation (ITC), has entered into a royalty-bearing license agreement with NEC Corporation of Japan for sales of wireless products compliant with all Third Generation (3G) and narrowband CDMA standards. Under the 3G agreement, ITC will receive a royalty on each licensed product sold by NEC. The licensed products include infrastructure, terminal units, communication cards and other mobile devices compliant with Third Generation and narrowband CDMA standards. NEC will pay ITC an advance royalty of $19.5 million.
Once that advance is exhausted, NEC will be obligated to pay additional recurring royalties to ITC as it sells licensed products. In addition, NEC and ITC agreed to settle the outstanding 1995 2G TDMA license agreement dispute for the payment by NEC of $53 million to ITC. The $53 million is in addition to the royalty advance previously paid by NEC under the 1995 agreement.”
NEC was one of IDCC’s major revenue sources in 2002 generating over $30m of licensing revenues. These licensing revenues were composed of $12.4m for the 2G settlement for not quite a full year, $7.8m for 3G infrastructure prior to 2002, and $10.1m of 3G infrastructure for 2002. NEC will be selling 3G handsets in 2003, which will trigger increased revenues in addition to 3G infrastructure. NEC has begun delivery on a 2 million 3G handset order with Hutchison for a European 3G launch, and has just started selling dual-mode 2G/3G handsets to Docomo in Japan.
One of IDCC’s Goals for 2002 was to expand the number and scope of strategic relationships. IDCC signed a multi-faceted strategic agreement with Tantivy in Nov. ‘02. First IDCC acquired exclusive rights to over 200 of Tantivy’s CDMA2000 patents, some of which are believed to be “essential” for the manufacture of CDMA2000 products. Secondly IDCC acquired non-exclusive rights to Tantivy’s smart antenna patents for the TDD standard. Third Tantivy signed a royalty-bearing 3G license with IDCC. The last area of the Tantivy agreement dealt with IDCC marketing and licensing Tantivy's technology and products in the Far East. Evidently IDCC will receive some type of fee for this service.
The Tantivy patents appear to establish some good synergy in possibly filling some of IDCC’s technology gaps. IDCC does claim some essential patents for CDMA2000, but this is probably the company’s weakest 3G standard IPR-wise. Perhaps these essential CDMA2000 patents of Tantivy combined with IDCC's own essential CDMA2000 patents will be enough to get the major CDMA2000 producers to license with InterDigital. Anything that strengthens IDCC’s position in CDMA2000 will be extremely beneficial to the company, as this standard will achieve commercial mass before WCDMA and TD-SCDMA.
The second technology gap in IDCC's IPR that Tantivy patents may fill is in TD-SCDMA. This standard is now very much in play with the very recent spectrum allocation in China, which greatly encourages the deployment of the TD-SCDMA standard. IDCC has stated that 75 to 80 percent of our TDD IPR also applied to TD-SCDMA. One area that is critical for TD-SCDMA is smart antenna technology. IDCC has some IPR in smart antenna technology. However additional smart antenna IPR from Tantivy, should further enhance IDCC’s already strong position for the TD-SCDMA standard.
It appears that IDCC obtained all these benefits by paying a very reasonable sum of 1 and a half million dollars, plus some future prorata sharing up to $24m on the exclusive rights to the CDMA2000 essential patents. But prorata sharing is only for any new IDCC licenses, which specifically include the Tantivy patents in the license agreement. IDCC pays Tantivy more, only if their patents are providing additional licensing benefits to InterDigital. The Tantivy patents were instrumental in IDCC obtaining its next 3G license with Hop-On in December ’02. From the Hop-On press release as follows: “Under the agreement, ITC has granted Hop-On a worldwide, non-exclusive license under InterDigital's patents to develop, manufacture and sell wireless devices built to Second Generation (2G and 2.5G) TDMA standards, including IS-54/136, GSM, GPRS, EDGE and others; and all Third Generation (3G) standards, including FDD and TDD for WCDMA, TD-SCDMA, and CDMA2000.”
"It further validates InterDigital's position as a recognized developer and contributor of essential technology while also demonstrating the positive impact of our recent acquisition of exclusive patent licensing rights from Tantivy Communications, particularly as it relates to CDMA2000."
The only other time that IDCC acquired additional technology is when they purchased Donald Schilling's company, SCM Mobilecom. At that point IDCC only had TDMA patents, but no CDMA patents. After IDCC acquired Schilling's company, IDCC filled the technology gap with a strong foothold in CDMA. And we all know where that CDMA foothold eventually led. Hopefully the Tantivy IPR will fill similar gaps and will continue to be extremely beneficial for IDCC also. IDCC has indicated that they may use some of the large expected cash inflows to fund other M & A activity, possibly acquiring additional strategic IPR similar to the Tantivy deal.
7. More 2G licensing momentum should be following the Ericy resolution in 2003 led by Sony/Ericy with their $26m 2G advance. Many other 2G infringers should be licensing with IDCC fairly soon. The triggers for signing these other companies will be the Ericy 2G resolution, and/or the need for 3G licenses. In June 2003, IDCC renewed the 2G PDC/PHS license with Sharp, entered into a new 2G license with Research In Motion, and entered into a new 2G license for PHS with Nakayo Telecom.
I had always felt that Ericy was a gigantic lid over IDCC’s licensing efforts. IDCC officials began speaking optimistically of licensing momentum during the Ericy resolution conference call on March 17. Some excerpts during the Q & A by Howard Goldberg as follows:
“We have a group, our licensing group, that has been diligently pursuing opportunities. They’ve been in discussions with multiple companies. The tide that we have been pushing against for the last year and a half or so was a very unstable marketplace in telecom, as well as sort of a deadlock or freezing effect from the Ericy litigation. I think things are starting to reverse in both directions. When we came back from the 3GSM congress in Cannes, we saw rising optimism concerning 3G. So there’s a positive atmosphere out there with respect to the environment. The issue of Ericy uncertainties hampering licenses has been removed and we believe turns into a positive.”
Howard was then asked if he considered the Ericy resolution to be a “watershed event” for IDCC in terms of credibility and in the sense of there being a number of companies, who have been waiting to see what would happen with Ericy before making any agreement, to see whether they could possibly get out of licensing with IDCC. Howard’s reply to this question as follows:
“I think you have encapsulated the dynamics. I believe that some period in the future we’re going to look back on this and say with certainty that this is a watershed event. It certainly feels to us like it’s a watershed event.”
After the Ericy 2G litigation was resolved, IDCC renewed the 2G PDC/PHS license with Sharp, entered into a new 2G license with Research In Motion, and entered into a new 2G license for PHS with Nakayo Telecom. Some excerpts from these three very recent press releases as follows:
“6/4/2003 11:41:00 AM - InterDigital and Sharp Extend Worldwide, Royalty-Bearing PDC/PHS Patent License Agreement; Agreements in Force Cover All Principal Global Wireless Telecommunications Standards
KING OF PRUSSIA, Pa.--(BUSINESS WIRE)--June 4, 2003--InterDigital Communications Corporation (Nasdaq:IDCC), a leading architect, designer and provider of wireless technology and product platforms, today announced that its subsidiary, InterDigital Technology Corporation (ITC), has extended its 1998 non-exclusive, worldwide, royalty-bearing patent license agreement with Sharp Corporation of Japan (Sharp) covering sales of terminal devices compliant with TDMA-based PDC and PHS standards.”
“6/4/2003 12:17:00 PM - InterDigital Signs Research In Motion to Worldwide, Royalty-Bearing GSM/GPRS/EDGE Patent License Agreement
KING OF PRUSSIA, Pa.--(BUSINESS WIRE)--June 4, 2003--InterDigital Communications Corporation (Nasdaq:IDCC), a leading architect, designer and provider of wireless technology and product platforms, today announced that its subsidiary, InterDigital Technology Corporation (ITC), has signed a non-exclusive, worldwide, royalty-bearing patent license agreement with Research In Motion Limited (RIM), a globally recognized and leading designer, manufacturer and marketer of innovative wireless solutions, including the BlackBerry(R) Wireless Handheld(TM), for the worldwide mobile communications market. The agreement covers wireless terminal units built to GSM/GPRS/EDGE standards.”
“6/6/2003 10:43:00 AM - InterDigital Signs Nakayo Telecommunications to Worldwide Patent License Agreement KING OF PRUSSIA, Pa.--(BUSINESS WIRE)--June 6, 2003--InterDigital Communications Corporation (Nasdaq:IDCC), a leading architect, designer and provider of wireless technology and product platforms, today announced that its subsidiary, InterDigital Technology Corporation (ITC), has signed a non-exclusive, worldwide, royalty-bearing patent license agreement with Nakayo Telecommunications, Inc., a manufacturer of telecommunications equipment for the Asian markets.
The agreement covers wireless terminal units and infrastructure compliant with TDMA-based PHS standards. Under this agreement, ITC will receive a royalty on each licensed product sold by Nakayo worldwide. Nakayo will pay ITC an advance royalty payment and a one-time license fee. Once the advance payment is exhausted, Nakayo will be obligated to pay additional royalties to ITC on each licensed product sold through the life of the licensed TDMA patents.”
The 2G PDC/PHS standard for Sharp expired in March 2003, but was renewed for an additional five years in June 2003. I think the renewal is effective as of the expiration date of the original contract, so that there should not be any gap in Sharp’s royalty for these standards in 2003.
Sharp has agreed to pay an advance of $17.5m in the third quarter of 2003 to renew the 2G PDC/PHS contract. Of this advance, $2.5m is a renewal fee and will be recorded as revenue on a straight-line basis over the five-year life of the renewed contract. The remaining $15m is an advance royalty on future sales of 2G PDC/PHS products by Sharp, and is estimated to cover about 10 to 14 months of anticipated sales.
The amount of the upfront advances and fees for Research in Motion and Nakayo were not disclosed. An additional advantage that the RIMM license gives to IDCC is credibility and prestige, as RIMM is very highly thought of by both the technical and the investment community. The PHS standard, which Nakayo just licensed, has been on the decline in its home country of Japan, but is just beginning to take-off in China. Low system deployment costs involving spectrum, infrastructure, and handsets is one of the big advantages of the PHS standard over other standards. Other IDCC Japanese licensees including Kyocera, Toshiba, Sanyo, and Hitachi are also beginning to sell significant numbers of 2G PHS handsets in China.
8. Recurring royalties are improving dramatically. The year 2002 marked the first time in which IDCC recorded earned revenue from some of the 3G prepaid advance royalties, in addition to having a significant increase in 2G recurring royalties. The Ericy resolution in 2003 has produced another 2G ongoing revenue stream of approximately $4m to $5m per quarter. Rate finalizations for 2G with Nokia and Samsung should generate at least $25m per quarter in additional ongoing revenue streams beginning in 2003 according to IDCC’s public projections.
Recurring royalties were under $1 million in 1998 and less than $10 million in 1999. In both 2000 and 2001, recurring royalties were a little over $30 million. During the first quarter of 2002, recurring royalty increased to $19 million, and normal ongoing recurring royalty amounted to $12m after factoring out $7m from pre-2002 NEC 3G infrastructure. During the second quarter of 2002 recurring royalty jumped to $23.5 million, and normal ongoing recurring royalty amounted to $16.5m after factoring out another $7m from Kyocero’s forfeited deferred advance. Thus IDCC earned almost as much ongoing recurring royalty in the first six months of 2002 as they did in all of 2001. In the third quarter of 2002, normal recurring royalty amounted to almost $14m. In the fourth quarter of 2002, the normal recurring royalty was $15.5m after factoring out Denso's $10m forfeited deferred advance. Therefore total normal recurring royalty amounted to $61.5m for 2002, after deducting nonrecurring earned royalties of $24m.
First-time recurring royalty in 2002 included 3G earned royalties of over $18 million and NEC 2G settlement royalties of $13 million. The NEC settlement of $53 million is being recorded into revenue at the rate of $13 million per year over four years beginning in 2002. Thus IDCC has a sure base of $3.3 million of recurring royalty per full quarter for sixteen quarters just from the NEC 2G settlement alone.
Also IDCC has over $90 million of deferred royalties on the books at Dec. 31, 2002. These deferred royalties advances will all turn into recurring royalty revenue as they are earned by licensee sales of covered products under SAB accounting principles. Even if the licensees with deferred balances stop selling the licensed products, IDCC will still get to keep the advanced upfront money and earn the remaining deferred royalty balance. This is exactly what happened with Kyocera and Denso in 2002. Both licensees quit selling GSM handsets, and therefore Kyocera's $6.9m and Denso's $9.7m non-refundable deferred balances were recorded as earned royalties in 2002.
IDCC’s recurring royalties has and should continue to increase dramatically. InterDigital’s 2003 recurring royalty is shaping up extremely well due to recent successes of IDCC’s current best–paying licensees Sharp and NEC. IDCC also has a new recurring royalty stream from Sony/Ericy, and should soon have significant recurring royalties from both Nokia and Samsung. From Investec analyst Scot Robertson’s updated report dated Dec. 2, 2002:
“Commercial 3G services continue to spread beyond Japan. Over the last month we have heard a lot of talk and seen a fair amount of PR from Network Operators trumpeting their near-term launching of commercial 3G services in the European, Korean, and Chinese markets. Sharp has announced that it supplies Vodafone-branded, camera-equipped handsets made by Sharp. Thus far Vodafone has ordered 500,000 handsets, and we have heard from a channel contact that an additional 1.0 million to 1.5 million could follow throughout fiscal 2003.” (My note: Docomo’s sales of camera phones are doing extremely well as stated in recent articles. Sharp’s camera phones are both Docomo’s and J-Phone’s best selling ones in Japan.)
”Likewise, NEC continues to gain significant traction in its bid to penetrate the European and Chinese mobile markets, announcing recent infrastructure and handset orders from Hutchison (i.e., continued base station deployment and an order for two million 3G video devices which should begin to ship in the March quarter), in addition to an order to supply 500,000 camera-equipped phones to China Mobile over the remainder of fiscal 2002 (March 2003). The company expects to increase shipments to 1.0 million units in 2003 and 3.0 million units in 2004. We highlight these orders as they stem from existing InterDigital licensees. However, this is just a taste of what is coming. Announcements for further network expansions from J-Phone in Japan, SK Telecom in Korea, and China Mobile in China, along with further European expansion from Vodafone and Hutchison, and even early 3G test networks in the U.S. have started to illuminate the vast near- and longer-term potential of the global 3G market.” (My note: NEC is also a major supplier of Docomo’s 3G FOMA infrastructure network and dual-mode 2G/3G handsets, which continue to roll out at a fairly rapid pace in Japan).
From the June 6, 2003 analyst update by Frank Marsala of Halpern Capital as follows:
“(2) NEC: a. We now estimate that Q103 revenue from NEC was about $9.0 million and will grow to about $11.6 million in Q203 and $11.2 million for each of Q3 and Q4. This increase is due to the projected increase in handset sales for NEC (the company is targeting 15 million units in its fiscal 2004, up from 9.4 million in fiscal 2003 (NEC is on a March fiscal year).
(3) Sharp: a. We estimate about $3.6 million in Q1 jumping to about $6.4 million in Q2 and $5.6 million for each of Q3 and Q4. We are assuming that Q2 jumps due to higher overall handset sales offset by a lower royalty rate in the new agreement. In our model, Q2 is inflated as there is some revenue that was earned in Q1 that will spill over into Q2 (approximately $1 million). Our estimated total for Sharp for 2003 is $21.3 million.”
Sony/Ericy prepaid a two–year advance of $26m for 2003 and 2004 to cover anticipated sales of 2G/2.5G TDMA-based handset sales. IDCC will earn the advance as the applicable handsets are sold. IDCC recorded $2.9m of earned revenue from this advance in the first quarter of 2003. The 2G infrastructure royalty of $1.5m per quarter coupled with $3m to $3.5m handset royalty per quarter should produce an ongoing revenue stream of $4.5m to $5m per Quarter from Sony/Ericy.
When the Nokia and Samsung 2G/2.5G royalty rates are finalized, they should produce a minimum of $25m ongoing royalty per quarter based upon the minimum annual projection of $80m from Nokia and $20m from Samsung just for 2003. From the Ericy press release dated March 2003 as follows:
“Based on the Company's application of the MFL provision, currently available third party estimates of Nokia's and Samsung's sales of covered products in 2002, and the Company's assumptions regarding such items as Nokia's and Samsung's sales mix, selling prices, and market share, the Company projects that Nokia's royalty obligation for 2002 could be in the range of $100 million to $120 million and Samsung's royalty obligation for 2002 could be in the range of $22 million to $27 million. Further, based on the application of the MFL provision and assumptions noted above, recent market forecasts, and the prepayment of royalties (net of related discounts) consistent with the terms of the Ericsson and Sony Ericsson agreements, the Company projects that 2003 royalty revenue from Nokia could be in the range of $80 million to $90 million, 2003 royalty revenue from Samsung could be in the range of $20 million to $24 million, and the aggregate prepayment of royalties from Nokia and Samsung for 2003 and 2004 could be in the range of $180 million to $220 million. Once these initial prepayments are exhausted, Nokia and Samsung can either make additional prepayments (net of related discounts) for twenty-four month periods, or pay royalties at the base rate on sales through 2006. The Company will not record revenue associated with the Nokia and Samsung license agreements until all elements required for revenue recognition are met.”
9. Unprecedented 10 year chip agreement with Infineon, a world leader in wireless chips. IDCC and Infineon expect to complete the full multi-mode 3G FDD protocol stack no later than the first quarter of 2004. The dual-mode 2G GSM/GPRS and 3G FDD chip should be ready for the commercial market in 2004. IDCC is also developing other TDD-based products for the emerging 3G market.
Infineon is a German wireless chip company, which was spun-off from Siemens. Infineon sells more GSM baseband chips than any chip company in the world. They signed a 10 YEAR 3G agreement with IDCC. No other wireless IPR company that I am aware of has a 10-year agreement with a major chip company. The length of this contract is highly abnormal and unprecedented. Wireless technology changes so much and so rapidly that long-term contracts are unheard of in this industry.
This 10-year contract currently involves WCDMA-FDD, and may be expanded to include TDD later. However, InterDigital may choose another chip company for TDD chips. If a wireless chip leader like Infineon enters into a ten year IPR contract, doesn’t this also say volumes about IDCC’s place and importance in 3G?
Infineon will get its FDD protocol stacks exclusively from IDCC for Infineon branded FDD or dual mode GPRS/FDD chips; unless IDCC enters into a development project with another chip company for the FDD protocol stacks. InterDigital also receives access to Infineon’s vast technology library for possible custom/specialized chips branded with IDCC’s name, but manufactured by Infineon. IDCC projects significant revenue from this contract in 2004, when 3G handsets should begin to be sold in mass, after the 3G network rollouts and thorough testing in 2003. IDCC will share in the revenue on each FDD or GPRS/FDD Infineon branded chip sold, they will receive revenue from marketing the jointly developed protocol software to non-Infineon customers, and will receive revenue from the sell of IDCC branded custom/specialized chips. It appears that the FDD protocol software is now ready for deployment on any operating system and any hardware platform. From press releases from 3GSM conferences:
“CANNES, France, Feb 17, 2003 (BUSINESS WIRE) -- Company To Demonstrate FDD and TDD Product Solutions and Launch New Radio Resource Management Offering Complementing the WTDD offering, InterDigital also is demonstrating a standards compliant WCDMA FDD multi-mode software protocol stack product for terminal devices, which was co-developed by InterDigital and Infineon. Currently being marketed by the Company and available for evaluation, the complete solution is comprised of a physical layer interface and layer 2/3 software, which when bundled together, provide wireless device manufacturers with a cost effective, rapidly deployable product. The product platform supports Infineon's 3G baseband processor and also is portable to other baseband processors.
CANNES, France, Feb 21, 2002 (BUSINESS WIRE) -- InterDigital Communications Corporation (Nasdaq: IDCC), today introduced its Frequency Division Duplex (FDD) technology software product for 3G mobile devices.
The new FDD Layer 2/3 software protocol stack is portable to multiple physical layer (Layer 1) implementations and can act as the communications engine for a wide range of 3G mobile devices. It integrates seamlessly with existing GSM/GPRS software and hardware, thus enabling the development and deployment of multi-mode 3G handsets while providing a stable migration path from the customer's existing GSM platform to 3G.
The FDD software product has been designed to reduce handset power consumption and memory utilization, two key 3G market requirements for handsets.We are designing our FDD software product to be integrated with our Time Division Duplex (TDD) technology platform to ensure seamless operation in 3G products….This complete UMTS FDD software protocol stack can run on any real time operating system and hardware platform…. It is fully compliant with the 3GPP FDD Release 4 Standard.”
IDCC is also developing TDD software and chips. Dr. Briancon described the WTDD Baseband Modem Chip for 3G terminals that InterDigital is developing. “The stand-alone chip we are developing incorporates leading-edge designs utilizing our pioneering technology”. This is a fully standards-compliant baseband modem chip for multi-mode 3G terminals designed to interface seamlessly with FDD/GSM hardware and software to enhance terminals with WTDD capability. Our chip will be designed to enable wireless devices to support voice and data traffic up to two megabits per second.
“Our design is harmonized with FDD and is implemented with a low gate count, enabling use of the WTDD technology at a low incremental cost," he said. InterDigital's complete WTDD solution consists of the baseband modem, a software protocol stack and the RF reference design. It will be particularly effective in delivering advanced voice and data capability to smart phones, wireless personal digital assistants, laptop computers, and other innovative wireless terminals.
IDCC is now demonstrating WTDD system solutions and related products:
“CANNES, France, Feb 17, 2003 (BUSINESS WIRE) -- Company To Demonstrate FDD and TDD Product Solutions and Launch New Radio Resource Management Offering InterDigital Communications Corporation (Nasdaq:IDCC), a leading architect, designer and provider of wireless technology and product platforms, today showcases two key elements of a complete Wideband CDMA (WCDMA) air interface solution at the 2003 3GSM World Congress in Cannes, France. The Company is demonstrating a standards compliant, end-to-end Wideband Time Division Duplex (WTDD) system along with its Frequency Division Duplex (FDD) multi-mode software protocol stack product for use in 3G terminal devices.
The WTDD system will demonstrate a simulated wireless phone call, beginning with call set up, and a connection supporting 384 kbps of streaming audio and video while operating point-to-point over a fully functioning radio network controller (RNC), Node B and end-user terminal device (UE). This spectrally efficient solution handles voice and up to 2Mbps of data over circuit switch and packet switch modes and integrates easily with proven FDD/GSM/GPRS hardware, software and network equipment, reducing development time, cost and risk.”
In addition, the Company is introducing SmartRRM(SM), a complete suite of advanced radio resource management algorithms and advanced simulation tools that maximizes TDD performance, lowers deployment costs, and optimizes enhanced services under different deployment scenarios. SmartRRM intelligently allocates radio resources to suit the character of the offered traffic, optimizing connections, network stability, connection reliability, system capacity, terminal battery consumption, and overall quality of service. The modular, flexible, self-contained architecture makes SmartRRM adaptable to any RNC design.
Excerpts from the latest 10K as follows:
“In the first quarter of 2003, we successfully publicly demonstrated the 3G Protocol stack’s performance characteristics with critical features, including 384 kbps voice and video transmission capability, on a variety of different hardware Platforms. The Company is now offering its FDD Protocol stack solution for evaluation and sale to 3G terminal unit producers and semiconductor producers. InterDigital and Infineon expect to complete the full multi-mode 3G Protocol stack no later than the first quarter of 2004. Under the agreement, executed in March of 2001 with a duration of nine years from the first sale, if any, of the joint 3G Protocol stack, the parties each own the technology they develop …Although we do not intend to participate in or subject the Company to the risks of the first cycle of the FDD product market, we do believe our investment in FDD technology development will result in a favorable return to the Company.
In the first quarter of 2003, we successfully publicly demonstrated the WTDD technology by operating it in a point-to-point environment over a fully functioning radio network controller, base station, and end-user terminal device configured for a mobile environment and demonstrated call setup and a 384 kbps streaming video and audio call. Beyond the scope of the Nokia project, we are self-funding additional work relating to a WTDD Platform. We believe that a substantial amount of our WTDD technology applies to other TDD technologies, such as TD-SCDMA. This global TDD development strategy includes our participation in China as a Council Member in the TD-SCDMA Forum, a body focused on the application of NTDD technology in wireless products, and our activity to implement our TDD technology into TD-SCDMA products. We have a small dedicated team working on TD-SCDMA product development, and we will expand that team if there is a strong indication of favorable market interest for NTDD in China or elsewhere that could lead to significant return on the Company’s TDD investment.”
10. The WTDD mode, used in conjunction with FDD, is most likely to be the dominant 3G technology according to most industry experts and wireless companies. The benefits of WTDD include superior asymmetrical data-handling capabilities, spectrum efficiencies of 20% - 35% that will significantly allow for more system users, and more/richer 3G applications at lower incremental cost savings of 25% to 50%. IDCC owns substantial essential IPR in WCDMA and has partnered with Nokia and Infineon to further develop this technology.
Most people in the industry believe that WCDMA, which includes WTDD and FDD, will ultimately be the 3G technology of choice with an estimated 80% to 85% of the total 3G market. The anticipated migration path for the currently dominant 2G GSM standard is first to GPRS and then to either EDGE or directly into WCDMA. The 2G TDMA standard is anticipated to migrate to GPRS or EDGE and then into WCDMA. The TDMA-based Japanese standards of PDC/PHS will most likely migrate directly to WCDMA. Only the narrowband CDMA camp, which includes IS-95 and CDMAOne, with about 15% of the current 2G market is expected to migrate to a different mode, CDMA2000.
From an IDCC press release dated 11-28-01: To enable fully rich applications, the 3G Wideband Code Division Multiple Access (WCDMA) standard provides for the deployment of both Frequency Division Duplex (FDD) and Wideband Time Division Duplex (WTDD) technologies.
InterDigital's Chief Technology Officer, Dr. Alain Briancon, explained how the asymmetric nature of WTDD technology, also known as High Chip Rate TDD, is the most cost effective solution for "always on" data applications for consumers and corporate users. "As 3G services are deployed, we, and many in the industry, believe that applications will shift from predominantly voice to data.”
We expect that as businesses become a more significant portion of the subscriber base with the introduction of 3G services, the trend toward data services will accelerate. These data and rich voice services are typically asymmetric or bursty in nature. WTDD technology's ability to accommodate such asymmetry in a spectrally efficient manner provides an important tool for the operator to maintain and improve the quality of service.”
From an IDCC press release dated 10-18-01: Dr. Briancon's presentation also highlighted both the efficiency and the multiple deployment scenarios of WTDD. For asymmetric applications, WTDD is 20%-35% more spectrally efficient in micro and pico cell deployments than a comparable FDD-only deployment, increasing significantly the number of users on the system.
Utilizing sophisticated simulation techniques, our detailed analysis of the performance of WTDD technology in a variety of deployments makes it clear that the technology is the efficient solution in micro and pico cells where asymmetric voice and data demands will be the most intense. WTDD technology is the ideal complement to FDD technology, which is most effective in macro and micro cell settings, Dr. Briancon said.
The technology supports voice and data functions, and is well suited for 'always on,' asymmetric Internet access, e-mail, data transfer, video streaming, and other rich applications. In addition, because the technology is robust and is designed to operate seamlessly with FDD, WTDD can be deployed and implemented in 3G networks at very low additional cost.
It will be particularly efficient handling a wide variety of multi-media traffic, including transmission of pictures, video streaming, making airline reservations on the go, Internet shopping and chat, music and many PDA applications. As the volume of data traffic over 3G networks increases, InterDigital sees applications for WTDD not only at capacity hot spots such as shopping malls and airports, but also for enterprise systems, such as intranets and extranets, and integrated services in Virtual Private Networks. InterDigital believes that the topography of most offices makes WTDD technology an ideal solution for enterprise applications. "We believe that the applications are almost limitless," Dr. Briancon concluded. "By focusing on full system deployment solutions with lower incremental costs per user, we open many doors. You can expect better and more frequent application implementation, constantly evolving network efficiency and an increasingly satisfying experience for the end user.”
Dr. Briancon described the WTDD Baseband Modem Chip for 3G terminals that InterDigital is developing. This is a fully standards-compliant baseband modem chip for multi-mode 3G terminals designed to interface seamlessly with FDD/GSM hardware and software to enhance terminals with WTDD capability. Our chip will be designed to enable wireless devices to support voice and data traffic up to two megabits per second.
“Our design is harmonized with FDD and is implemented with a low gate count, enabling use of the WTDD technology at a low incremental cost," he said. InterDigital's complete WTDD solution consists of the baseband modem, a software protocol stack and the RF reference design. It will be particularly effective in delivering advanced voice and data capability to smart phones, wireless personal digital assistants, laptop computers, and other innovative wireless terminals.
A current study dealing with cost efficiencies and spectrum utilization from an IDCC press release dated Feb.17, 2003:
“2/17/2003 10:10:00 PM - InterDigital Study Outlines 50% Cost Savings for Wireless Operators Deploying WTDD as Part of a Complete WCDMA Solution Conducted with Arthur D. Little, Study Finds WTDD Can Deliver Significant Cost Savings For 3G Wireless Data Over FDD Alone In Key Deployment Scenarios
InterDigital Communications Corporation (NASDAQ:IDCC), a leading architect, designer and provider of wireless technology and product platforms, today announced at the 3GSM Congress in Cannes, France the results of a third generation (3G) wireless economic and performance study conducted with the U.S.-based research firm Arthur D. Little (ADL). The joint, year-long study found significant capital, operating and total cost of ownership savings for operators that deploy Wideband TDD (WTDD) as part of a complete WCDMA wireless solution. The study also determined that WTDD deployed in a single 5MHz unpaired band provided higher capacity for data-intensive applications like video, internet access or multi-media messaging than FDD similarly deployed in two 5MHz paired bands of wireless spectrum.
"There is a growing appetite in the global consumer market for wireless data on the go, as reflected in the increasing demand for camera phones, other mobile data devices and the applications that support them," said Dr. Alain Briancon, InterDigital's Chief Technology Officer. "This consumer demand is matched by an obvious expectation and desire on the part of operators for higher revenues per user, lower costs of deployment and the capability to adapt deployments to their unique marketing and operational needs.
The joint study concluded that WTDD deployed for capacity enhancement can provide approximately 50% savings for operators in projected network capital and operating costs over a ten year period; and 25 to 35% savings in wide-area broadband data deployment scenarios. An additional 15% cost savings over the same period of time can be achieved by deploying WTDD in 10MHz of spectrum, rather than 5MHz.
The study also found that WTDD deployed in a single, unpaired 5MHz band -- utilizing InterDigital's multi-user detectors (MUD) receivers and SmartRRM(SM) radio network controller -- could support over 70% more users per cell at 384 kbps data transmission than 10MHz of FDD comparably deployed. Capacity improvements also were seen at data speeds of 64 and 144 kbps.”
In order to successfully implement WCDMA 3G technology, additional radio spectrum has to be allocated and made available in each country. Many European and Asian countries have already allocated and auctioned additional spectrum for 3G, including specific spectrum for TDD deployment. Many thought that the United States would be far behind in the deployment of 3G technologies due to conflicting spectrum availability problems, which would not be cleared up for several more years. However, the FCC is very much aware of the importance of 3G, and is rapidly clearing-up spectrum availability problems now. The FCC has already reallocated 75 MHz of spectrum from government use to commercial use.
Infineon and IDCC have developed an FDD chipset that utilizes much of InterDigital’s FDD IPR, and will be instrumental in the worldwide deployment of this technology. Nokia and IDCC have thoroughly tested WTDD, and will be instrumental in the successful worldwide deployment of this technology. Other companies have quickly recognized the many benefits of TDD technology based on the test results and have very recently established the TDD Coalition.
Some had thought that the spectrum problems and possible delays in allocating licensed spectrum might lead to some non-3G wireless technologies gaining an early foothold in the United States. Fixed, unlicensed spectrum technologies such as 802.11 (WI-FI) were being predicted to do very well in the US market. However, WTDD is being shown to be more cost effective than 802.11. WTDD has the added advantages of mobility/roaming, security, and full integration with other wireless and wired technologies, which the 802.11 standards lack. Couple the previous advantages with the benefits of using allocated licensed spectrum, rather than unlicensed spectrum with its host of potential problems, and even the US operators might become early adopters of WTDD. Even some carriers, like Craig Communications and Walker Wireless, who previously had plans to implement the 802.11 standards for concentrated hotspots are implementing WTDD instead.
11. IDCC is very actively involved in the various standard bodies and worldwide organizations, such as, the UMTS Forum, the GSM Association, the TD-SCDMA Forum, and the TDD Coalition, which promote and inform the wireless industry. These organizations are composed of the leading equipment manufacturers, chip producers, telecom operators, software developers, wireless IPR owners, and other interested suppliers and parties. This active involvement further enhances IDCC’s growing reputation as a leading company within, and a major supplier of enabling technologies to the wireless industry.
From the latest 10K: “To facilitate our position as a contributor to emerging wireless technologies, we are active in the Third Generation Partnership Project (3GPP), through our membership in the European Telecommunications Standards Institute (ETSI), and have been an active member of several Standards Development Organizations and industry associations that influence and sponsor standards development including the ITU, the telecommunications Industry Association (TIA), the Engineering Subcommittee T1P1 (T1P1), the Institute of Electrical and Electronic Engineers (IEEE) and the American National Standards Institute (ANSI). For 3G standards, we have submitted nearly 1,000 contributions to standards bodies worldwide and over 60% of those contributions have been adopted.
We have made technical contributions in the IEEE Standards bodies and expect that effort to expand. We have also taken leadership positions in a number of these standards bodies. Company management and engineers either have served or are currently serving in a number of leadership positions in key industry standards bodies including past Chair of the IEEE 802.16a Task Group (Broadband Wireless Access, 2-11 GHz), current Chair of the IEEE 802.16e Task Group (Mobile Broadband Wireless Access, based on the 2-11GHz IEEE 802.16a air interface); current Vice Chair of the 3GPP RAN Working Group 3 (WG3); Vice Chair of T1P1.4 Wireless Wideband Internet Access; past North American Rapporteur for ITU-R IMT-2000 Deployment Handbook; past Editor, 3GPP RAN WG1 Physical Layer Procedures (TDD)(R5) and past Editor and Rapporteur, 3GPP RAN WG4, TDD Base Station Classification.
In addition to our participation in a number of standards bodies, we are also active in several technology forums that foster our business interests. For example, our Chief Technology Officer (CTO) chairs the Universal Mobile Telecommunications System (UMTS) Forum Task Force on TDD and Wireless LANs, and is the Chair, as well as a member of the Associate Member Interest Group (AMIG) of the GSM Association. Our Chief Operating Officer is the Vice-Chair of the Manufacturing Task Force for the UMTS Forum. A member of our CTO Office is the Co-chair of the GSM Association’s Wireless LANs Task Force. Further, we are a Council Member (a senior level position held by a limited number of the world’s leading wireless companies) of the TD-SCDMA Forum, and a member in the TDD Coalition, an industry consortium which promotes TDD airlink technology.”
IDCC’s involvement in the various worldwide organizations is in addition to the active involvement in worldwide standards bodies. InterDigital is embedding their technology into all the standards, as well as, building a growing reputation as an enabler of this cutting-edge technology to the benefit of the entire industry. IDCC hosted and was a major presenter at a General Assembly meeting of the UMTS Forum. From a press release dated 6/6/02:
"InterDigital today announced that it is hosting the General Assembly of the UMTS Forum and its members for a two day conference on 3G wireless services on June 6 and 7, 2002 in Philadelphia, Pennsylvania, USA…The UMTS Forum is an international organization with more than 236 member companies from the mobile operator, supplier, regulatory, consultant, IT and media/content communities in over 41 countries worldwide. The Forum's goal is to promote global success for 3G services delivered on all 3G technologies recognized by the International Telecommunication Union (ITU).
During the General Assembly, Dr. Alain Briancon, InterDigital's Chief Technology Officer, will report the initial findings of a UMTS task force focused on the deployment of Time Division Duplex (TDD) technology and Wireless Local Area Networks (WLANs) for 3G wireless data services. This UMTS task force will ultimately make recommendations to operators on deployment scenarios for TDD technology to cost effectively deliver wireless data services to consumers worldwide. Dr. Briancon also will report the results of a survey taken to gather and evaluate the attitudes of operators and service providers regarding the timing of the rollout of 3G wireless."
Interdigital was ratified as an associate member of the prestigious GSM Association. Only telecom operators can be ratified as full members into the GSM Association. Then IDCC was afforded the very high honor of being one of the few non-operator presenters at their annual meeting in Rome. From a press release dated 4/18/02:
“ROME, Apr 18, 2002 (BUSINESS WIRE) -- InterDigital Communications Corporation (Nasdaq:IDCC), a leading architect, designer and provider of advanced wireless technologies and product platforms, highlighted the advantages of Wideband Time Division Duplex (WTDD) technology for 3GSM(TM) networks, driven by its power to enhance the quality of service and the continuity of the user experience in the migration to 3G products and services.
The presentation was delivered to the 47th GSM(TM) Plenary meeting held this week in Rome and attended by over 500 members of the GSM Association, representing mobile network operators and suppliers worldwide. InterDigital also was ratified as an Associate Member of the GSM Association during the Plenary.
In his presentation, InterDigital's Chief Operating Officer Rip Tilden stated that WTDD technology, part of the 3GSM Wideband CDMA (WCDMA) standard, can significantly enhance the experience for 3G users as they access advanced data services, making the technology an important competitive offering for operators. He defined the continuity of user experience as the highest quality of service possible as users move smoothly among a wide range of advanced data services and among 3G networks globally utilizing a variety of devices.”
IDCC also has substantial IPR even in a TDD standard option, TD-SCDMA, advocated by the Chinese. In November ’02 the Chinese government announced that they would allocate twice as much radio spectrum for TD-SCDMA than for any other 3G standard. This is a very clear indication that the Chinese government will greatly encourage the development and deployment of the TD-SCDMA standard in China. IDCC has extensive essential IPR in TDD and has publicly stated that 75% of its WTDD IPR also applies to TD-SCDMA.
IDCC was elected as a member at large of the TDS-CDMA forum, and then immediately selected into the highest echelon of this organization as a Council Member. The Chinese market is usually extremely difficult to enter, and those companies that do gain entrance usually have to invest heavily in China. IDCC has just entered into the middle of the developments in the largest wireless market in the world through invitation rather than investment. The following excerpts are from an IDCC press release dated 01/17/02:
“The TD-SCDMA Forum, organized in September 2000 by the China Mobile Communications Association, was created to promote the development and advancement of TD-SCDMA technology and applications within China and throughout the world. The Forum, with more than 300 members, provides a platform for worldwide exchange to communicate ideas or developments that impact TD-SCDMA technology.
In recognition of its leading position as a global developer of TDD technology and products, InterDigital will join other Forum Council members, including Alcatel China, China Mobile, China Telecom, China Unicom, CATT, CNC, CRTC, DaTang Group, Huawei Corporation, Jitong, Siemens, Motorola, Nortel, Qualcomm, UT Starcom and Zhongxing in promoting the development and application of TD-SCDMA technology.
Our selection as a Council Member reflects industry recognition of InterDigital's strong position as a pioneer of Time Division Duplex (TDD) technology. With almost 500 contributions to Third Generation (3G) standards to date, InterDigital is one of the wireless industry's leaders in defining the TDD standard for the 3G wireless market….The 3G WCDMA standard incorporates both TD-SCDMA and WTDD, along with FDD technology. The two forms of TDD technology have strengths in different deployment scenarios for different market needs.….TD-SCDMA complements and fits the evolution of GSM networks….InterDigital, with its strong TDD technology focus, is well positioned to deliver TDD solutions worldwide. At least 75% of the core TDD technology we are developing can be employed in either TD-SCDMA or WTDD applications. Much of this core TDD technology is incorporated into contributions accepted by worldwide standards organizations.”
Infineon and IDCC have developed an FDD chipset that utilizes much of InterDigital’s FDD IPR, and will be instrumental in the worldwide deployment of this technology. Nokia and IDCC have thoroughly tested WTDD, and will be instrumental in the successful worldwide deployment of this technology. Other companies have quickly recognized the many benefits of TDD technology based on the test results and have very recently established the TDD Coalition. Information about the TDD Coalition as follows:
“The TDD Coalition a new industry consortium whose purpose is to promote Time Division Duplexing (TDD) airlink technology and explain its benefits to operators, regulatory bodies, standard groups, the media, and the broadband industry in general. The coalition shares a common conviction that TDD is a spectrally efficient and cost-efficient airlink technology, which can offer tremendous benefits to broadband wireless operators and their customers.”
The coalition's 15- member organization include Aperto Networks, ArrayComm, BeamReach Networks, CALY Networks, Clearwire Technologies, Harris Corp., InterDigital, IPWireless, LinkAir, Malibu Networks, Navini Networks, Pointred Technologies,Radiant Networks, Raze Technologies, and Wavion. For more information about the TDD Coalition visit http://www.tddcoalition.org ."
12. Four new analysts have initiated coverage of IDCC since 2001 with probably others to follow. IDCC is getting more press in the mass media, including Inc magazine’s new “Innovation 50” ranking and a recent article in the Wall Street Journal. Additionally institutional ownership in IDCC has recently increased significantly from under 20% to over 30%.
Until very recently there were no Wall Street analysts formally following IDCC, mainly due to their small size and little need for investment banking services. InterDigital currently has only about 55 million shares of stock outstanding, almost $100 million in cash and securities, virtually no debt, and no need for external financing. A stated goal of the company is to obtain additional analysts’ coverage. An analyst with PMG Capital/Investec initiated coverage of InterDigital in April ’01 followed by initial coverage from an analyst with Hilliard Lyons in May ‘01. These were followed by initial coverage from RTX Securities in December ’02, and Halpern Capital in April ’03. However, I’m not sure if PMG Capital/Investec or RTX securities still cover IDCC due to reorganizations and wireless analysts leaving those firms.
During the Annual Stockholder Meeting in June 2002 Guy Hicks, VP of Communication, indicated that IDCC had seven to ten new analysts who were closely following IDCC developments. These are analysts who follow the wireless industry and our partners, and some of our licensees. One of these interested analyst from RTX Securities initiated coverage on Dec. 4, '02 with a Buy rating and target price of $25. Renowned wireless analyst Frank Marsala of Halpern Capital initiated coverage on April 22, 2003 with an extremely favorable initial report. When Nokia and Samsung’s 2G royalty rates are finalized, which should be fairly soon, then IDCC should get flooded with new analyst coverage and mass media press.
An example of mass media coverage involved Inc magazine ranking IDCC seventh in its very first “Innovation 50” rankings. From IDCC’s press release on July 31, 2002 announcing the ranking as follows:
“IDCC announced that it has been named to Inc magazine's first-ever ranking of the "Innovation 50," which identifies America's 50 most inventive entrepreneurial firms. Of the 50 companies that made the list, InterDigital was ranked seventh. The list appears in the magazine's August issue, which is hitting newsstands this week. The Innovation 50 ranks small and medium-sized firms (revenues under $100 million) that have been awarded the most patents between 1996 and 2001.”
Another example of media coverage is IDCC being the top pick of the editors of 10x5y, which picks the companies most likely to have a tenfold increase in stock price within 5 years: http://www.10x5y.com/strategy/thestock/index.shtml
At the beginning of 2002, institutional ownership in IDCC was less than 20%. By the end of 2002, institutional ownership was 29% and climbed to over 33% at the end of the first quarter of 2003. Several new institutional investors recently established new positions in IDCC led by prominent investment guru and commentator Louis Navallier. Mr. Navallier’s mutual funds became the second largest owner of IDCC stock by the end of 2002. The institutional “smart money” is beginning to flow into IDCC in a big way.
The increased analyst coverage, media coverage, and institutional ownership will force Wall Street to take much more notice of IDCC. I think Wall Street will be looking for those companies that will benefit the most financially in the new wireless world and this fascinating 3G technological revolution. The name of the game is making money in the tremendous market opportunity that will be 3G. InterDigital should become a very important and prominent player.
13. IDCC is strategically positioned within a dynamic industry, which is projected to generate astronomical future revenues, and offers superior value based upon a highly probable near-term and long-term earnings explosion.
Several industry statistical groups are currently projecting total 3G and 4G revenues in the trillions of dollars. We are just beginning a new wireless revolution which will entail: Wireless + an always on Internet + multimedia messaging + pictures + streaming video + video conferencing + music on demand + location services + mobile ecommerce + computer functions + voice + complete mobility of all these functions = a New World. Those companies, such as IDCC, that are strategically positioned to take advantage of this technological shift in paradigms will reap huge financial rewards. IDCC has embedded their technology into all of the future standards. No matter which wireless standard or what type of wireless products/devices become dominant in 3G, IDCC’s technology will be there. One will need special calculators with extra 0’s, according to our CEO Howard Goldberg, to calculate a probable royalty to IDCC from all future 3G devices.
IDCC’s closest competitor, who has a similar business model, is Qualcomm. Both companies own substantial wireless IPR. Neither company is an equipment manufacturer any longer. Qualcomm sold their handset and infrastructure divisions, whereas IDCC quit manufacturing their fixed local loop Ultraphone system. Both companies' business models now focus on IPR licensing, wireless protocol software and chips, and developmental services. Both companies are positioned to do extremely well in 3G.
However, there are some notable differences between these two competitors. IDCC has developed IPR in the TDMA/GSM standards, whereas Qualcomm has developed very little in these standards. IDCC has focused upon wideband CDMA in 3G to best accommodate huge amounts of data, whereas, Qualcomm has focused on narrowband CDMA. Wideband CDMA, which is projected by most wireless industry groups to capture at least 80% of the future 3G market, has elements of TDMA/GSM mixed in with the CDMA. WCDMA is IDCC’s forte. Qualcomm’s real strength lies in the CDMA2000 narrowband standard, which is projected to ultimately garner only 15% of the 3G market. However, Qualcomm does have significant IPR in WCDMA also, and IDCC does have IPR in CDMA 2000 as well. The recent strategic agreement with Tantivy, whereby IDCC obtained exclusive licensing rights to over 200 of Tantivy’s CDMA2000 patents, when coupled with InterDigital’s existing CDMA2000 patents significantly enhances IDCC’s IPR position in the CDMA2000 standard.
Qualcomm has licensed over 100 companies for its 2G technology, whereas IDCC has licensed only about 30 companies. QCOM has been fully rewarded already for its 2G contributions and IPR. IDCC has not yet been properly compensated for all of their 2G contributions and IPR. All equipment manufacturers will eventually need to come to IDCC for a 3G license. At that point or before, unresolved 2G issues with unlicensed manufacturers will need to be worked out. This might entail 2G settlement amounts with future installment payments, similar to the NEC and Ericy arrangements, or higher 3G royalty rates, or guaranteed 3G chip purchases from an IDCC chip partner, or combinations thereof with other possible creative solutions.
I firmly believe that IDCC’s earnings will explode in the short-term. IDCC operated at a net loss in 2000 and 2001, and barely broke even in 2002. IDCC earned $.49 per share: basic and $.45 per share: diluted during the first quarter of 2003. My full-year revenue and earnings projections for 2003 from existing licensees as follows:
Ericy 2G settlement $31m (net of 10% insurance reimbursement)
Ericy 2G recurring infrastructure $6m
Sony/Ericy 2G recurring handset $13m (for 2003)
Nokia 2002 accrual $100m (recorded into '03)
Samsung 2002 accrual $ 22m (recorded into '03)
Nokia 2003 discounted recurring $80m
Samsung 2003 discounted recurring $20m
NEC 2G settlement $13m
NEC 3G infra/handsets $19m
Sharp GSM/GPRS/3G $6m
Sharp PDC/PHS $16m
Nokia engineering $1m
Other existing licensees $10m
Interest Income $5m (2.5% on $400m cash balance x 1/2 year)
Total projected revenues $342m
Total projected expenses $84m ($21m average per quarter)
Projected earnings pre-tax $258m
Projected income taxes $46m
Projected federal and state income tax at 38% (after all $137m of NOL carryforwards are fully utilized) = $258m -137m NOL carryforward = $121m taxable at 38% = $46m total. Foreign withholding at $342m foreign revenue x 10% foreign withholding = $34m payable to foreign tax authorities, with the remaining $12m payable to US tax authorities).
Estimated Net Income $212m
Estimated Earnings per Share = $3.85 (based on estimated 55m Basic weighted average shares outstanding). Note: I used the lowest projected royalties for Nokia and Samsung for 2002 and 2003. Using just the midpoints of IDCC’s projections for Nokia and Samsung will yield over $4.00 earnings per share: basic and diluted.
Of course, the market might discount the Nokia and Samsung 2002 royalties that will have to be recorded into 2003 and the nonrecurring Ericy 2G settlement, when trying to establish appropriate PE multiples for the 2003 earnings.
IDCC’s earnings growth rate should be sustainable over a longer-term for several reasons. First other companies should license for 2G after Sony/Ericy, Nokia, and Samsung. These three agreements should establish the 2G precedents for many others. Second several of the leading manufacturers should begin licensing with IDCC for CDMA2000 and other 3G standards as implementation and worldwide deployment continue to ramp-up. Third I have not even begun to factor in other 3G related revenues, such as chip revenues, software stack sales, technology transfer revenues, and engineering services revenues. Fourth the general economy should begin to pick-up significantly fairly soon based upon improving conditions. Fifth the wireless industry should revive and again achieve significant growth, as enhanced and new wireless services begin to arrive and capture the public’s imagination.
Let the parties begin soon. CEO Howard Goldberg’s hockey stick analogy is very much alive and well. I firmly believe that IDCC’s earnings and stock price are about to explode and rocket straight-up. IDCC’s price charts should soon look exactly like a hockey stick.
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