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Interdigital, Inc. 10-Q Summary: Period Ended June 30, 2009

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2009, and the six months ended June 30, 2009. Interdigital, Inc. operates as a single reportable segment focused on technology development and patent licensing. During this period, the company executed a strategic repositioning announced on March 30, 2009, which involved ceasing further product development of its SlimChip modem technology to focus on IP licensing and monetization.

Key Financial Metrics

Note: Revenue is primarily derived from patent licensing royalties. Deferred revenue increased significantly due to a major agreement with Samsung.

Material Changes vs. Prior Period

• Revenue Growth: Revenue for the six months ended June 30, 2009, increased 27% to $145.5 million compared to $114.7 million in the prior year. This was driven by a $46.4 million increase in fixed-fee amortized royalty revenue, primarily from a new patent license agreement with Samsung signed in January 2009.
• Profitability: Net income for the six months ended June 30, 2009, rose to $17.8 million from $13.2 million in the prior year, despite a $37.0 million repositioning charge. Operating expenses excluding the repositioning charge decreased 15% year-over-year.
• Repositioning Charge: The company incurred a $37.0 million charge in the first half of 2009 related to the SlimChip repositioning. Approximately $30.6 million of this was non-cash asset impairments, with the remainder representing cash severance and contract termination costs.
• Liquidity: Total cash, cash equivalents, and short-term investments increased to $216.6 million at June 30, 2009, from $141.7 million at year-end 2008, largely due to the receipt of the first $100 million installment from the Samsung agreement.

Guidance, Outlook, and Risks

• Outlook: Management expects to incur an additional $1.0 million to $2.0 million in repositioning costs in the second half of 2009. Approximately two-thirds of recurring patent licensing revenues are based on fixed payments, providing insulation from market swings.
• Deferred Revenue: The company expects the amortization of fixed-fee royalty payments to reduce the deferred revenue balance by $177.3 million over the next twelve months.
• Litigation: A significant ongoing matter is the USITC investigation against Nokia. An evidentiary hearing was held in May/June 2009, with an initial determination expected by August 14, 2009, and a final USITC determination by December 14, 2009. The company is also pursuing collection of a $500,000 bond posted by Nokia related to a previously overturned preliminary injunction.
• Stock Repurchases: The company authorized a new $100 million share repurchase program in March 2009. As of June 30, 2009, approximately $85.3 million remained available under this program.

Key Facts for Investor Verification

• Samsung Agreement Impact: Verify the sustainability of revenue growth driven by the $400 million Samsung patent license agreement, specifically the timing of the remaining three $100 million installments.
• Nokia Litigation Outcome: Monitor the August 2009 initial determination and December 2009 final determination in the USITC case against Nokia, as this impacts future licensing leverage and potential damages.
• Repositioning Execution: Confirm that the cessation of SlimChip product development has resulted in the projected reduction in development expenses and that no further material impairment charges are anticipated beyond the estimated $1-2 million.
• Customer Concentration: Note that Samsung and LG accounted for 53% of total revenue in Q2 2009, creating significant concentration risk.