InterDigital, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; financial amounts below are in millions of dollars unless otherwise noted. InterDigital reports one segment and derives most revenue from patent licensing.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $87.7 | $104.5 | $170.1 | $180.7 |
| Operating income (loss) | $(3.1) | $31.9 | $8.8 | $36.6 |
| Net income (loss), consolidated | $(6.8) | $20.6 | $(2.8) | $18.9 |
| Net income attributable to InterDigital | $1.6 | $22.3 | $7.2 | $22.4 |
| InterDigital diluted EPS | $0.05 | $0.72 | $0.23 | $0.72 |
- Q2 operating margin was approximately (3.6)%, versus 30.5% a year earlier; first-half operating margin was 5.2%, versus 20.3%. The filing does not present a gross margin.
- First-half operating cash flow was $(37.1) million, compared with $42.9 million provided in the prior-year period. Patent royalty cash receipts fell $79.9 million to $75.4 million; the company attributed the decline principally to lower and differently timed receipts.
- At June 30, cash and cash equivalents were $410.1 million, short-term investments $425.8 million, and restricted cash $1.8 million. Combined cash, restricted cash and investments totaled $837.7 million, down $93.1 million from year-end. Long-term debt was $420.6 million; cash and investments exceeded debt by approximately $415 million, before other obligations.
- Current assets were $922.7 million and current liabilities $234.2 million. Deferred revenue totaled approximately $241.3 million, including current and long-term balances.
- The quarterly dividend declared was $0.35 per share. The company repurchased 82,600 shares for $5.4 million during Q2; approximately $60.3 million remained under the authorization at quarter-end.
Revenue trends and changes
- Q2 revenue decreased 16% year over year. Patent royalties fell 15% to $86.2 million, while technology-solutions revenue decreased 54% to $1.5 million.
- Recurring revenue was $78.1 million, down 8%. Lower fixed-fee royalties, primarily following expiration of the LG license, were partly offset by eight new patent licenses signed in the prior 12 months. Non-current patent royalties declined by $9.7 million, principally because the prior-year quarter included Huawei past-sales royalties.
- For the first half, revenue declined 6%. Current patent royalties were nearly flat at $153.0 million; non-current patent royalties decreased 33% to $13.4 million and technology-solutions revenue fell 43% to $3.7 million.
- Apple, Samsung and Huawei represented 32%, 22% and 13% of Q2 revenue, respectively; Kyocera contributed 12%. The filing reports that customers individually accounting for at least 10% collectively represented 79% of Q2 revenue.
Outlook, management commentary, risks and unusual items
- Restructuring: Q2 included $13.2 million of net restructuring expense, including an $11.0 million patent impairment, $11.1 million of severance and benefits, and $1.2 million of outside services, offset by a $10.0 million reimbursement arrangement. The company expected an additional $15–$20 million of restructuring charges in the second half of 2021 and approximately $15 million in annualized recurring expense savings beginning in Q4 2021. It proposed eliminating 66 research-and-innovation positions, 60 in France; Chordant also began winding down operations.
- Xiaomi agreement after quarter-end: On August 3, 2021, InterDigital announced a multi-year, worldwide, non-exclusive, royalty-bearing license covering cellular, WiFi and HEVC technologies, with all pending disputes between the companies to be terminated. Q2 revenue does not include the agreement; management expected recurring and non-recurring revenue from Q3, along with related performance-compensation expense adjustments.
- Contracted revenue: Signed and committed Dynamic Fixed-Fee Agreement payments were expected to generate $426.8 million over the remaining contract terms, including $142.9 million for the rest of 2021 and $239.3 million in 2022. Separately, management expected $158.9 million of the June deferred-revenue balance to be recognized over the next 12 months.
- Debt and accounting: Early adoption of ASU 2020-06 increased the carrying value of the 2024 convertible notes by $50.2 million at January 1, 2021, largely by reversing the unamortized debt discount. It reduced non-cash interest expense and increased reported EPS by $0.09 in Q2 and $0.17 in the first half. The notes have $400 million principal, bear 2.00% interest and mature in 2024.
- Taxes and one-off items: The first-half effective tax rate was (169.6)%, affected by losses in jurisdictions with valuation allowances; excluding those allowances, the company calculated a 104.3% rate. Other income included a $1.9 million contract-termination gain in Q1 and a $1.0 million investment gain in Q2. A prior-period asset-classification error was revised and deemed immaterial to prior periods.
- Litigation and uncertainty: InterDigital and Lenovo have patent, FRAND and antitrust disputes underway in multiple jurisdictions. In a UK technical trial, a court decision issued July 29 found one asserted patent valid, infringed and essential to LTE Release 8; other proceedings remain pending. Xiaomi-related litigation was subject to the subsequent licensing settlement. Management stated it did not believe other ordinary-course disputes would materially affect results, and no amounts were accrued for the described proceedings as of June 30.
- Management said available liquidity should fund operations, capital needs, debt obligations, buybacks and dividends for the next 12 months. It reported limited operational and financial impact from COVID-19 to date, while noting uncertainty around the pandemic, customer payments, device shipments and remote-work cybersecurity. No clear full-year revenue or EPS guidance is provided in the filing.
Investor verification points
- Confirm the Xiaomi license’s revenue timing, composition, and related compensation costs in subsequent filings.
- Track execution and realized savings from the restructuring, including actual second-half charges and the French consultation process.
- Assess the durability of recurring royalties after the LG license expiration, customer concentration, and timing of royalty cash collections.
- Review operating cash flow and deferred-revenue movements against revenue recognition, and monitor liquidity alongside the 2024 notes and other obligations.
- Follow outcomes of the Lenovo and other patent/FRAND litigation and any resulting licensing, damages, or enforcement effects.
- Check subsequent-period tax rates, cash taxes and the impact of valuation allowances, as the reported first-half effective rate was unusually volatile.