InterDigital, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited consolidated results; the company reports one segment. Comparisons are with Q1 2018 unless otherwise stated. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior balance |
|---|---|---|
| Total revenue | $68.6 million | $87.4 million |
| Operating income (loss) | $(0.2) million | $30.2 million |
| Net income (loss) attributable to InterDigital | $(2.8) million; $(0.09) per diluted share | $30.2 million; $0.85 per diluted share |
| Net cash from (used in) operations | $(30.8) million | $(0.6) million |
| Cash, cash equivalents and short-term investments | $793.0 million, plus $13.4 million restricted cash | $945.8 million, plus $13.7 million restricted cash |
| Total debt carrying value | $321.6 million | $317.4 million |
| Total assets / shareholders’ equity | $1,479.8 million / $825.5 million | $1,626.6 million / $938.0 million |
Operating margin was approximately negative 0.2%, versus approximately 34.5% in Q1 2018. The quarter’s operating loss and net loss included significant changes in revenue mix and increased expenses. The company paid $11.6 million in dividends and repurchased $109.0 million of stock; operating cash outflow and these financing uses were partly offset by net sales of short-term investments. Cash and investments remain substantial, though their combined balance declined about $153.0 million from year-end.
Changes versus the prior period
- Revenue declined 22% to $68.6 million. Current patent royalties rose 13% to $72.2 million, and technology-solutions revenue increased to $2.0 million; however, non-current patent royalties fell from $23.3 million to negative $5.8 million.
- The decline in non-current royalties primarily reflected prior-year agreements and a $5.5 million net contra-revenue charge in Q1 2019 related to a restructured long-term customer license.
- Operating expenses increased 20% to $68.8 million. The Technicolor acquisition contributed $12.1 million of Q1 expenses, including $3.0 million of transaction and integration costs; acquired operations contributed $5.6 million of revenue.
- Operating cash use increased to $30.8 million, mainly because cash receipts from patent royalties and technology solutions were lower, in part due to timing of dynamic fixed-fee royalty receipts.
Liquidity, debt, outlook and risks
- The $316.0 million, 1.50% senior convertible notes mature in March 2020 and were classified as current debt at March 31, 2019. Management stated that available funds and expected operating cash generation should cover operations, capital needs, debt obligations, buybacks and dividends for the next 12 months.
- Signed contracts and committed dynamic fixed-fee payments were expected to generate $189.4 million of revenue for the remainder of 2019, $248.3 million in 2020, $178.6 million in 2021 and $85.2 million in 2022. These are contract-based expected recognitions, not total-revenue guidance.
- Deferred revenue was $223.4 million at quarter-end; the company expected $84.8 million of that balance to be recognized over the next 12 months. It reported no material liquidity obligation associated with deferred revenue.
- Customer concentration is significant: Apple, Samsung and LG represented 41%, 29% and 13% of Q1 revenue, respectively. Five licensees accounted for 53% of net receivables at quarter-end.
- Huawei filed a proceeding in China seeking FRAND licensing terms for Chinese patents covering 3G, 4G and 5G products for 2019–2023; its prior license expired December 31, 2018. The filing also describes ongoing patent disputes and China regulatory commitments.
- After quarter-end, InterDigital and Asus signed a multi-year license amendment on April 12, 2019, and the parties’ litigation was dismissed. The agreement’s terms are confidential.
- The company expected its proposed acquisition of Technicolor’s R&I unit to close in late Q2 2019, subject to customary conditions. No cash consideration was expected; the agreed terms included ending a jointly funded R&D collaboration and reducing Technicolor’s revenue-sharing rights.
- InterDigital adopted lease accounting guidance on January 1, 2019, recording $13.6 million of right-of-use assets and $17.2 million of lease liabilities at adoption; management said the adoption had no material income-statement or cash-flow impact. The filing also revised prior-period noncontrolling-interest presentation, concluding the error was not material to prior periods.
Investor verification priorities
- Assess the sustainability and timing of royalty receipts, including the unusual negative non-current royalty amount and the $5.5 million customer-related contra-revenue charge.
- Review the March 2020 convertible-note repayment or conversion alternatives, alongside continued dividends and share repurchases.
- Track customer concentration, Huawei negotiations and proceedings, and the expiration or renewal of China regulatory commitments.
- Confirm progress and final terms for the Technicolor R&I acquisition and any resulting changes to costs, research capacity or revenue-sharing arrangements.