InterDigital, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. InterDigital earns most of its revenue from patent licensing. On April 3, 2018, it reorganized its holding-company structure; the filing says the reorganization did not change the combined business, assets or liabilities.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $69.6 million | $135.8 million | $157.0 million | $230.3 million |
| Operating income | $15.7 million | $80.9 million | $45.8 million | $114.9 million |
| Net income attributable to InterDigital | $10.7 million | $52.5 million | $40.6 million | $86.3 million |
| Diluted EPS | $0.30 | $1.46 | $1.14 | $2.39 |
| Operating cash flow | Not presented by quarter | $6.2 million | $(6.4) million |
- Q2 operating margin was approximately 22.5%, compared with 59.6% a year earlier; first-half operating margin was approximately 29.2%, compared with 49.9%. Margins are calculated from reported revenue and operating income.
- At June 30, cash and cash equivalents were $523.8 million and short-term investments were $576.8 million, totaling $1.10 billion. Current assets were $1.20 billion and current liabilities were $128.3 million.
- Long-term debt had $316.0 million principal outstanding and a $291.9 million carrying value. The notes are 1.50% convertible notes due March 2020.
- First-half declared dividends were $0.70 per share. The company repurchased $9.2 million of shares in the first half.
Comparability and material changes
- InterDigital adopted ASC 606 on January 1, 2018 using the modified retrospective method, increasing opening retained earnings by $161.3 million. Prior-year results remain under ASC 605, so reported year-over-year comparisons are not on the same accounting basis.
- Under ASC 605, Q2 2018 revenue would have been $90.6 million, including $21.1 million more revenue and $4.3 million less interest expense than reported under ASC 606; net income would have been $22.5 million higher. For the first half, ASC 605 revenue would have been $195.6 million, with $38.6 million more revenue and $9.0 million less interest expense; net income would have been $38.7 million higher.
- Management said Q2 recurring revenue on the prior accounting basis was $88.6 million, versus $87.9 million in Q2 2017. The reported decline reflected both ASC 606 effects and operational factors, including the prior-year Microsoft settlement revenue, lower shipments by some variable licensees, and expired agreements. New dynamic fixed-fee agreements partly offset the operational decline.
- Reported first-half operating expenses fell 4% to $111.2 million. Lower incentive compensation, development and personnel costs were partly offset by higher patent enforcement and amortization costs.
Outlook, risks and unusual items
- Based on signed contracts and committed Dynamic Fixed-Fee Agreement payments at June 30, the company expected to recognize $118.0 million for the remainder of 2018, $236.1 million in 2019, $236.1 million in 2020, $169.0 million in 2021 and $85.2 million in 2022. These are expected revenues, not guidance for total company revenue.
- Management believed available funds and operating cash generation would cover operations, capital needs, debt, the existing repurchase and dividend programs, and the Technicolor acquisition for the next 12 months. It expected to continue a quarterly $0.35 dividend, subject to the board’s assessment of relevant factors.
- On July 31, 2018, after quarter-end, the company completed its acquisition of Technicolor’s patent licensing business for $150 million cash, acquiring approximately 18,000 patents and applications. Technicolor is entitled to 42.5% of future net cash receipts from new consumer-electronics licensing efforts; no revenue sharing applies to mobile licensing.
- Tax results included a forecast $19.5 million benefit related to income qualifying for FDII and $3.7 million of discrete tax benefits. The company said the effective tax rate remains subject to tax-law interpretation and guidance. It was reviewing the expected financial-statement effect of a U.S.-Korea tax competent-authority agreement reached July 24, 2018.
- Litigation remains a significant uncertainty. Asus’s expert claimed $75.9 million in damages in its U.S. case, with interest, costs, attorneys’ fees and possible treble damages also sought; InterDigital recorded no accrual and said a potential loss was reasonably possible but not estimable. ZTE and Huawei-related proceedings in China and other patent disputes remain pending. The company likewise recorded no accrual for the ZTE China matters, assessing losses as reasonably possible but not probable.
- Revenue and receivables are concentrated among a small number of licensees: five licensees represented 91% of net receivables at June 30. Apple and Samsung accounted for 40% and 28% of Q2 revenue, respectively.
Important facts for investors to verify
- Assess revenue and earnings using ASC 606 and the company’s ASC 605 reconciliations; distinguish accounting-transition effects from underlying licensing trends.
- Track licensee shipments, renewals, new fixed-fee agreements and the concentration of revenue and receivables among major customers.
- Monitor the Technicolor acquisition’s integration, cash impact and consumer-electronics revenue-sharing obligations.
- Follow litigation developments, especially the Asus damages claim and pending ZTE and China proceedings, and any change in loss estimates or accruals.
- Confirm cash generation, debt repayment or conversion developments, and the sustainability of dividends and repurchases.