InterDigital, Inc. — FY 2018 Form 10-K
Business context and reporting period. This annual filing covers the year ended December 31, 2018; the requested 2018 Q4 figures are also summarized below. InterDigital primarily licenses patents covering wireless and video technologies. It completed its acquisition of Technicolor’s patent-licensing business on July 30, 2018, adding approximately 18,000 patents and applications, including about 3,000 related to video coding.
Financial results and position
| Metric | FY 2018 | Prior comparable period |
|---|---|---|
| Total revenue | $307.4 million | $532.9 million in FY 2017 |
| Operating income | $62.6 million | $301.5 million in FY 2017 |
| Net income attributable to InterDigital | $63.9 million; diluted EPS $1.81 | $174.3 million; diluted EPS $4.87 in FY 2017 |
| Operating cash flow | $146.8 million | $315.8 million in FY 2017 |
| Cash, cash equivalents, restricted cash and short-term investments | $959.5 million | $1,158.0 million at FY 2017 year-end |
| Total debt, balance-sheet carrying value | $317.4 million | $285.1 million at FY 2017 year-end |
| Working capital | $844.9 million | $1,019.4 million at FY 2017 year-end |
Fourth quarter: Revenue was $75.3 million, net income attributable to common shareholders was $1.8 million, and diluted EPS was $0.05. FY 2017 Q4 revenue was $205.3 million and diluted EPS was $1.48. These quarterly figures are not directly comparable because 2018 reflects ASC 606 and 2017 reflects ASC 605.
Revenue-recognition comparability: InterDigital adopted ASC 606 on January 1, 2018 using the modified retrospective method. Reported FY 2018 revenue was $307.4 million; under the prior ASC 605 method it would have been $382.1 million. The filing attributes $74.7 million of the reported revenue decrease to the accounting change; the remaining $150.8 million operational decrease versus 2017 was primarily driven by lower non-current patent royalties. Under ASC 605, FY 2018 net income attributable to InterDigital would have been $148.5 million and diluted EPS $4.21, according to the filing’s reconciliation.
Reported operating margin was approximately 20.4% and net margin attributable to InterDigital approximately 20.8%; year-over-year comparisons are substantially affected by the accounting change and lower non-current royalties. Patent licensing royalties were $302.1 million; technology solutions revenue was $4.6 million and patent sales were $0.8 million. Apple, Samsung and LG represented approximately 36%, 25% and 10% of FY 2018 revenue, respectively.
Material changes and notable items
- Operating cash flow fell $169.0 million year over year, mainly as patent-licensing cash receipts declined $183.7 million. Cash receipts from patent and technology-solutions agreements totaled $325.4 million.
- Operating expenses rose 6% to $244.8 million. Technicolor contributed $32.0 million of 2018 operating expenses, including $17.8 million of one-time transaction-related costs; the acquired business contributed $4.5 million revenue after closing.
- Interest expense increased to $36.0 million, including $16.7 million associated with significant financing components under ASC 606. Other expense also included an $8.4 million loss on strategic investments.
- The company recorded an income-tax benefit of $27.4 million, including an $18.0 million FDII benefit and a $14.7 million benefit tied to anticipated amended returns. It received $97.4 million, including interest, from a U.S.-Korea competent-authority agreement.
- InterDigital repurchased $110.5 million of stock in 2018 and declared $1.40 per share in dividends. The board increased the repurchase authorization to $600 million; approximately $168.1 million remained at year-end.
Outlook, risks and contingencies
- Management said existing liquidity and expected operating cash flow should fund operations, capital requirements, debt obligations, repurchases and dividends for the next 12 months. It gave no specific financial guidance in the provided filing text.
- The $316.0 million principal amount of 1.50% convertible notes matures March 1, 2020. The filing also reports $18.4 million of acquisition-related long-term debt. Management’s current intent is to settle conversions using cash and shares.
- Key risks include dependence on a small group of licensees; uncertain renewals and new licensing deals; potentially lower FRAND royalty rates; challenges enforcing patents and defending licensing practices; U.S.-China trade and geopolitical conditions; and integration and monetization of the Technicolor portfolio. Apple has certain termination rights after September 30, 2021; Samsung’s agreement ends December 31, 2022.
- In the Asus litigation, the company recorded no accrual. Asus’s expert claimed $75.9 million in damages, with possible additional interest, costs, attorneys’ fees and treble damages; InterDigital said a potential loss was reasonably possible but could not estimate a range. Trial was scheduled for May 2019.
- Huawei’s patent license expired December 31, 2018. A new proceeding filed in China in January 2019 seeks FRAND terms for Chinese 3G, 4G and 5G patents covering 2019–2023. Separately, the Chinese Supreme People’s Court’s December 2018 action effectively vacated an earlier adverse Huawei decision.
- Management made a binding offer to acquire Technicolor’s Research & Innovation unit, expected to close in mid-2019 subject to conditions. No cash consideration was specified; the arrangement would replace the joint R&D collaboration and reduce Technicolor’s revenue-sharing rights.
Important facts for investors to verify
- Reconcile reported FY 2018 revenue and earnings with the ASC 605 comparison, and assess the continuing effect of ASC 606 on timing and volatility.
- Review the renewal and termination terms for major licensees, especially Apple and Samsung, and the concentration of revenue in those customers.
- Assess the refinancing or settlement plan for the 2020 Notes and the cash-flow effects of fixed-fee prepayments, dividends and repurchases.
- Track outcomes and exposure in the Asus and Huawei matters, including any developments affecting FRAND rates or patent licensing practices.
- Evaluate Technicolor acquisition integration, consumer-electronics licensing prospects, contingent revenue sharing and the proposed R&I acquisition.