InterDigital, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2013; filed July 26, 2013. InterDigital operates in patent licensing and technology solutions and reports one segment. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $67.7 million | $71.9 million | $115.1 million | $141.2 million |
| Operating income (loss) | $12.7 million | $17.6 million | $(2.4) million | $37.0 million |
| Net income (loss) attributable to InterDigital | $9.2 million | $9.7 million | $(3.0) million | $20.6 million |
| Diluted EPS | $0.22 | $0.22 | $(0.07) | $0.46 |
| Operating cash flow | Not presented quarterly | $219.8 million | $(41.3) million |
- Q2 patent licensing royalties were $67.2 million, including $24.2 million of past-sales revenue primarily from the Pegatron arbitration award. Total Q2 revenue fell 6% year over year; operating income declined about 28%.
- First-half revenue fell 19%. Lower fixed-fee amortized royalties—mainly following expiration of the Samsung 3G license component—and lower per-unit royalties and patent-sale revenue outweighed higher past-sales revenue.
- First-half operating expenses rose 13% to $117.4 million, including $12.1 million higher intellectual-property enforcement and litigation costs and a $1.5 million repositioning charge. A $6.7 million investment impairment contributed to first-half other expense.
- Cash, cash equivalents and short-term investments totaled $769.8 million at June 30, up $192.5 million from year-end. Operating cash flow benefited from $343.4 million of cash receipts under patent-license and technology-solutions agreements, including $242.4 million in prepayments.
- Current and long-term deferred revenue totaled approximately $382.0 million, up $113.8 million from year-end. The company said it had no material obligations associated with this balance.
- Long-term debt had a $204.5 million carrying value against $230.0 million principal; fair value was $247.0 million. The notes bear 2.50% interest and mature in March 2016.
- Accounts receivable were $60.6 million, down from $169.9 million at year-end; four licensees represented 95% of receivables. Total assets were $1.154 billion and total liabilities $635.7 million.
Changes, outlook and significant matters
- Q2 results included a $29.9 million Pegatron arbitration award received in May: $23.5 million for past royalties, $6.2 million interest and other costs. The award was confirmed by a federal court in June.
- Management believed available funds and operating cash generation would cover operations, capital requirements, debt obligations, the existing repurchase program and dividends for the next 12 months. It expected to continue quarterly dividends comparable to $0.10 per share, subject to board review and relevant factors. No specific earnings or revenue guidance was provided.
- A technology-solutions agreement arbitration remained pending; $52.6 million of related revenue was deferred, with a decision expected in 2013. The filing says $45.5 million had been collected and $7.1 million remained in receivables.
- In the 2011 USITC case involving Nokia, Huawei and ZTE, the administrative law judge found no violation, citing non-infringement and/or invalidity. Both sides sought Commission review; a final Commission determination was targeted for October 28, 2013. The judge found respondents had not established FRAND or other equitable defenses.
- InterDigital’s 2013 USITC and related court cases against Samsung, Nokia, Huawei and ZTE continued. The related Delaware court dismissed several FRAND-related counterclaims, while allowing certain contract and declaratory claims to be amended.
- Chinese courts had ruled against InterDigital in Huawei proceedings, including finding certain conduct violated China’s Anti-Monopoly Law, awarding Huawei approximately $3.2 million, and setting a ceiling of 0.019% of product sales for specified Chinese essential-patent royalties. Appeals were heard in July 2013. InterDigital accrued a $3.2 million litigation contingency.
- Management identified regulatory scrutiny of standard-essential patents, legal outcomes, and changes in patent law and rules as risks that could increase costs or affect licensing and enforcement strategies. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported revenue and operating cash flow is recurring versus driven by Pegatron past royalties, interest, and licensee prepayments.
- Outcomes and timing of the USITC, Delaware, China, European Commission and arbitration matters, including potential effects on royalty rates, injunctions, costs and license renewals.
- The deferred $52.6 million technology-solutions revenue and the result of the related arbitration.
- Licensee concentration and the impact of Samsung’s expired 3G license component and shipment trends on future royalties.
- Debt maturity and conversion terms, dividend sustainability, and the company’s stated 12-month liquidity assessment.