InterDigital, Inc. — Q1 2011 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2011, compared with Q1 2010. InterDigital has one reportable segment, principally licensing wireless patents and providing technology solutions.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $78.5 million | $116.2 million | Down 33% |
| Operating income | $37.3 million | $74.7 million | Down 50% |
| Net income | $23.3 million | $48.8 million | Down 52% |
| Diluted EPS | $0.51 | $1.10 | Down $0.59 |
| Operating margin | 47.5% | 64.3% | Calculated from reported figures |
| Net margin | 29.7% | 42.0% | Calculated from reported figures |
| Operating cash flow | $(5.2) million | $72.7 million | Down $77.9 million |
- Patent licensing royalties were $77.0 million, down 32%; technology solutions revenue was $1.5 million, down 38%.
- Per-unit royalties rose 32% to $39.5 million, while fixed-fee amortized royalties fell 27% to $35.2 million. Past-sales revenue fell to $2.3 million from $35.7 million.
- Operating expenses were broadly stable at $41.2 million versus $41.5 million. Other expense was $0.9 million, including a $1.3 million investment impairment. Effective tax rate was approximately 35.8%.
- At March 31, cash and cash equivalents were $200.1 million and short-term investments were $327.3 million, totaling $527.4 million. Current assets were $611.5 million and current liabilities $160.2 million; working capital was $451.3 million.
- Quarter-end debt was approximately $0.4 million. Deferred revenue totaled approximately $422.7 million, including $132.9 million current. Total assets were $839.4 million.
- Cash declined $15.3 million during the quarter. The company paid $4.5 million in dividends; $6.7 million was spent on capitalized patent costs.
Material changes and drivers
- Revenue decreased $37.7 million year over year, principally due to much lower past-sales revenue compared with Q1 2010 and the expiration of the 3G portion of LG’s license at year-end 2010. Higher per-unit royalties partly offset lower fixed-fee royalties.
- Q1 2010 operating cash flow benefited from substantial license-related receipts, including a $100 million Samsung installment. Q1 2011 cash use reflected $20.1 million of incentive compensation payments, foreign withholding taxes, and operating costs.
- Four customers represented 96% of net accounts receivable at quarter-end. Samsung accounted for 33% of Q1 2011 revenue; Research In Motion 15%; and HTC 10%.
Outlook, risks and unusual items
- Management provided no quantified Q2 2011 revenue guidance, stating it would do so after receiving and reviewing royalty and product-sales reports. It said available resources were expected to fund operations, capital needs, the repurchase program and dividends for the next 12 months.
- On April 4, 2011, after quarter-end, the company issued $230 million of 2.50% senior convertible notes due 2016. Net proceeds were approximately $222.1 million; pro forma debt at March 31 would have been approximately $230.4 million. The notes are convertible subject to stated conditions and are generally cash-settled up to principal, with potential shares for value above principal.
- The company also entered note-hedge and warrant transactions intended in part to reduce potential conversion dilution. Warrants covering approximately 4.0 million shares have a $66.3528 strike price and become exercisable in tranches beginning June 2016; they may dilute EPS if the share price exceeds the strike price. The filing gives differing hedge-cost figures: $42.7 million in Note 8 and $47.7 million in MD&A.
- Management warned that the March 2011 Japan earthquake and tsunami could affect handset demand, supply chains, royalties and future cash flow; it expected only a modest Q2 effect but could not predict the full impact.
- The Nokia patent-infringement appeal remained pending, with oral argument held in January 2011; no related liability was recorded. Separately, approximately $12.8 million of revenue was deferred pending arbitration over royalties under a technology-solutions agreement.
- Management noted adoption of updated multiple-deliverable revenue guidance had no material Q1 impact. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether per-unit royalty growth can offset lower fixed-fee revenue, including the impact of the LG license expiration and customer concentration.
- The timing and outcome of the Nokia appeal and the royalty arbitration; the filing records no Nokia-related liability and defers $12.8 million tied to arbitration.
- Post-quarter convertible financing terms, actual financing and hedge costs, and the potential dilution and counterparty risks of the hedge and warrant arrangements.
- How Japan-related disruption affects customer sales, reported royalties and cash flow, and whether deferred-revenue recognition follows the expected schedule.
- The filing’s hedge-cost discrepancy: $42.7 million in the financial-statement note versus $47.7 million in MD&A.