InterDigital, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited consolidated results; dollar amounts below are in millions unless otherwise stated.
Business context
InterDigital earns revenue primarily from patent licensing royalties and technology solutions. Its technology activity includes SlimChip modem intellectual property and technology-transfer agreements. Following its 2009 repositioning, the company ceased further SlimChip product development and focused on licensing and technology solutions.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $91.2 | $74.9 | $207.3 | $145.5 |
| Operating income | $53.1 | $40.2 | $127.8 | $26.5 |
| Net income | $35.0 | $26.4 | $83.8 | $17.8 |
| Diluted EPS | $0.78 | $0.59 | $1.87 | $0.39 |
| Operating margin | 58.2% | 53.7% | 61.6% | 18.2% |
| Net margin | 38.4% | 35.3% | 40.4% | 12.2% |
Revenue increased 22% in Q2 and 42% in the first half year over year. Q2 patent licensing royalties were $85.1 million, up 17%; technology solutions revenue was $6.1 million, up from $2.2 million. First-half patent royalties rose to $198.9 million, including $40.7 million of past-sales and other royalty revenue. First-half net income benefited from the absence of the $37.0 million repositioning charge recorded in the comparable 2009 period.
Q2 operating expenses rose 10% to $38.1 million, mainly due to incentives, consulting, patent portfolio costs and development activity, partly offset by lower patent litigation and arbitration expense. First-half expenses fell 33% to $79.6 million; excluding the prior-year repositioning charge, they declined 3%. The first-half effective tax rate was approximately 35.2%, versus 36.4% in 2009.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $81.5 million, down from $103.3 million. Net cash increased $6.6 million; cash and cash equivalents ended at $217.4 million.
- Cash, cash equivalents and short-term investments totaled $485.8 million, up $76.0 million from year-end 2009. Management attributed the increase principally to receipt of the third of four $100 million installments under the January 2009 Samsung license agreement.
- Operating cash flow also reflected $180.8 million of receipts from patent-license and technology-solutions agreements, offset by operating costs and tax payments. Investing activities used $84.4 million, including $69.4 million net purchases of short-term investments and $13.9 million of capitalized patent costs. Financing provided $9.4 million; no shares were repurchased in the first half.
- Current assets were $723.2 million and current liabilities $252.5 million; working capital was $470.7 million. Adjusted working capital, a company-defined non-GAAP measure, was $155.0 million, down $78.9 million from year-end.
- Total debt was approximately $0.6 million. Total deferred revenue was approximately $587.1 million, down $81.1 million from year-end; it is a revenue-recognition liability, not debt. The company expected fixed-fee royalty amortization to reduce that balance by $169.9 million over the next 12 months.
Management stated that available cash, investments and operating cash generation should be sufficient for operations, capital needs and potential repurchases during the next 12 months, and that it did not anticipate needing debt or equity financing during that period.
Material changes, outlook and risks
- Q2 included $4.9 million of past-sales revenue related to a patent-license renewal. First-half revenue also included $39.9 million associated with the CHMC license and an audit identifying additional royalty obligations at an existing licensee, including $35.7 million related to past sales.
- InterDigital signed technology agreements with Beceem and CapiSemi in the first half. The CapiSemi arrangement involves SlimChip modem-core integration and engineering support; the Beceem agreement licenses certain signal-processing technologies for multimode 4G chips.
- The filing provided no specific Q3 revenue forecast; management said it would provide expectations after receiving and reviewing licensee royalty and product-sales reports. Adoption of new multiple-deliverable revenue guidance was pending; the company expected it could accelerate revenue recognition for some future agreements.
- In the Nokia USITC case, the Commission had found no infringement and terminated the investigation. InterDigital appealed certain findings; Nokia and the Commission filed opposition briefs in July 2010, with InterDigital’s reply due August 30, absent extension. The company recorded no liability for this matter. The filing also describes a separate appeal concerning recovery on Nokia’s $500,000 injunction bond.
- Customer concentration remains material: Samsung and LG represented 28% and 16% of Q2 revenue, respectively; three customers accounted for 91% of net receivables at June 30. The company also identifies litigation outcomes, royalty reporting and revenue timing, tax expense, and customer credit exposure as uncertainties.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No additional repositioning charges were expected.
Investor verification checklist
- Reconcile the $39.9 million first-half contribution from the CHMC agreement and licensee audit, including the $35.7 million attributed to past sales, and assess how much is non-recurring.
- Track Samsung installment timing and receipts, remaining deferred revenue, and actual royalty-reporting trends that determine future revenue.
- Review concentration in customers and receivables, particularly Samsung, LG and the three customers representing 91% of receivables.
- Monitor the Nokia appeal and related proceedings; the filing states no related liability was recorded.
- Compare future operating cash flow with reported earnings, given lower first-half cash flow year over year and significant working-capital and license-payment timing effects.