InterDigital, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial figures below are in millions unless otherwise noted. InterDigital licenses patents and provides technology solutions; it reports one segment.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $104.5 | $75.6 | $180.7 | $144.2 |
| Operating income | $31.9 | $8.9 | $36.6 | $8.8 |
| Net income attributable to InterDigital | $22.3 | $7.7 | $22.4 | $4.9 |
| Diluted EPS | $0.72 | $0.24 | $0.72 | $0.15 |
| Operating margin | 30.5% | 11.8% | 20.3% | 6.1% |
Q2 revenue comprised $101.2 million of patent royalties and $3.3 million of technology solutions revenue. Recurring revenue was $85.2 million, versus $74.4 million a year earlier. Non-current patent royalties were $19.2 million in Q2, primarily associated with the Huawei agreement. The company reported $20.6 million of consolidated Q2 net income; net income attributable to InterDigital was higher because of losses attributable to noncontrolling interests.
For the first half, operating cash flow was $42.9 million, compared with cash used of $53.5 million in 2019. Investing activities used $6.2 million; financing activities used $116.5 million, including repayment of $94.9 million of 2020 convertible notes and $21.5 million of dividends. Cash, cash equivalents and restricted cash ended at $677.3 million; short-term investments were $169.0 million. Combined cash, restricted cash and short-term investments totaled $846.2 million, down $90.1 million from year-end 2019.
At June 30, total debt carrying value was approximately $359.1 million: $336.5 million for the 2.00% convertible notes due 2024 and $22.6 million of Technicolor-related revenue-based debt. The 2024 notes had $400 million principal outstanding. Current liabilities were $203.9 million and current assets were $921.0 million. Deferred revenue, current and long-term combined, was approximately $280.9 million.
Changes and key drivers
- Q2 revenue rose 38% year over year, and first-half revenue increased 25%. Growth primarily reflected Huawei and other fixed-fee licensing agreements. Variable patent royalties declined 47% in Q2 and 41% in the first half, partly due to forecast volume declines amid COVID-19 and conversions of some agreements from variable to fixed fee.
- Q2 operating expenses increased 9% to $72.6 million; first-half expenses increased 6% to $144.1 million. Drivers included Technicolor acquisition-related operations, patent enforcement and performance compensation, partly offset by lower personnel costs.
- Q2 results included $19.2 million of non-recurring revenue, a $2.9 million performance-compensation charge, and $17.2 million of Technicolor acquisition-related operating expenses. The prior-year comparison included a $14.2 million gain related to the Technicolor R&I acquisition and a $5.5 million debt-extinguishment loss.
- First-half other income included a $5.5 million gain from an observable price change in a strategic investment. First-quarter 2020 also included a $1.1 million impairment related to an abandoned leased property.
- In Q2, Huawei represented 29% of revenue, Apple 27%, and Samsung 19%. For the first half, Apple represented 31%, Samsung 22%, and Huawei 17%.
Outlook, risks and contingencies
- Management said available liquidity and expected operating cash flows should fund operations, capital requirements, debt obligations, repurchases and dividends for the next 12 months. It expressed an expectation of continuing quarterly dividends comparable to $0.35 per share; the filing does not provide formal revenue or earnings guidance.
- Signed and committed Dynamic Fixed-Fee Agreement payments expected to be recognized are $152.1 million for the remainder of 2020, $235.4 million in 2021, $130.7 million in 2022 and $43.9 million in 2023. Management expects $141.5 million of the June 30 deferred revenue balance to be amortized over the next 12 months. These are contract-based expectations, not total-company guidance.
- InterDigital said COVID-19 had limited impact on operations and financial position in the first half, and fixed-fee royalties insulated much of its revenue from market conditions. Risks remain around licensee payments, device shipments, economic conditions, remote-work cybersecurity and operational controls.
- The multi-year Huawei worldwide fixed-fee license, signed in Q2, covers certain 3G, 4G and 5G terminal products through December 31, 2023; related litigation was dismissed. Lenovo litigation remains active, including U.K. patent and FRAND proceedings and U.S. antitrust and FRAND claims. Lenovo and Xiaomi also brought China proceedings seeking FRAND royalty determinations; InterDigital said it had not been served with those complaints as of the filing. InterDigital filed Indian patent infringement actions against Xiaomi in July 2020.
- The company disclosed no material accrual or estimable range for the described legal matters as of June 30. It also noted a $25 million maximum commitment through 2020 to fund possible Madison Arrangement shortfalls; no funding had been contributed by quarter-end.
- Management reported no material COVID-19-related changes to significant accounting judgments or estimates and no material changes in market-risk disclosures. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of revenue and future cash receipts comes from fixed-fee agreements, and whether contracted payments are collected as expected.
- The durability of revenue growth after separating recurring royalties from Huawei-related and other non-recurring royalties.
- Licensee concentration, payment timing, and exposure to changes in handset and consumer-electronics shipments.
- Cash generation and liquidity after debt service, dividends, patent investment and any future share repurchases; the 2024 notes’ conversion and dilution implications.
- Developments and potential costs or outcomes in Lenovo, Xiaomi and other licensing litigation, alongside the Madison Arrangement funding commitment.