InterDigital, Inc. — Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results; the company reports one segment. InterDigital generates revenue primarily from patent licensing royalties and technology solutions.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2010 period.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $76.5 | $91.9 | $224.8 | $299.3 |
| Operating income | $32.2 | $54.5 | $99.3 | $182.2 |
| Operating margin | 42.1% | 59.3% | 44.1% | 60.9% |
| Net income | $26.2 | $35.5 | $66.7 | $119.3 |
| Diluted EPS | $0.57 | $0.79 | $1.45 | $2.67 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(32.6) | $163.1 |
- Q3 revenue declined 17% year over year. Patent licensing royalties were $75.3 million, down 13%; technology solutions revenue was $1.2 million, down 79%.
- Nine-month revenue declined 25%. Per-unit royalties rose 11% to $108.6 million, but fixed-fee amortized royalties fell $44.7 million and past-sales royalties fell $30.7 million.
- Q3 net income included a $6.8 million tax benefit from resolving tax contingencies. The nine-month effective tax rate was approximately 27.3%, versus 35.3% in 2010.
- Nine-month operating cash use was $32.6 million, compared with $163.1 million generated in 2010. Management attributed the change in part to lower customer receipts and timing of taxes and incentive payments; 2010 receipts included Samsung installment payments.
Financial position and liquidity
- At September 30, cash and cash equivalents were $409.7 million and short-term investments were $280.9 million, totaling $690.6 million, up $148.9 million from year-end 2010.
- Total assets were $1.022 billion; total liabilities were $573.4 million. Current assets were $782.1 million and current liabilities $167.6 million.
- The company issued $230 million of 2.50% senior convertible notes due 2016. Their balance-sheet carrying value was $190.6 million after unamortized discount; reported fair value was $251.0 million. Nine-month interest expense related to the notes was $7.2 million.
- Deferred revenue, current and long-term, totaled approximately $339.2 million, down $127.7 million from December 31, 2010. Management expected $133.5 million of fixed-fee royalty amortization over the next 12 months.
- The company paid $13.6 million in dividends during the first nine months and declared quarterly dividends of $0.10 per share. Management believed available liquidity and operating cash generation would be sufficient for the next 12 months.
Material changes, outlook, and risks
- Revenue weakness chiefly reflected expiration of the 3G portion of the LG license agreement at the end of 2010, lower past-sales royalties, and reduced technology solutions revenue. Smartphone-related customer sales supported per-unit royalties.
- Q3 included $7.9 million of past-sales revenue from an existing-customer audit. Patent licensing royalties rose 10% sequentially, mainly from that audit. Operating expenses included a $0.9 million long-term compensation accrual adjustment.
- Operating expenses increased 18% in Q3, principally from intellectual-property enforcement and litigation, personnel costs, and costs of evaluating strategic alternatives. The company began a strategic review that could include a sale or other transaction; there was no timetable or assurance of a transaction.
- A technology solutions agreement arbitration concerns royalty obligations and potentially license scope. The company deferred $25.6 million of related revenue at September 30, compared with $8.6 million at year-end 2010.
- InterDigital filed a USITC action alleging infringement of seven patents by Nokia, Huawei, and ZTE, seeking import exclusion and cease-and-desist orders. The investigation target date was February 28, 2013; a related Delaware district-court action was stayed. Huawei separately filed a Delaware action alleging failure to offer FRAND licensing terms. Outcomes and potential financial effects were uncertain.
- Revenue and receivables were concentrated: Samsung represented 34% of Q3 and nine-month revenue; three customers accounted for 97% of net receivables at quarter-end. Management cited no material change in market-risk disclosures.
Important facts for investors to verify
- Whether the strategic-alternatives review leads to a transaction and what its terms may be.
- Resolution and potential revenue-recognition effects of the technology solutions arbitration and the $25.6 million deferred amount.
- Progress and outcomes of the USITC, FRAND, and related patent disputes, including the effect on licensing and enforcement rights.
- Future royalty receipts, customer concentration, deferred-revenue run-off, and the reasons operating cash flow differs materially from net income.
- Convertible-note dilution, cash interest and eventual repayment or conversion obligations, alongside the company’s dividend and liquidity plans.