InterDigital, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. InterDigital develops and licenses wireless and other technology patents and provides technology solutions. This unaudited filing covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Figures below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $76.2 million | $68.6 million; up 11% |
| Patent royalties | $73.0 million | $66.4 million; up 10% |
| Technology solutions revenue | $3.2 million | $2.0 million |
| Operating expenses | $71.5 million | $68.8 million |
| Operating income (loss) | $4.7 million | $(0.2) million |
| Operating margin | 6.1% | Approximately (0.2)% |
| Interest expense | $10.5 million | $9.5 million |
| Income (loss) before taxes | $0.2 million | $(6.0) million |
| Consolidated net loss | $(1.7) million | $(4.2) million |
| Net income (loss) attributable to InterDigital | $0.1 million | $(2.8) million |
| Basic and diluted EPS | $0.00, rounded | $(0.09) |
| Net cash used in operating activities | $26.9 million | $30.8 million |
At March 31, 2020, cash and cash equivalents were $515.8 million and short-term investments were $265.1 million. Including $13.9 million of restricted cash, total cash, cash equivalents, restricted cash and short-term investments were $794.8 million. Total debt carrying value was approximately $354.8 million; the $94.9 million balance of the 2020 Notes was repaid at maturity in March. Shareholders’ equity totaled $775.6 million.
Changes and notable items
- Recurring revenue was $75.5 million versus $74.2 million. Fixed-fee royalty revenue rose 6% to $66.3 million; variable patent royalty revenue fell 36% to $5.9 million. The company attributed the variable royalty decline partly to anticipated COVID-19-related volume reductions and transitions from variable to fixed-fee agreements.
- Total revenue growth was partly driven by a $5.5 million prior-year contra-revenue charge related to a restructured license. Q1 2020 also included $0.7 million of non-current patent royalties and no patent-sale revenue.
- Operating expenses increased 4%, including higher recurring costs from the Technicolor acquisitions and a $2.0 million charge for corporate initiatives. The company also recorded a $1.1 million impairment related to closing its San Diego office.
- Other income included an investment-related fair-value gain. The filing’s note identifies a $5.5 million unrealized gain, while MD&A describes a net $4.4 million gain; the reported amounts reflect differing descriptions in the filing.
- Operating cash use improved by $3.9 million year over year, which management attributed primarily to working-capital timing. Investing activities used $94.5 million, largely reflecting net purchases of short-term investments; financing activities used $106.0 million, including debt repayment and dividends.
Outlook, management commentary and risks
- Management said its cash, investments and expected operating cash flows should be sufficient for operations, capital needs, debt obligations, repurchases and dividends over the next 12 months. It expected to continue quarterly dividends comparable to $0.35 per share.
- For signed and committed Dynamic Fixed-Fee Agreement contracts, the company expected to recognize $195.0 million for the remainder of 2020, $191.4 million in 2021 and $86.7 million in 2022. It expected $126.3 million of the March 31 deferred-revenue balance to be recognized over the next 12 months.
- Management reported limited operational and financial impact from COVID-19 through Q1, citing the substantial share of fixed-fee revenue. It cautioned that future effects remain uncertain, including potential impacts on customers’ payments, device shipments, markets, cybersecurity and internal processes amid remote work.
- On April 28, after quarter-end, InterDigital announced a multi-year, worldwide, non-exclusive fixed-fee license agreement with Huawei covering specified 3G, 4G and 5G products, including Wi-Fi and HEVC, through December 31, 2023. The parties agreed to dismiss pending litigation; the filing does not state the agreement’s financial terms.
- Lenovo and Motorola filed a U.S. antitrust and FRAND complaint on April 9, alleging violations related to licensing of 3G and 4G standard-essential patents. The filing describes other patent disputes and regulatory matters; management did not believe the other ordinary-course disputes would have a material adverse effect, and no potential loss range was accrued or disclosed for the described proceedings.
- Apple and Samsung accounted for 37% and 26% of Q1 revenue, respectively; LG accounted for 10%. Management also noted that five licensees represented 66% of net accounts receivable at quarter-end.
Important facts for investors to verify
- Huawei agreement economics, revenue recognition and the completion of agreed litigation dismissals.
- Revenue and receivable concentration, and the ability of major licensees to make payments on time.
- COVID-19 effects on variable royalties, license negotiations, customers and operations beyond Q1.
- Cash generation versus the dividend, repurchase program and debt obligations; the 2024 Notes have $400 million principal and mature in 2024.
- Resolution and potential financial consequences of the Lenovo proceedings and other licensing disputes.