InterDigital, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2019; filed October 31, 2019. InterDigital is a patent licensing and technology company with one reportable segment. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $72.5 | $75.1 | $216.8 | $232.1 |
| Operating income | $3.8 | $12.9 | $12.5 | $58.8 |
| Net income attributable to InterDigital | $2.2 | $21.8 | $7.2 | $62.9 |
| Diluted EPS | $0.07 | $0.61 | $0.22 | $1.77 |
| Operating margin | 5.2% | 17.2% | 5.8% | 25.3% |
- Revenue mix: Q3 patent royalties were $68.0 million, down 8%; technology solutions revenue was $3.7 million, up from $1.0 million; patent sales contributed $0.8 million. Nine-month patent royalties declined 10% to $208.0 million. Current patent royalties rose 4% for the nine months, but non-current royalties fell from $25.5 million to a negative $4.9 million, reflecting prior-period past royalties and a $5.5 million contra-revenue charge related to a restructured license.
- Cash flow: Operating cash flow was $72.0 million for the first nine months, versus $176.6 million a year earlier. The company attributed the decline mainly to lower and differently timed royalty receipts and prior-year working-capital timing. Investing activities provided $244.2 million, largely reflecting net sales of short-term investments. Financing used $58.7 million.
- Liquidity: At September 30, cash and cash equivalents were $735.9 million, short-term investments $211.7 million, and restricted cash $10.3 million; together these totaled $957.9 million. Current assets were $1,022.5 million and current liabilities $334.3 million. Management said available funds and expected operating cash flow should cover operations, capital needs, debt obligations, repurchases and dividends for the next 12 months.
- Debt: Balance-sheet debt carrying value was $439.5 million, including $93.1 million current and $346.4 million long-term. The company had $400 million principal amount of 2.00% convertible notes due 2024 and $94.9 million principal remaining on 1.50% notes due March 2020. The 2020 notes were classified as current. It also reported $20.4 million of Technicolor-related revenue-sharing debt.
- Margins and costs: Operating expenses rose 11% in Q3 to $68.7 million and 18% for the nine months to $204.2 million. Nine-month interest expense was $30.3 million, compared with $27.2 million. The nine-month effective tax rate was 50.1%; the filing says it would have been a 25.3% benefit excluding the effect of valuation allowances.
Material changes versus comparable periods
- Q3 revenue fell 3%, primarily because of lower royalties from a Taiwanese licensee; higher fixed-fee royalties and technology-services revenue partly offset the decline. Apple, Samsung and LG represented 39%, 27% and 11% of Q3 revenue, respectively.
- Nine-month revenue declined 7%, mainly because of lower non-current royalties, partly offset by higher fixed-fee royalties and technology-solutions revenue. Apple, Samsung and LG together accounted for 77% of nine-month revenue.
- Operating income and attributable earnings declined substantially. Higher recurring costs and patent amortization from the Technicolor acquisitions, increased enforcement and litigation costs, and lower non-current royalties were important factors. Q3 2018 also included a much larger tax benefit than Q3 2019.
- Cash and short-term investments were broadly stable in aggregate, at $957.9 million versus $959.5 million at year-end 2018. During the nine months, the company issued $400 million of 2024 notes, used proceeds in part to repurchase $221.1 million principal of 2020 notes, and repurchased 2.5 million of its shares for $171.3 million.
Outlook, commentary, risks and unusual items
- Revenue visibility: Signed Dynamic Fixed-Fee Agreement payments were expected to contribute $63.7 million for the remainder of 2019 and $248.3 million in 2020, with further scheduled amounts in 2021 and 2022. The company expected $171.4 million of its September 30 deferred-revenue balance to amortize over the following 12 months; deferred revenue was not presented as a cash obligation.
- Management outlook: Management stated that liquidity should be sufficient for the next 12 months and expected to continue quarterly cash dividends comparable to $0.35 per share. These are forward-looking statements, not guaranteed outcomes.
- Unusual items: Nine-month other income included a $14.2 million gain associated with acquiring Technicolor’s Research & Innovation unit and an $8.5 million gain on the Hillcrest product-business sale; these were partly offset by a $5.5 million debt-extinguishment loss. Q3 also included a $3.3 million impairment of a strategic investment. These items affected period-to-period comparisons.
- Business changes: The May 2019 acquisition of Technicolor’s R&I unit added research capabilities and employees; it involved no cash consideration. The Hillcrest product business was sold in July for initial proceeds of $10.0 million, with a portion held in escrow; InterDigital retained substantially all related patent assets. After quarter-end, the company signed two new patent licenses, including one with ZTE, and said related litigation would end subject to ZTE’s performance of obligations.
- Legal and regulatory matters: Huawei’s Chinese court action seeks a FRAND licensing determination; InterDigital challenged the court’s jurisdiction, with a decision pending. Lenovo challenged jurisdiction in both U.K. and Delaware patent proceedings filed by InterDigital; those challenges were pending. The filing also describes ordinary-course licensing disputes and ongoing oversight of commitments made in China’s antimonopoly investigation. The commitments concerning arbitration before seeking injunctive relief expired in May 2019.
- Other risks: Licensing revenue is concentrated among a small number of customers, and royalty receipts can vary with licensing agreements and timing. Outcomes of patent litigation, FRAND determinations, tax matters and future license negotiations are uncertain. The filing reports no material change in market-risk disclosures and says disclosure controls were effective.
Most important facts for investors to verify
- Whether recurring royalty collections and revenue from major licensees stabilize or improve, given customer concentration and the nine-month decline in cash receipts.
- The timing and economics of the new ZTE and other post-quarter licenses, including completion of agreed litigation dismissals.
- Repayment, refinancing or conversion treatment of the $94.9 million 2020 notes due March 2020, and the potential dilution and cash effects of the convertible notes and warrants.
- Whether management’s 12-month liquidity assessment and dividend expectations remain supported by operating cash flow and contractual royalty receipts.
- Developments in the Huawei and Lenovo proceedings, and any financial or licensing impact from other legal or regulatory matters.
- The effect of acquisition-related recurring costs, patent amortization, tax valuation allowances and other unusual gains or charges on future reported earnings.