InterDigital, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; the company reports one segment. Amounts below are U.S. dollars.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $118.6M | $194.2M | $228.9M | $252.1M |
| Operating income | $58.6M | $128.4M | $109.8M | $128.3M |
| Net income attributable to InterDigital | $32.6M | $78.9M | $61.7M | $77.0M |
| Diluted EPS | $0.89 | $1.93 | $1.67 | $1.90 |
- Q2 operating margin was approximately 49.4%, versus 66.1% a year earlier; six-month operating margin was approximately 48.0%, versus 50.9%. Q2 net margin was approximately 27.0%, versus 40.6%; six-month net margin was approximately 26.3%, versus 30.6%.
- Six-month operating cash flow was $27.1M, compared with $30.3M. Investing activities used $162.7M and financing activities provided $214.1M. Cash and cash equivalents increased to $507.0M; short-term investments were $400.6M, for combined cash and investments of $907.6M.
- At June 30, total debt had $546.0M principal and $475.2M carrying value, including $221.6M classified as current for the 2016 notes. The company issued $316.0M of 1.50% convertible notes due 2020; its $230.0M of 2.50% notes mature in March 2016.
- Current assets were $1,117.2M and current liabilities $398.4M. Deferred revenue totaled approximately $422.8M. Four licensees accounted for 98% of net receivables.
Changes versus comparable periods
- Q2 revenue fell 39% year over year, mainly because past patent royalties were $92.7M lower. Q2 2014 included revenue from three new license agreements; Q2 2015 included $27.2M of past royalties recognized under the Arima settlement.
- Recurring revenue rose $16.9M in Q2, including a $22.1M increase in per-unit royalties, primarily from higher shipments by Pegatron and other Taiwan-based licensees. Fixed-fee royalties declined $4.9M, in part following expiration of the Apple license.
- For the first half, recurring revenue increased $71.1M, while past sales decreased $94.2M; total revenue declined 9%. Higher per-unit royalties were partly offset by lower past-sales revenue and lower technology-solutions revenue.
- Operating expenses declined 9% in Q2 and 4% in the first half, mainly due to lower performance-based compensation. Development and commercialization costs for IoT and next-generation network technologies increased. Higher interest expense reflected the 2020 notes.
Outlook, risks and unusual items
- Management said available liquidity and expected operating cash flow should be sufficient for the next 12 months, including operations, capital needs, debt obligations, the repurchase program and dividends. This is management’s expectation, not earnings guidance; the filing provides no numerical revenue or earnings forecast.
- The company expects to continue quarterly dividends comparable to $0.20 per share, subject to its financial condition, capital needs, debt restrictions and other factors. It expanded its repurchase authorization to $400M; $223.2M had been repurchased under the program through June 30.
- The confidential Huawei arbitration award was finalized July 14, 2015, after quarter-end. InterDigital sought confirmation in U.S. court; Huawei sought annulment in France and had made no payments as of the filing. The company said revenue would be recognized only when fixed or determinable and collectibility reasonably assured.
- Patent litigation and licensing disputes are significant uncertainties. In the Nokia 2007 USITC remand, the ALJ found infringement of asserted ’966 and ’847 patent claims, but the Commission reviewed portions of that decision and had not issued its final determination. The 2011 USITC appeal ended adversely for InterDigital. Separately, a Delaware jury found three patents valid and infringed by ZTE, while finding no infringement of another patent; post-trial motions and further proceedings remained pending.
- InterDigital’s Chinese licensing commitments include offering qualifying Chinese manufacturers worldwide essential-patent licenses on FRAND terms and expedited binding arbitration before seeking exclusionary relief; specified commitments run through May 2019. China and Taiwan regulatory and licensee disputes remain potential risks. Management said no listed legal matter met the accrual criteria at June 30 and did not believe ordinary-course disputes would materially affect results, but outcomes remain uncertain.
- Other unusual items include the Arima settlement royalty recognition and a King of Prussia facility sale for net consideration of $4.5M with a leaseback of up to one year; the related gain was to be recorded when the lease term ends.
Important facts for investors to verify
- Whether higher recurring per-unit royalties are sustained and how customer shipment levels, license expirations and licensee concentration affect revenue.
- Resolution, timing and potential financial impact of the Huawei award, the Nokia USITC proceedings, the ZTE and Nokia district-court cases, and Chinese and Taiwan disputes.
- The company’s ability to address the $230M 2016-note maturity and its planned use of cash, including buybacks and dividends.
- Whether the Arima settlement royalties are collected and whether the facility-sale gain is recognized as expected.