InterDigital, Inc. — Q2 2019 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2019. InterDigital develops and licenses wireless and other technology patents; it reports one segment. Amounts below are in U.S. dollars.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $75.6M | $69.6M | $144.2M | $157.0M |
| Operating income | $8.9M | $15.7M | $8.8M | $45.8M |
| Operating margin | 11.8% | 22.5% | 6.1% | 29.2% |
| Net income attributable to InterDigital | $7.7M | $11.0M | $4.9M | $41.2M |
| Diluted EPS | $0.24 | $0.31 | $0.15 | $1.16 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(53.5)M | $6.2M |
- Q2 revenue rose 9%, supported by higher fixed-fee and variable royalties and technology-solutions revenue. Six-month revenue fell 8%, principally because prior-year non-current royalties were not repeated and a $5.5M charge reduced non-recurring revenue in Q1 2019 under a restructured license.
- Operating expenses increased 24% in Q2 and 22% in the first half, largely reflecting the Technicolor acquisitions, including patent amortization, ongoing costs and integration expenses.
- Q2 other income included a $14.2M net gain associated with the Technicolor R&I asset acquisition, partly offset by a $5.5M debt-extinguishment loss. The gain included a $20.5M release of contingent consideration; it was not recurring operating revenue.
- First-half effective tax rate was 59.5%, affected by valuation allowances in certain jurisdictions and $3.4M of discrete tax expense. Management said the rate would have been 20.4% excluding the valuation allowance.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $531.7M, restricted cash $11.5M and short-term investments $299.5M: $842.6M combined, down $116.8M from year-end 2018. Current assets were $941.0M and current liabilities $242.9M.
- Operating cash flow was negative $53.5M in the first half, versus positive $6.2M a year earlier. Management attributed the decline mainly to timing and lower receipts on dynamic fixed-fee royalty agreements; royalty cash receipts fell $30.9M year over year.
- The company issued $400M of 2.00% convertible notes due 2024 and used proceeds in part to repurchase $221.1M principal amount of 1.50% notes due 2020. The remaining 2020 notes had $94.9M principal and were classified current, with maturity in March 2020. Total reported debt carrying value was $434.4M, including $19.7M of Technicolor-related revenue-linked debt.
- InterDigital repurchased 2.5M shares for $171.3M in the first half and increased its repurchase authorization to $700M; approximately $96.8M remained at June 30. Quarterly dividends were $0.35 per share. The company stated that available funds should cover operations, debt obligations, repurchases and dividends for the next 12 months.
Changes, outlook and notable matters
- Q2 recurring revenue was $74.4M, up from $67.5M, with management citing new fixed-fee agreements and revenue associated with Technicolor. Committed Dynamic Fixed-Fee Agreement payments were expected to contribute $128.2M for the remainder of 2019 and $248.3M in 2020; these are contracted amounts, not total company revenue guidance.
- The May 2019 acquisition of Technicolor’s Research & Innovation unit added research capabilities and employees, with no cash consideration. The prior jointly funded R&D collaboration ended; Technicolor retains a reduced, conditional revenue-sharing right.
- No numerical full-year revenue or earnings guidance is provided. Management expects the existing liquidity sources to be sufficient for the next 12 months and expects future quarterly dividends comparable to $0.35 per share.
- In July 2019, InterDigital completed the sale of Hillcrest Laboratories and said it expected to record a gain in Q3; substantially all acquired patent assets were retained.
- InterDigital settled its litigation with Asus in April 2019 through a multi-year amendment adding 4G coverage; terms are confidential and the case was dismissed. Huawei filed a China proceeding seeking FRAND licensing terms for Chinese essential patents covering 2019–2023. ZTE litigation remained pending, with a related case stayed.
- InterDigital’s Chinese regulatory commitments concerning offers of arbitration before seeking exclusionary relief expired May 22, 2019. Its other stated licensing commitments remained in place.
- Revenue and receivables are concentrated: Apple, Samsung and LG accounted for 75% of Q2 revenue; five licensees represented 72% of net receivables at June 30. The filing also reports a non-material revision to prior-period noncontrolling-interest presentation; cash flows were unaffected.
Investor verification priorities
- Assess the timing and collectability of royalty cash receipts, especially dynamic fixed-fee payments, and the impact on operating cash flow.
- Review the remaining $94.9M of 2020 notes, refinancing terms, conversion dilution and the company’s capacity to sustain repurchases and dividends.
- Evaluate customer concentration and the status, potential costs and outcomes of the Huawei and ZTE matters, as well as the implications of the expired Chinese commitment.
- Separate recurring operating performance from the Technicolor-related gain, debt-extinguishment loss, acquisition costs and tax effects.
- Track the expected Hillcrest sale gain and actual recognition of contracted fixed-fee revenue against the disclosed schedule.