InterDigital, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 28, 2011. The filing is an annual report, not a standalone Q4 filing. Q4 2010 results are shown separately below where available. InterDigital primarily licenses wireless communications patents and also earns revenue from technology solutions.
Financial performance
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Revenue | $394.5 million | $297.4 million | +33% |
| Operating income | $235.9 million | $113.9 million | +107% |
| Net income | $153.6 million | $87.3 million | +76% |
| Diluted EPS | $3.43 | $1.97 | +$1.46 |
| Operating cash flow | $133.9 million | $320.7 million | −58% |
- Patent licensing generated $370.2 million, or about 94% of revenue; technology solutions generated $24.3 million. Licensing revenue comprised $195.8 million of fixed-fee amortization, $133.1 million of per-unit royalties, and $41.3 million related to past sales.
- Operating margin was approximately 59.8%, versus 38.3% in 2009. Operating expenses were $158.7 million, down 14%; however, 2009 included a $38.6 million repositioning charge, and expenses excluding that charge increased about 10% in 2010.
- Q4 revenue was $95.3 million versus $76.4 million in Q4 2009. Q4 net income was $34.3 million versus $38.9 million; the prior-year quarter included a $16.4 million foreign-tax-credit benefit.
- Cash and short-term investments totaled $541.7 million at year-end, up from $409.8 million. Working capital was $441.0 million; total debt was only $0.5 million. Deferred revenue was $467.0 million, including fixed-fee royalties and customer prepayments to be recognized later.
- Shareholders’ equity increased to $353.1 million from $169.5 million. The company recorded a $4.5 million dividend payable after announcing a quarterly dividend of $0.10 per share; the first payment was made in February 2011.
Material changes and notable items
- Revenue growth reflected new and renewed licenses, past-sales payments and audit resolution, higher per-unit royalties (including strength among smartphone-focused customers), and a full year of amortization from 2009 Samsung and Pantech agreements.
- Samsung represented 26% of FY 2010 revenue and LG 15%, down from 33% and 19%, respectively, in 2009. The LG agreement expired at year-end 2010: LG retained a paid-up license for specified single-mode GSM products but became unlicensed for other previously covered products.
- Samsung paid the third and fourth $100 million installments under its 2009 agreement during 2010. The agreement covers specified 2G products on a paid-up basis and 3G products through 2012; $102.7 million of related revenue was recognized in 2010.
- Operating cash flow fell despite higher earnings, largely reflecting the timing and composition of licensing receipts, tax payments, and deferred-revenue movements. Cash receipts from patent licensing and technology solutions were $372.3 million in 2010, compared with approximately $506.5 million in 2009.
- Management continued the shift toward technology development and licensing after the 2009 cessation of further SlimChip ASIC development. No further repositioning charges were recorded in 2010.
Outlook, risks, and contingencies
- Management expected substantial growth in 3G handset sales volumes in 2011 and anticipated new or renewed license agreements. These are forward-looking expectations, not guaranteed guidance.
- Key risks include dependence on a small number of licensees and customer-reported royalty data; renewal and expansion of agreements, including coverage of newer LTE/4G products; potential pressure on royalty rates; and disputes over patent validity, essentiality, infringement, and fair, reasonable, and nondiscriminatory terms.
- Samsung and LG together accounted for 41% of 2010 revenue. Revenue was concentrated in international customers, principally in Korea and Japan; substantially all receipts were denominated in U.S. dollars.
- The Nokia USITC case remained on appeal, with no decision issued as of the filing. The USITC had found no violation; InterDigital sought reversal and remand. The company recorded no related liability. Related Nokia proceedings remained stayed or pending.
- Tax outcomes remain uncertain, including the realization of a $16.4 million foreign-tax-credit benefit recognized in 2009, open tax examinations, and a New York audit concerning separate-company reporting. The company had not accrued exposure for the New York matter.
- Management said available funds and operating cash flow should cover operations and capital needs for the next 12 months. Fixed and prepaid royalties already received reduce future cash receipts from the related customers. The filing reports no material off-balance-sheet arrangements.
- PricewaterhouseCoopers issued an unqualified opinion on the financial statements and internal control over financial reporting. The company also revised EPS calculations for prior periods after determining that certain restricted stock units had been incorrectly treated as participating securities; management said the prior-period impact was not material.
Important facts for investors to verify
- Renewal or replacement of LG’s expired license and the scope of products covered by any subsequent agreement.
- Progress in licensing 4G/LTE products and the ability to extend or renew licenses as technologies and product sales change.
- Samsung agreement terms and revenue recognition through 2012, alongside the high proportion of revenue and receivables tied to a limited number of customers.
- Royalty collections, customer audit results, and the conversion of the $467.0 million deferred-revenue balance into future recognized revenue and cash.
- Developments in the Nokia appeal and other patent disputes, and the eventual resolution of the foreign tax-credit and New York tax matters.
- Whether 2011 handset-market growth and new or renewed licensing agreements meet management’s stated expectations, and whether the new dividend remains sustainable.