InterDigital, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited. InterDigital develops and licenses wireless technology and patents; it reports one operating segment.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | First nine months 2017 | First nine months 2016 |
|---|---|---|---|---|
| Revenue | $97.3 million | $208.3 million | $327.6 million | $392.0 million |
| Operating income | $40.9 million | $156.7 million | $155.8 million | $228.2 million |
| Net income attributable to InterDigital | $35.5 million | $104.5 million | $121.8 million | $172.5 million |
| Diluted EPS | $1.00 | $2.99 | $3.40 | $4.92 |
| Operating margin | 42.0% | 75.2% | 47.6% | 58.2% |
Q3 patent licensing royalties were $92.6 million, including $83.7 million of current royalties and $8.8 million of past royalties. Technology solutions revenue was $4.8 million. For the first nine months, patent royalties were $314.1 million and technology solutions revenue was $13.5 million.
Cash and cash equivalents were $283.6 million and short-term investments were $683.7 million at September 30, totaling $967.2 million, up $14.5 million from year-end 2016. Nine-month operating cash flow was $98.3 million, versus $200.9 million a year earlier. Investing activities used $165.6 million and financing activities used $53.3 million. Accounts receivable were $400.1 million, up from $228.5 million at year-end; four licensees represented 95% of receivables.
Long-term debt had $316.0 million principal and a $281.8 million carrying value. The debt consists of 1.50% convertible notes due 2020. Current assets were $1.42 billion and current liabilities $440.4 million. Deferred revenue totaled approximately $724.1 million, including current deferred revenue of $351.0 million.
The company declared dividends of $0.95 per share for the first nine months. In September it raised the quarterly dividend to $0.35 per share, which it said it currently expects to continue, subject to business and other factors. No shares were repurchased in Q3; approximately $186 million remained under the $500 million authorization.
Material changes versus comparable periods
- Q3 revenue fell 53% year over year, largely because Q3 2016 included substantial past royalties associated with the Huawei license. Q3 2017 included $8.8 million of past sales related primarily to the completion of a Huawei patent transfer.
- Q3 per-unit royalties declined $25.7 million, primarily following the Apple license agreement signed in Q4 2016; fixed-fee amortized royalties rose $27.9 million, primarily related to that agreement. Current revenue was comparatively stable: $88.5 million in Q3 2017 versus $84.3 million in Q3 2016.
- Nine-month revenue declined 16%, mainly due to $72.7 million lower past patent royalties. Fixed-fee amortized royalties increased $116.1 million, partly offsetting lower per-unit revenue.
- Nine-month operating expenses increased 5% to $171.8 million, with higher commercial initiatives, amortization and consulting costs, partly offset by lower incentive compensation and patent maintenance costs.
- Operating cash flow declined $102.5 million, primarily because cash receipts were $150.5 million lower, including lower fixed-fee royalty collections than in 2016. Taxes paid declined $29.5 million.
Outlook, risks and unusual items
- Management said available cash, investments and expected operating cash flows should be sufficient for operations, capital needs, debt obligations, the repurchase authorization and dividends for the next 12 months. No formal revenue or earnings guidance is provided in the filing.
- The Q3 effective tax rate was 10.2%; it included a $9.1 million discrete tax benefit related primarily to reversal of uncertain tax positions. For the first nine months, the 19.8% rate included $12.1 million of share-based compensation tax benefits and the $9.1 million benefit; management said the rate would have been 34.2% without these benefits. These items make reported earnings and tax rates less comparable.
- Revenue recognition guidance was expected to be adopted January 1, 2018, using the cumulative-effect method. Management expects most or all revenue from certain static fixed-fee licenses to be recognized when signed, while per-unit royalties will be accrued based on estimates of licensees’ same-period sales and later adjusted. The filing does not quantify the overall financial impact.
- Key legal matters remained pending, including disputes involving Huawei, ZTE, Pegatron and Asus. The Taiwan Fair Trade Commission closed its investigation on October 24, 2017, finding no violation. The Asus arbitration rejected Asus’s fraudulent-inducement claim, and the parties jointly sought court confirmation of the awards. The company recorded no accrual for the described litigation contingencies, stating they did not meet accrual or range-disclosure requirements at September 30.
- Revenue and receivables are concentrated among a small number of licensees: Apple, Huawei and Samsung represented 29%, 26% and 18% of Q3 revenue, respectively. The filing also cites litigation and licensing uncertainty, estimation risk in future royalty accruals, and dependence on licensee reporting and collections.
Important facts for investors to verify
- Whether recurring royalty revenue and cash collections can offset the lapping of large, nonrecurring past-royalty items; assess customer concentration and the $400.1 million receivable balance.
- The composition, collectability and timing of receivables, related foreign withholding taxes, and the impact of deferred-revenue amortization on future reported revenue.
- The actual transition impact of the new revenue standard, particularly static fixed-fee licenses, estimated per-unit royalties and any significant financing components.
- Developments in the ZTE, Huawei, Pegatron and Asus disputes, and any resulting effects on licensing, cash flows or patent enforcement.
- Convertible-note terms, potential dilution and the company’s capital-allocation plans, including dividends and the remaining repurchase authorization.