InterDigital, Inc. — Q3 2010 Form 10-Q
Business context and period. InterDigital reported results for the quarter and nine months ended September 30, 2010. Its business centers on patent licensing and technology solutions; the company reports one segment. Financial amounts below are in U.S. dollars, generally millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $91.9 | $75.5 | $299.3 | $221.0 |
| Operating income | $54.5 | $46.6 | $182.2 | $73.0 |
| Net income | $35.5 | $30.6 | $119.3 | $48.4 |
| Diluted EPS | $0.79 | $0.69 | $2.66 | $1.08 |
| Operating margin | 59.3% | 61.7% | 60.9% | 33.1% |
| Net margin | 38.6% | 40.6% | 39.9% | 21.9% |
- Q3 revenue rose 22%; nine-month revenue rose 35%. Nine-month patent licensing royalties were $285.0 million, including $41.3 million of past-sales revenue; technology solutions contributed $14.3 million.
- Q3 operating expenses increased 30% to $37.5 million, mainly from higher long-term compensation, sublicense fees and consulting costs. For nine months, expenses declined 21% to $117.1 million, largely because the prior-year period included $37.0 million in repositioning charges; excluding those charges, expenses increased about 6%.
- Operating cash flow was $163.1 million for nine months, versus $332.5 million in 2009. The company attributed the decline chiefly to lower receipts from licensing and technology agreements and working-capital timing. Investing cash flow was negative $72.8 million; financing cash flow was positive $12.4 million.
- Cash and cash equivalents were $313.6 million and short-term investments were $250.0 million at September 30, for combined liquidity of $563.6 million, up $153.8 million from year-end 2009. Total debt was approximately $0.5 million. Total liabilities were $608.3 million and shareholders’ equity was $305.3 million.
- Current assets were $642.0 million and current liabilities $224.4 million. Deferred revenue totaled approximately $531.1 million, down $137.1 million from year-end; management expected $158.0 million of fixed-fee royalty amortization to reduce that balance over the next twelve months.
Changes and notable items
- Nine-month revenue growth reflected higher per-unit and fixed-fee royalties as well as $38.5 million more past-sales revenue than the prior-year period. The company recognized $39.9 million in nine-month revenue connected with its CHMC license and an audit of an existing customer, including $35.7 million from past sales.
- Third- and fourth-quarter $100 million installments under the Samsung license were received during the first nine months of 2010, supporting liquidity. Samsung represented 26% of nine-month revenue; LG represented 14%, and CHMC 11%.
- In Q3, InterDigital licensed SlimChip 2G/3G modem technology to a mainland China chipset manufacturer, with milestone payments and per-unit royalties. Related technology-solutions revenue was $3.2 million for the quarter under proportional-performance accounting.
- The 2009 repositioning included ending further SlimChip ASIC development and a workforce reduction. No additional repositioning charges were recorded in 2010, and management did not expect further related charges.
- In October 2010, InterDigital amended executive compensation programs: the long-term plan shifted to 75% performance-based awards and 25% time-based RSUs; STIP targets increased five percentage points for 2011. The supplemental stock program ended and no profit-sharing contribution was planned for 2011 or the foreseeable future.
Outlook, risks and contingencies
- No specific Q4 2010 revenue forecast was provided; management said it would provide expectations after receiving and reviewing royalty reports. Management believed available liquidity and operating cash generation would fund operations and capital needs over the next twelve months without anticipated debt or equity financing.
- Patent licensing revenue and cash receipts depend on license terms, customer sales and royalty reporting. Revenue concentration remains significant, and four customers accounted for 84% of net receivables at September 30. The company recorded a $0.6 million Q3 expense for a bad-debt reserve increase related to a technology-solutions customer.
- The Nokia USITC case remained under appeal at the Federal Circuit, with oral argument scheduled for December 9, 2010. The company sought reversal of certain claim constructions and non-infringement findings; Nokia and the Commission opposed. InterDigital recorded no related liability.
- Following Broadcom’s announced agreement to acquire Beceem, InterDigital agreed to suspend certain development work pending the transaction. If it closes, the Beceem agreement is to terminate on agreed financial terms and the technology is to be removed from Beceem products; if it does not close by the specified date, development work is to resume.
- Management identified no material change in market risk and reported effective disclosure controls, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much future revenue is recurring fixed-fee or per-unit royalty revenue versus past-sales recognition, and how customer sales and renewals affect it.
- The timing and collectability of deferred revenue, receivables and royalties, including exposure to the largest customers.
- The outcome and potential business impact of the Nokia appeal and other patent disputes.
- Whether the Beceem/Broadcom transaction closes and how the related license termination or resumed development affects technology-solutions revenue.
- Whether cash generation and liquidity remain adequate as Samsung installment receipts are exhausted and tax payments, compensation and licensing costs evolve.