InterDigital Announces Third Quarter 2010 Financial Results (and the initiation of a regular dividend)
InterDigital Announces Third Quarter 2010 Financial Results
Growth in Sales of Mobile Devices and Expansion of Customer Relationships Drives Strong Profitability
Company Signals Commencement of Regular Quarterly Dividend
KING OF PRUSSIA, Pa.--(BUSINESS WIRE)-- InterDigital, Inc. (NASDAQ:IDCC - News) today announced results for the third quarter ended September 30, 2010.
Highlights for third quarter 2010:
* Net income of $35.5 million, or $0.79 per diluted share, a 16 percent increase over third quarter 2009;
* Revenue of $91.9 million, a 22 percent increase over third quarter 2009; and
* Ending cash and short-term investments totaling $563.6 million.
“We turned in another very strong quarter, as evidenced by significant profitability and a substantially strengthened cash position,” commented William J. Merritt, InterDigital’s President and Chief Executive Officer. “The broad improvement in our results arose from several key factors, including the contribution from new customer agreements and very strong unit volume growth from existing customers.”
“Our development programs also progressed well, continuing to address the complex bandwidth challenge facing networks today,” continued Mr. Merritt. “In one of our programs, we demonstrated a Machine-to-Machine gateway and server prototype, which should enable the proliferation of M2M connections while preserving network integrity and capacity. That demonstration was well received by manufacturers and standards bodies alike, and is among the many innovations the company is producing to address the demand for more wireless data throughput with better performance characteristics.”
“InterDigital’s balance sheet has never been stronger, owing to the company's excellent performance recently,” commented Terry Clontz, InterDigital’s Chairman of the Board. Mr. Clontz added, "The Board has been carefully considering its capital management policy in view of the company’s strong cash flow, generated by one of the best wireless technology patent portfolios in the industry. The Board believes opportunities remain robust to enhance shareholder value through continued focused investments in market-leading wireless technology, while also returning appropriate levels of capital to our shareholders. In the past we have returned cash to shareholders through share buybacks. While the company plans to maintain its current share repurchase authorization, we believe it is time to include other means of returning surplus cash to shareholders. Given our financial strength and confidence in our core licensing business, the Board intends to announce a regular quarterly dividend policy during fourth quarter 2010. The initiation of a regular dividend is expected to be at a level commensurate with other high technology companies with similar growth prospects and cash positions.”
Third Quarter 2010 Summary
Net income for third quarter 2010 totaled $35.5 million, or $0.79 per diluted share, an increase of 16 percent over third quarter 2009 net income of $30.6 million, or $0.69 per diluted share. Contributions from several new customers as well as higher unit sales by many of the company’s existing per-unit customers drove higher profitability in the quarter.
Total revenue in third quarter 2010 of $91.9 million increased 22 percent from $75.5 million reported in third quarter 2009. Patent licensing royalties of $86.1 million increased 18 percent, over $73.0 million in third quarter 2009. The increase is driven by new and renewed agreements as well as growth in customers’ smartphone product sales. The fixed fee amortized portion of the royalty revenue totaled $49.6 million, an increase of 11 percent over third quarter 2009 of $44.8 million, driven by new customer agreements. Per-unit royalties of $35.8 million rose 29 percent over $27.7 million reported for third quarter 2009, driven by increasing sales of customers’ mobile devices and new customer agreements. Technology solutions revenue in third quarter 2010 of $5.8 million more than doubled from $2.5 million in third quarter 2009 due to contributions from customers added during first nine months 2010. Customers that accounted for ten percent or more of the $91.9 million of third quarter 2010 total revenue were Samsung (28 percent), LG Electronics (16 percent), and Sharp (11 percent).
Third quarter 2010 operating expenses of $37.5 million increased by $8.6 million, or 30 percent, over $28.9 million reported in third quarter 2009. The increase in expense is largely the result of adjustments to the accrual for the company’s long-term compensation program (“LTCP”). In third quarter 2009, the company reduced the accrual for an incentive period under the LTCP by $4.0 million based on the company’s revised expectations for a lower payout. However, during 2010, new customer agreements and amendments have contributed in excess of $100 million of cash and receivables, which resulted in an increase to the LTCP accrual. In addition, expenses rose $6.1 million as a result of (i) sublicense fees and other non-personnel expenses to support technology transfers under the new technology solutions agreements entered into during first nine months 2010, (ii) new research and development projects initiated in the last twelve months, (iii) patent amortization and (iv) an increase in costs associated with due diligence related to potential patent acquisition opportunities. These and other increases were offset by a lower level of intellectual property enforcement activity ($1.4 million in third quarter 2010 versus $3.3 million in third quarter 2009).
Net interest and investment income for third quarter 2010 of $0.6 million increased from $0.5 million in third quarter 2009 primarily due to higher investment balances in third quarter 2010.
The company’s third quarter 2010 effective tax rate was approximately 36 percent, slightly higher than the 35 percent effective tax rate experienced in third quarter 2009.
Nine Months Summary
The company’s first nine months 2010 net income totaled $119.3 million, or $2.66 per diluted share, a 65 percent increase over the first nine months 2009 pro forma net income1 of $72.4 million, or $1.61 per diluted share. The first nine months 2009 pro forma results do not include a $37.0 million repositioning charge. This year-over-year increase in net income was driven by revenue contributions from several new customers as well as growth in sales from existing customers. On a GAAP-reported basis, first nine months 2009 net income totaled $48.4 million, or $1.08 per diluted share.
Total revenue in first nine months 2010 of $299.3 million increased 35 percent from $221.0 million reported in first nine months 2009, driven by a $70.0 million, or 33 percent, increase in patent licensing royalties. Of this increase, $38.5 million related to past sales generated by new and renewed agreements and routine audits, the largest contributor to which was Casio Hitachi Mobile Communications Co., Ltd. (“CHMC”). The fixed fee amortized portion of royalty revenue in first nine months 2010 totaled $146.3 million, an increase of 9 percent over first nine months 2009 of $133.7 million, driven by a new customer agreement with Pantech and a full nine months of revenue from the agreement with Samsung signed during first quarter 2009. Per-unit royalties of $97.4 million in first nine months 2010 rose 24 percent over $78.5 million reported for first nine months 2009, driven by new, renewed and expanded license agreements with customers as well as increased sales of customers’ smartphone products. Technology solutions revenue in first nine months 2010 of $14.3 million more than doubled from $6.0 million in first nine months 2009 due to contributions from new technology solutions agreements added in first nine months 2010 and royalties on customer sales of products containing the company’s SlimChip™ modem core platform. Customers that accounted for ten percent or more of the $299.3 million of first nine months 2010 total revenue were Samsung (26 percent), LG Electronics (14 percent), and CHMC (11 percent).
First nine months 2010 operating expenses of $117.1 million increased by 5 percent over the $111.0 million operating expenses during first nine months 2009, which excludes the $37.0 million repositioning charge during first nine months 2009. The increase in expense is largely the result of adjustments to the accrual for the company’s LTCP, as described above. In addition, expenses rose $7.2 million as a result of sublicense fees and other non-personnel expenses to support technology transfers under the new technology solutions agreements entered into during first nine months 2010, patent amortization and an increase in costs associated with due diligence related to potential patent acquisition opportunities. These and other increases were offset by lower levels of personnel, depreciation and amortization and other costs resulting from the company’s March 2009 decision to cease further development of its SlimChip modem technology. In addition, the company experienced a lower level of intellectual property enforcement activity in first nine months 2010 ($10.3 million in first nine months 2010 versus $11.5 million in first nine months 2009).
Net interest and investment income for each of first nine months 2010 and first nine months 2009 totaled $2.0 million.
The company’s first nine months 2010 effective tax rate was approximately 35 percent, as compared to the first nine months 2009 effective tax rate of approximately 36 percent.
In first nine months 2010, the company generated $141.4 million of free cash flow2 compared to $307.0 million in first nine months 2009. The decrease of $165.6 million in free cash flow was driven primarily by a reduction of $149.3 million in cash receipts from patent license agreements due to a higher level of patent licensing prepayments received in first nine months 2009 compared to first nine months 2010.
Near-Term Outlook
Scott McQuilkin, Chief Financial Officer, commented, “Our third quarter results reflect the growth of our customer base and strong sales from our existing customers driven by the rebound in industry mobile phone shipments. We will provide an update on our revenue expectations for fourth quarter 2010 after we receive and review the applicable patent license and product sales royalty reports.”
Conference Call Information
InterDigital will host a conference call on Thursday, October 28, 2010 at 10:00 a.m. Eastern Time to discuss its third quarter 2010 performance and other company matters. For a live Internet webcast of the conference call, visit www.interdigital.com and click on the link to the Live Webcast on the homepage. The company encourages participants to take advantage of the Internet option.
For telephone access to the conference call, please dial (888) 802-2225 within the U.S. or (913) 312-1254 from outside the U.S. Please call by 9:50 a.m. ET on October 28 and ask the operator for the InterDigital Financial Call.
An Internet replay of the conference call will be available on InterDigital’s web site in the Investor Relations section. In addition, a telephone replay will be available from 1:00 p.m. ET October 28 through 1:00 p.m. ET November 2. To access the recorded replay, call (888) 203-1112 or (719) 457-0820 and use the replay code 3791114.
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