IDCC

InterDigital, Inc. (IDCC)

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InterDigital, Inc. (IDCC)

Q2 2013 Earnings Call

July 25, 2013 10:00 AM ET

Executives

Patrick Van de Wille – VP, Communications and IR

Rich Brezski – CFO

Bill Merritt – President and CEO

Analysts

Anil Doralda – William Blair & Company

Charlie Anderson – Dougherty & Company

Presentation

Operator

Good day and welcome to the InterDigital Second Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrick Van de Wille. Please go ahead, sir.

Patrick Van de Wille

Thanks, Erica. Good morning everybody and welcome to InterDigital’s Second Quarter 2013 Earnings Conference Call. With me this morning are Bill Merritt, our President and CEO, and Rich Brezski our CFO. Consistent with last quarter’s call, we will offer some insights about the quarter and the company and then we’ll open the call up for questions. Before we begin our remarks, I need to remind you that in this call we will make forward-looking statements regarding our current beliefs, plans and expectations which are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ materially from results and events contemplated by such forward-looking statements.

These risks and uncertainties include those set forth in our earnings release published this morning as well as those detailed in our Annual Report on Form 10-K for the year ended December 31, 2012, and from time to time in our other filings with the Securities and Exchange Commission.

These forward-looking statements are made only as of the date hereof and except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

In addition, today’s presentation contains references to free cashflow, a non-GAAP financial measure. A schedule setting out a reconciliation of free cashflow to net cash provided by operating activities, the most directly comparable GAAP financial measure will be included at the back of our earnings release issued today, which has also been posted in the Investor section of our website at www.interdigitial.com.

And with that taken care of, I’ll turn the call over to Rich Brezski.

Rich Brezski

Thank you, Patrick. We are pleased to report strong free cashflow of approximately $133 million for the second quarter of 2013, and $204 million for the first half of 2013. Our second quarter free cashflow which is driven by approximately $187 million in cash received including prepayments totaling $135 million from existing licensees and nearly $24 million related to the Pegatron arbitration award.

The remaining $6 million we received from Pegatron was classified as interest income and therefore was not included within our free cashflow. With $770 million of cash in short-term investments at the end of June, we are well-positioned to continue to drive our business forward. That includes both investing in the development of advanced wireless technologies and funding any litigation that may be necessary to achieve our licensing goals.

We recorded a second quarter revenue of $67.7 million which was in line with our guidance, and net income of $9.2 million or $0.22 per share. As we previously communicated, our second quarter revenue included $23.5 million related to our arbitration with Pegatron while we recorded another $6.2 million from Pegatron as interest income.

On the expense side, halfway through the year, we’re on track to deliver exactly what we guided towards at the end of 2012. Our second quarter 2013 operating expenses, not including litigation and repositioning, were $37.5 million, down $2.7 million sequentially from first quarter 2013.

This increase was primarily due to seasonal items that elevated first quarter expenses including higher fringe rates, vacation accrual and [inaudible] cost. Last year, we indicated that we expected our internally funded research and development cost pretty roughly $50 million.

With an additional potential, $10 million to $15 million based on external funding including our Convida Wireless doing ventures. Halfway through 2013, our development expenses in total are $30 million, in line with that guided range.

In addition, we realized significant savings from our voluntary early retirement program and reinvested a portion of that savings toward augmenting our patent portfolio, investing in patent department resources and strengthening our management team.

Our litigation expenses in second quarter was somewhat lower than first quarter when the most recent ITC file took place. Nonetheless, we expect litigation expenses to remain at high levels and possibly increase sequentially in third quarter as we move toward our scheduled December trial date in the ITC action we filed at the beginning of the year.

Our second quarter effective tax rate remains high at roughly 45%. Due to our second quarter income partly offsetting our first quarter loss, our effective tax rate for the first half of the year is actually higher than for either the first or second quarter.

As we discussed last quarter, our effective tax rate is currently high due to the mix of income included in our tax projections for the year. We continue to expect that our effective tax rate will return to levels we experienced in recent years once we sufficiently expand our revenue from patent licensed royalties.

Finally, we are just beginning to receive our royalty reports from our customer second quarter sales which contribute to our third quarter revenue. As a reminder, the $23.5 million of revenue we recognized in Q2 related to the recent arbitration award represent the past royalties determined under that award and covered the period through June 30 of 2012.

Read the rest of this transcript for free on seekingalpha.com