InterDigital, Inc. (IDCC)

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InterDigital, Inc. (IDCC)

Q3 2013 Earnings Call

October 31, 2013 10:00 AM ET


Patrick Van de Wille – VP, Communications and IR

Bill Merritt – President and CEO

Rich Brezski – CFO


Charlie Anderson – Dougherty & Company

Anil Doralda – William Blair

Eugene Fox – Cardinal Capital Management



Good day. And welcome to the InterDigital, Third 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

Thank you very much. Good morning, everyone and welcome to InterDigital third quarter 2013 earnings conference call. With me this morning are Bill Merritt, our President and CEO and Rich Brezski, our CFO. Consistent with the last quarter’s call, we’ll offer some insights about the quarter and our outlook 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 plan and expectations which are not guarantee the 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.

This risks and uncertainties include those set forth in our earnings release published today. Our annual report on form 10-K for the year ended December 31, 2012. Our quarterly report on form 10-Q for the quarter ended June 30, 2013 ran those details from time to time and our other filings with the Securities and Exchange Commission.

This forward-looking statements are made only as of the date hereof. And except it [ph] is 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.

With that, let me turn the call over to Bill.

Bill Merritt

Thank you, Patrick, and good morning, everyone. As you saw in this morning’s release, we delivered another strong quarter with strong revenue and profitability. The meaningful portion of that revenue was driven by some recent arbitration wins and we expect those wins will help drive future quarters as well.

Let me start with those arbitration decisions as well as an update on the overall ligation landscape and how that is driving licensing. Following that I’ll talk a little bit about the Signal Trust for Wireless Innovation which we launched recently. Last I will provide a brief update on our innovation successes.

So first on the arbitrations, we had two significant wins. One in the third quarter involving one of our technology solution customer and the second in early October involving Apple.

In the first arbitration the panel confirmed that we are entitled to the full amount of royalties specified under this technology license agreement with that customer for those products that were the subject of the arbitration.

The customer haven’t [ph] been paying royalties but had done so under reservation pending the arbitration result. For that reason we differed recognizing the cash collected as revenue.

With the arbitration panel now having ruled we are recognizing $52 million in past payments, this full amount we differ to the products that were involved in the arbitration. We also expect to recognize solid incremental royalties based on the customers’ future quarterly sales of the product involve in the arbitration.

We also secured a positive result in our arbitration with Apple. With the panel confirmed that our patent license agreement with them was limited in scope. The arbitration war [ph] declared that Apple’s iPad and any Apple products that operated in CD-May 2000 [ph] or LTE networks are not licensed under the Apple PLI [ph].

This is particularly important as Apple is not a manufacturer but typically purchases it’s products from Asian suppliers. As you know we have patent license agreements with this significant number ODMs in Taiwan and China. Currently all of our agreements with the ODMs are running royalty agreements with very solid royalty terms.

Generally those agreements provide for the payment of running royalty buy the ODM on any sales to a company of products that are not licensed by InterDigital. So if a company purchases a product from one of our ODM licenses and that product is not licensed by the buyer, then typically that ODM will pay us royalties pursuing to the terms of their agreement.

This dynamic laid out in the second quarter whether as the result of the – an arbitration with Pegatron over this type of issue. We recognize approximately $23 million in past sales revenue committed to Pegatron sales of certain cellular terminal [ph] products through June 2012.

During this quarter, we recognized another $12 million based upon Pegatron sale of additional products from June 2012 through March 2013. For fourth quarter 2013, we project that we will recognize approximately $27 million in past sales revenue related to these products as well as other products that have been determined not to be licensed under the agreement we have with Pegatron’s customers. In addition we expect Pegatron will also contribute to recurring fourth quarter licensee revenue based on current sales of these products.

We’re obviously happy with these arbitration decisions. Combined they have driven nearly $90 million in added revenue in the second and third quarters and are expected to drive at least another $27 million in revenue next quarter perhaps more depending upon Pegatron’s levels of third quarter sales.

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