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InterDigital Looks Good

Posted on Monday, Mar 30th 2009

On March 2, InterDigital reported a strong fourth quarter. As we saw in our most recent post on the company, InterDigital resolved its long-running 2G and 3G licensing disputes with Samsung. This resulted in their signing a 2G and 3G patent agreement with Samsung that will generate $400 million cash over 18 months. With this deal, InterDigital has about 50% of the 3G market. Let’s take a closer look at its performance.

Q4 net income increased to $3.8 million, or $0.09 per fully diluted share from net loss of $2.0 million or $0.04 per share in Q4 07. Revenue was $58.7 million, an increase of 7% y-o-y and 6.5% q-o-q due to $4.1 million increase in technology solutions revenue and a $3.8 million increase in past infringement. However, this was partly offset by declining royalties from licenses in Japan that led to $4 million decline in recurring revenue. Recurring patent license royalties were $46.3 million in the quarter while technology solution sales were $5.1 million.

Operating expenses in the quarter were $53.9 million, down from $57.6 million last year as a result of resolution of the Samsung deal. The case against Nokia is also moving in a positive direction and if it too ends in a deal, InterDigital would capture 80% of the market.

For the full fiscal year 2008, net income was $26.2 million, or $0.57 per diluted share compared to $20.0 million, or $0.40 per diluted share in 2007. Revenue declined 2% to $228.5 million. Recurring patent licensing revenues decreased to $207.1 million due to the absence of recurring 2G revenue from Sony Ericsson and softness in the Japanese market. Technology solutions revenue increased to $12.0 from $3.4 million in 2007 due to increased royalties and license fees from its SlimChip modem IP.

During the GSM Mobile World Congress in February, InterDigital showcased its SlimChip HSPA Modem that is pre-integrated with Texas Instruments’ advanced new OMAP 3 Mobile Development Platform (MDP). Guest author Vijay Nagarajan had pointed out last year how Texas Instruments, which lacks a standard 3G baseband solution, would benefit from such a deal. TI recently decided to run its baseband business as an end-of-life business after failing to find a buyer.

In 2008, the company generated $45.0 million of free cash flow. It ended the year with $142 million in cash and short-term investments. During 2008, InterDigital bought back shares for $81.5 million. And on March 12, it announced a $100 million stock repurchase program. InterDigital has a healthy mix of fixed and unit-based agreements. In Q4, about 43% of recurring revenue was from fixed revenue deals. The unit-based deals, on the other hand, offer the company the opportunity for growth in a booming market. With the Samsung deal, InterDigital expects the fixed component of its recurring revenue to increase to about 60% in the first quarter of 2009. It expects recurring revenues in the range of $69 million to $71 million in Q1. Based on its strong cash flow position, InterDigital said during the earnings call that it would be seeking merger and acquisition opportunities. The stock is currently trading around $23 with a market cap of about $1 billion. It hit a 52-week high of $32.73 on January 26.

Chart for InterDigital, Inc. (IDCC)

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