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InterDigital Inc. (NASDAQ:IDCC)

Q2 2009 Earnings Call

July 29, 2009 10:00 am ET

Executives

Janet Point - EVP, Communications and IR

Bill Merritt - President and CEO

Scott McQuilkin - CFO

Analysts

Tom Carpenter - Hilliard Lyons

Kevin Sharbatoni - Boenning & Scattergood

Bill Nasgovitz - Heartland Funds

Operator

Good day, everyone. Welcome to today's InterDigital’s Second Quarter 2009 Earnings Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Janet Point. Please go ahead.

Janet Point

All right. Thank you and welcome to InterDigital's second quarter earnings conference call. With me this morning are Bill Merritt, our President and CEO; and Scott McQuilkin, our CFO. Consistent with last quarter's call, we will offer some highlights about the quarter and the company and then open up the call for questions.

Before we begin our remarks, I need to remind you that in this call we will be making forward-looking statements regarding our current beliefs, plans, and expectations, which are not guarantees of future performance and are subject to risk and uncertainties that could cause actual results and events to differ materially from the results and events contemplated by such forward-looking statements.

These risks and uncertainties include those set forth in our earnings release published yesterday and those detailed 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 acceptance required by law, we undertake no obligation to update or revise any of them, where there is a result of new information, future events, or otherwise.

So, with that taking care of, I will now turn the call over to Scott.

Scott McQuilkin

Thank you, Janet, and good morning to everyone. Our second quarter financial results reflects strong growth in revenue combined with a structural reduction in expenses that drove significantly higher earnings.

Comparing second quarter 2009 to second 2008, total revenue was $74.9 million, an increase of 28%. Expenses declined 32% to $34.7 million. The combination of increased revenue and lower expenses drove net income to $26.4 million, an increase of $20.6 million over the year ago quarter. Diluted earnings per share was $0.59 more than four times our EPS in second quarter 2008, and slightly above full year 2008 EPS of $0.57.

Free cash flow for second quarter 2009 was $43 million, $23 million higher than the $20 million of free cash flow in second quarter 2008. The increase in free cash flow was driven by a higher level of cash receipts from the company’s patent licensees and a lower level of cash outlays. Our cash in short-term investment balances increased $217 million at June 30, 2009; up 53% from year-end 2008.

Our total revenue for the quarter consists of three components; current patent royalties, patent royalties for past sales, and technology solutions revenue. Current patent royalties were $70.4 million in second quarter 2009, up 26% over second quarter 2008. Significant increase in current patent royalties over second quarter 2008 is due primarily to the contribution of 25.7 million from Samsung.

This revenue was a result of the $400 million patent license that was signed in January of this year. We received a first payment of $100 million in January and the second payment of $100 million in July. This second payment will be reflected in our third quarter free cash flow and cash balances. The revenue for the Samsung agreement is amortized on a straight line basis over the life of the agreement, so we recognized 2.5 months of revenue in first quarter of 2009, and full three months of revenue in second quarter 2009.

Patent royalties for past sales resulted from an audit of one of our licensees and were $2.3 million in second quarter 2009, compared to $0.3 million in second quarter 2008. Our auditing activities are a routine part of the licensing program, so patent royalties as result of these efforts have become a more regular contributor to our revenues. The growth in patent license revenue over the last year was tampered by lower revenue resulting from a decline in sales for a number of our per unit licensees. As a reminder, our reported per unit royalties for second quarter 2009 are based on our licensee sales for calendar first quarter 2009.

As a perspective, overall industry handset volume was down in first quarter 2009 versus the comparable quarter a year ago, and were even weaker in Japan. Our technology solutions revenue was $2.2 million, compared to $2.5 million in second quarter 2008. Importantly, this element of our revenue stream has shifted from services-based revenue to per unit royalty revenue. While profitable overall, service-based revenue is typically accompanied by current period expenses and can be somewhat lumpy.

On the other hand, our per unit royalty revenue is driven by recurring sales of our customers products containing our SlimChip modem IP and generally does not require a significant current period expenses. Therefore, it not only has our per unit royalty revenue grown over time, but the transition from services-based revenue to per unit royalty revenue has resulted in a significantly higher profit contribution from this revenue source.

I want to make a few points to put the quarterly revenue trends in perspective. First, although the economic climate has created near-term challenges for some of our licensees other licensees have continued to generate healthy increases in sales. This is been driven by a combination as a fundamental growth over time in 3G handset sales as well as market share gains for competitors that are well-positioned in growing market segments such as smartphones.

Second our exposure to the relatively matured Japanese handset market is decreasing over time as we had significant new licensees with a diversified global customer base. Specifically, in second quarter 2009, royalties from Japanese per unit licensees accounted for 20% of recurring revenue, compared to 38% in second quarter of 2008. As our overall licensing revenues increase, we expect our exposure to this market to decline naturally as we add other significant licensees outside of that market.

Third, we have a significant opportunity to grow and diversify our patent royalty revenue by licensing other handset makers and increasing our share of the 3G handset market under license. Following the completion of our license agreement with Samsung, our share of 3G handset market under license increased to about 50%. As you may know, the major unlicensed handset makers; Nokia, Sony Ericsson, and Motorola, account for about one-third of the 3G market.

Fourth, our revenues today are based almost exclusively on royalties relating to the sale of handsets. While the handset market is very large there are also other products with wireless capability that utilize our patented technology. Example of these products are, laptops, netbooks, mobile internet devices, and a broad range of machine-to-machine and other consumer electronics devices with wireless capabilities.

Sales of these products are growing overtime and represent a significant opportunity to expand and diversify our revenue base and further leverage our investment in research and development. We remain optimistic about the fundamental growth prospects for 3G handsets and other advanced devices even in a weak global economic conditions, may continue to effect industry handset sales near term.

More importantly, we remain confident in our ability to add new licensees which could significantly increase our royalty revenues, earnings and cash flow. Turning to the expense side, second quarter 2009 operating expenses were $34.7 million This represents a $16.2 million or 32% decrease from second quarter 2008 expenses, a $12.5 million or 26% decrease from first quarter 2009, excluding repositioning costs. At a high level, our operating expenses consist of two basic components; first, operating expenses other than patent litigation and arbitration costs; and second, patent litigation and arbitration costs.

The first component, operating expenses other than patent litigation and arbitration costs were $29.2 million in second quarter 2009. This represents a $9.1 million or 24% decrease from second quarter 2008. Most of the decrease is structural in nature and driven by a reduction in development expenses associated with our SlimChip program. Our development expenses in second quarter were $13.2 million, which is somewhat lower than our guidance of $14 million to $15 million.

Reflecting the positive impact of the Canadian research and development credit and lower than expected outside services cost as we transitioned our full development efforts to our core business. Our second quarter 2009 operating expense also includes the credit to SG&A cost of approximately $1 million relating to the reversal of a bad debt reserve.

The second component of our operating expenses is patent litigation and arbitration costs. These expenses totaled $5.5 million in second quarter 2009, or $7 million less than second quarter 2008 expenses. The significant decrease in patent litigation and arbitration costs is due primarily to the elimination of ongoing expenses following the resolution of the ITC proceeding with Samsung and our U.K. patent matters with Nokia.

We believe that our investment in patent litigation is validated by the successful completion of our license agreement with Samsung, is also positioned as very well with respect to our ITC proceeding with Nokia. Going forward, when necessary, we will continue to invest and vigorously defend our strong and well diversified patent portfolio. Therefore, we expect that these expenses will vary from quarter-to-quarter depending on the level of activity.

Our cash position remains very strong; we ended second quarter 2009, with $217 million in cash and short-term investments, which represents $4.89 per diluted share. We continue to have confidence in our ability to generate value for our shareholders by licensing our significant portfolio patents as well as future licensing opportunities with new technologies generated from our investments in core research and development. Given our strong cash balances and free cash flow, we have the financial capacity to take advantage of these opportunities.

Further, we have continued our past practice of enhancing shareholders value through stock repurchases. In March, we announced the new $100 million stock repurchase program and repurchased 14.7 million or 600,000 shares of common stock through June 30, 2009. As of the end of the second quarter, we have repurchased a total of 23.1 million shares of our stock or about 35% of the outstanding shares.

In summary, our financial position is strong and we continue to make significant progress toward our objectives of securing revenue from every 3G device sold and building value for our shareholders. I'll now turn the call over to, Bill.

Bill Merritt

Thanks, Scott, and good morning to everyone. As you saw on our earnings release last night and just heard from, Scott, the company delivered a very strong quarter. We substantially grew our profit, delivered solid cash flow, while at the same time increasing our investment in our core licensing and R&D business. Consequently, we are very happy with how 2009 is shaping up.

Scott has already detailed the financial picture. Let me update you on our licensing and key R&D initiatives, which we believe will drive in greater success this year and years to come. From the licensing side, we continue to have good discussions with a number of companies. We expect those discussions to result in more license agreements this year. While those agreements vary in size all of them will provide incremental revenue going forward.

In addition, we have of course the upcoming determination on August 14th, in our 3G ITC case with Nokia. We continue to negotiate with Nokia on a settlement and as always we would like to work out an agreement with them on acceptable terms. If we cannot, however, we are very willing to have ALJ issue his recommended decision as we remain confident in our position. We strongly believe the patent asserted in the case are valid and infringed by Nokia's UMTS products. And we believe, we demonstrated our position to the ALJ through the presentation of our case. So we believe we will prevail.

Of course, no one can ever predict the final outcome of these cases and in discussions with a number of analysts on this issue, they have asked what a win, a settlement, or an adverse decision means to the company. I think it is a good question, so let me share our view.

As a preliminary matter, it’s important to remember that the ITC case with Nokia does not define InterDigital, nor does it define the overall strength of our licensing position. InterDigital has a portfolio of over 3000 patents. We filed for another 150 patents every year. And the ITC case just involves, just the handful of those patents that we believe are relevant to 3G products.

So from that perspective, a win while certainly very positive, will not drastically change our licensing program. We ever designed licensing program on the basis that we currently hold, and continue to receive patents covering inventions that are essential to the 2G, 3G and emerging LTE standards. Thus a win would simply confirm what we already believe. That being said, to the extent Nokia and InterDigital do not settle the case prior to the decision.

A win should provide a significant incentive for Nokia to settle on favorable terms for us. And I expect that those terms would likely be at a higher royalty rate than what we are offering today, as this is typical practice for a party that opts to take a decision versus settle. A win would also likely motivate the remaining unlicensed parties to take a license with us, hopefully, without extended litigation.

In my view, a positive settlement with Nokia would largely have the same effect as a win. While we would not have the independent view of a judge as to the validity and infringement of the patents in the case, we would have nearly 75% of the 3G handset market under license including two large and well resourced companies, Nokia, and Samsung that have the opportunity to test the patents to litigation.

We would also have a well established and fairly visible rate structure, so while we cannot predict what an unlicensed company will do, a prospective licensee typically wrestles with two issues in deciding to take a license, namely, what are they need to do so at all, and what will be the competitive impact of doing so.

Given that we would have answered those questions, we would be hopeful that we could move at reasonable speed through the remainder of the unlicensed 3G market. It is also important to understand, that an unfavorable decision in the Nokia case, while certainly not expected, would not change our goal of licensing the entire 3G market or represent a significant impediment in reaching that goal. Let me tell you why, in simple terms.

First the patents in this case again represent just a small portion of our 3G portfolio. In discussions with prospective licensees, we use many more patents that are relevant to 3G products. So even if there was an adverse decision, we have ample patents to rely on reaching acceptable resolutions with unlicensed companies including Nokia. These other patents include new 3G patents issued since the ITC proceeding was commenced.

Second, the judicial process is very useful in understanding how to evolve our licensing programs and our approach to protecting our intellectual property. And in fact, it helps us understand any vulnerabilities of the patent in terms of Prior R ambiguous terms among others. The patent system also allows for the refinement of patent claims in response to Prior R and claim construction issues. Therefore, we as innovators have the opportunity to secure new patents that overcome any issues that maybe raised in the ITC action. While not guaranteed, my experience has been, that patents secured with the benefit of a judicial decision are stronger and more compelling in a licensing context.

So in sum, I believe we will win the ITC case against Nokia. However, whether we do or not, we’ll have no impact on our company, our business, or our bright future; we have the resources, financial strength, patents and creative energies to secure licenses with all manufacturers of 3G products, and we intend to do so; all that bodes very well for the company.

As you’ve already seen from Scott's financial report, we are generating significant cash flow and profit. Assuming positive results with Nokia and others we would have even greater cash flow and profit. In that regard, many of you have asked what our strategy is for using that cash. Let me answer those questions.

At a high level, the answer is relatively simple. We will do what delivered the greatest value to our shareholders, whether that is internal R&D, sum level of M&A, dividends, or stock buybacks. While the exact mix of those options is depended on a number of factors, I suspect like any investment strategy, our approach will be balanced; with some amount being returned to shareholders directly, and some being invested in internal R&D, and some also being used for targeted M&A.

As for R&D efforts, they are focused in two areas; the first is of core cellular systems evolution. This investment has historically produced substantial returns through our handset licensing business and we expect that success to continue. Over the past three months, we have increased our resources in this area, redeploying a number of engineers from our modem product program. The increased investment in this area has allowed us to increase the number of contributions we make to the standard bodies, increasing further the number of essential patents we can generate.

As I have discussed previously, we have been very successful in getting our inventions incorporated into the LTE standard, the first version of which is largely complete. We are now working on advanced versions of LTE, which will be very complex, but will give users unprecedented bandwidth on the go. As you would expect through such a system, there will be a number of very difficult problems to solve. This is where InterDigital shine.

Further, we are working on cellular systems beyond LTE, envisioning what users will want 10 years from now, and building the systems that will lead us to pass their expectations. The second part of our R&D initiatives, it moves us above the modem into middleware and applications that as we have described before will harness the capacity of the underlying radio access technologies, making them work together to create what we continue to refer as the network of networks.

These smart networks will connect people with people, people with machines and machines with machines making wireless connectivity ubiquitous. This future is very exciting to us for two reasons; first, it allows us to do again what we do best, create the inventions that will enable the future; second, it is exciting because we believe the volume of terminal unit shipments have been always limited by the world's population. As all things become wireless, that limiter on volume disappears resulting in substantially higher number of shipments, which means more revenue for us as our patents would be relevant to all wireless terminals.

We will compliment our internal R&D with targeted external acquisitions. Our focus for M&A is patent and invention rich smaller companies. We are in discussions with a number of companies that could bring us IPR, creative platforms, and key talent to help drive our technology roadmaps. If we find the right opportunity, we have the financial strength and talent to move quickly, which brings me to the last topic, which is managing innovation.

We do not invest in R&D for the sake for R&D. We do so to make money. So companies need internal processes that will allow them to produce faster results in relevant markets with clear go-to-market strategy. To manage profitable innovation in InterDigital, we have created an internal organization populated with some of our key technology business and market strategists. This group will act as an Internal Portfolio Manager and venture capitalists deciding whether to fund a projects or not, and also whether that project should be an internal project or one pursued through external sources.

To make the group even stronger, we’ve recently announced a key hire into this group, that being the Naresh Soni, a wireless veteran, who previously held senior engineering post at Nokia and STMicro among others. Naresh will be a key player in our Strategy group and he is already helping us refine our roadmaps and extend our visions. With that visions, our engineering talent, our financial resources and drive, InterDigital has the capacity to do great things. I’m proud to be leading the organization and we intend to deliver ever increasing value to our shareholders.

Thank you for your time this morning. Operator, you may now open the call up for questions.

Question-and-Answer session

Operator

Thank you. (Operator Instructions). We’ll take our first question from Tom Carpenter with Hilliard Lyons.

Tom Carpenter - Hilliard Lyons

Good morning, Bill, Janet, Scott.

Bill Merritt

Good morning.

Scott McQuilkin

Good morning.

Janet Point

Hi.

Tom Carpenter - Hilliard Lyons

Bill, thank you for the additional drill down on the plan beyond Nokia. Before you’ve talked about ITC and other legal matters, you mentioned that why these could come to ruling, generally these things settle, because there is too much to loose, the party is such a disparity in the outcome. And this time, as you ran the gamete, it almost seem like you were leaning for that you’d like a legal ruling, that validates the patents because that helps you more in licensing efforts going forward.

Bill Merritt

Yes. Well, I would say that my preference remains the settlement on the right terms. I think, that’s always been our approach and I think that the parties are trying to see if they can do that, and if we can do that, that is the best result. And I think that largely gives you the same benefit as a win, because now again, as I said you would have been through a litigation with two very capable parties and both of them choosing to take a license I think it does result in the same thing as a win.

My point on a judicial decision is that they are very valuable almost either way they go. On a win, it's certainly very valuable because it validates your position, and even in an adverse decision, it’s valuable because to some extent it becomes a roadmap for going back at patent office and working within the patent office's rule, securing new patents that overcome whatever issues may have caused difficulty in initial case.

In my career, I have done that on a number of occasions and what you come out with at the end of that process a very, very strong patent, because on the face of the patents is all the prior work that the other side has sighted in the claim construction -- in the claims and the patent you have been got rid of any terms that were ambiguous or perceived to be ambiguous. You don’t put ambiguous terms and to begin with on purpose, but sometimes in hindsight you get the benefit of that. So, judicial opinions either way I see as very valuable.

Tom Carpenter - Hilliard Lyons

Excellent. We were talking about beyond the modem into middleware than the networks, it almost sounds like you guys might just -- might be more than just the patent route, it could be some solutions, I’m sure you saw the Qualcomm and Verizon announcement yesterday.

Bill Merritt

Yes, I -- we did.

Tom Carpenter - Hilliard Lyons

As you guys think about getting into that space, would you continue to, I guess traditional and new focus just on patents or would you may be partner with someone who is going to have solutions or how can we think of you maybe delving into some of these new businesses?

Bill Merritt

I think the best way to look at it is, typically our investment starts at a time when there is a great opportunity to create IPR; and we sort of ground ourselves there and create almost an immediate return if we’re successful in creating good patents.

And then we sort of viewed a sort of a real options model. We have a second phase of development where you then can say, well I can create IP that I may provide to another company to let them go to the market with that product and you look at the business model for creating IP are there are enough potential customers and if you get enough of a return and if you can you take that next step in the real options process.

And then I think there is a third step beyond that where you'd say, well I have created the IP, I actually think this is such a great solution, and the market is such that we can do this on our own and therefore you take that next step to productize it yourself and you go to market on your own. And I think that generally we use the real options process in the company and we sort of look at it in those three stages and I think we are going to continue to look at things in those three stages.

But I think we always start with, let’s start with projects where there is IPR, an IPR rich environment because it almost guarantees the key to a high probability of getting a return on that investment because of our success in patent license.

Tom Carpenter - Hilliard Lyons

Great, I have got two questions and I will jump back in the queue. When you are looking at patents or companies on the M&A side, is your preference to acquire ones that may be already have started the licensing royalty stream or maybe one where there is a Greenfield opportunity where they haven't had the talks for various reasons, either they are too small or they are just starting a legal or negotiating process?

Bill Merritt

Certainly the right company in others space would be fine. From experience I actually find those who haven't done anything yet to be better because it could be that the way they were approaching and would approach it would be different than how we would want to do it.

And I think we would rather get that Greenfield opportunity and even if that meant that, we had to work back the patterns in that company for a couple of years, to get them in the right spot, get them in the right position, that’s fine, we are not looking to grab on to an immediate revenue stream or looking to grab on to things that can drive future value. So, as I said either time would be ok? But, if not, I’d say probably ones that are2 Greenfield would be better.

Tom Carpenter - Hilliard Lyons

And jumping to Scott, I haven’t forgotten about you. You ended June with 217 million, which was about $5 per share in cash, you add on the 100 million from Samsung that takes you up, what seven-ish per share?

Scott McQuilkin

Yes, that’s close.

Tom Carpenter - Hilliard Lyons

That makes your job pretty easy.

Scott McQuilkin

Yes, I have a great job these days. Was that your question?

Tom Carpenter - Hilliard Lyons

No, it’s a question, you did a excellent job and I answered it. Thank you.

Operator

(Operator Instructions). And we’ll take our next question from Kevin Sharbatoni with Boenning & Scattergood.

Kevin Sharbatoni - Boenning & Scattergood

Good morning. Couple of housekeeping questions. First, I think you mentioned there was a $1 million credit to the SG&A line that was obviously down over past quarters. Was there some help there from the restructuring or was it purely that credit or can we expect kind of that $7 million level going forward?

Scott McQuilkin

Yes, the $1 million reversal of an allowance for bad debt was a one-time event, it related to specific relationship with a specific customer we had previously reserved for an uncollectible account there and then we're able to work out a resolution with that customer and as a result we made that reversal. But I would say that's not something I would assume that we'll be able to do going forward on a regular basis.

Kevin Sharbatoni - Boenning & Scattergood

Okay. Could you give us breakdown in the quarter of fixed versus per unit as a percentage?

Scott McQuilkin

Yes, the fixed was about 35%. I am sorry fixed was about 65%, the variable was 35%.

Kevin Sharbatoni - Boenning & Scattergood

Okay, great. And then I noticed sharp dropped off for the 10% customer was that a result of just units being down or was there something else there and then can you also give some color on kind of other customers that are below that 10% line?

Scott McQuilkin

We normally don't provide a lot of detail on revenues for specific customers below the 10% level. I would say that the main reason we're only reporting two 10% customers is because we added Samsung and the combination of Samsung and LG push the other folks down as a percentage of the total. So, that's the reason.

Kevin Sharbatoni - Boenning & Scattergood

Okay. That makes sense. I know you mentioned you don't want to go into specifics on revenues for other customers but are there any trends you are seeing in terms of smartphone adoption or anything like that with smaller licensees?

Scott McQuilkin

Well, I think three trends, I would point to; one is our second quarter results which really reflected industry activity for the first quarter were weak and that's a function of the industry. There is various projections and some preliminary numbers out there for the second quarter that suggest the first quarter may be the weakest of the year, and we may get some bounce back as we proceed through the year, I'm hopeful that’s the case.

In Japan, which represents I think 20% of our revenues in terms of the per unit licensees in Japan, that was probably a bit weaker and there is some issues that affect Japan, which is a relatively mature market for 3G technology that affects Japan more so than other parts of the world. That said, we also saw some increase and we have seen overtime some very significant and regular increases in a number of our other licensees and that’s good to see.

I think if the market picks up, we will probably see even better increases from those folks. And not surprisingly, I think those folks are ones that are strong and effective in the smartphone market, which is growing; the other ones that are the leaders in 3G technology, which is growing and we expect to see continued growth from those folks. And some of those folks were on fixed revenue recognition and others are per unit, so the revenue should grow.

Kevin Sharbatoni - Boenning & Scattergood

Okay. And then, Verizon announced they're going to be rolling out LTE trials in Seattle and Boston later this year and then they send around 30 markets next year. Can you give us any update on kind of where that stands in those discussions?

Bill Merritt

Generally, we’re happy to see LTE starting to get some level of roll out, out there. Our patent position on LTE is very good and it’s getting better as we continue to participate in the standards bodies. I think I had mentioned in the prior call, we are starting to have a bit more discussions on the LTE front now as in licensing discussion as it becomes more apparent, it’s going to roll out in somewhat near term. And I think again, we’re well positioned for those discussions and would fully expect as we did when we transition from 2G to 3G, transition very easily over to LTE licensing.

Kevin Sharbatoni - Boenning & Scattergood

Okay, and one last question. I know you mentioned as a high level -- have you given any kind of breakdown as to what percent of sales are not coming from handsets currently? Or can you give us an idea of where you think that could end up as a kind of a portion of your sales?

Scott McQuilkin

I would say the vast majority of our revenues right now and in the past have come from handsets.

Kevin Sharbatoni - Boenning & Scattergood

Right.

Scott McQuilkin

And I think my point in the comments was that, that does represent the full market potential that’s available to us, the full addressable market. We have seen pretty significant growth and development in wireless applications affecting notebooks, and netbooks, and mobile internet devices, and such; and that market is becoming significant and we expect it to continue to grow overtime. So, that’s a market we’re very focused on and going after, but to-date we haven’t seen the potential of that reflected in our numbers.

Kevin Sharbatoni - Boenning & Scattergood

Ok, great. That’s all I have. Thanks.

Bill Merritt

Thank you.

Operator

We’ll take our next question from Bill Nasgovitz with Heartland Funds.

Bill Nasgovitz - Heartland Funds

Yes. Good morning.

Bill Merritt

Good morning.

Scott McQuilkin

Hi, Bill.

Bill Nasgovitz - Heartland Funds

Just a question, in terms of valuation, I’d just love to have your opinion with a stellar quarter like this and perhaps more to come with Nokia and others, why do you think, let’s just call it top tier brokers and investment bankers of the world don't take a liking to InterDigital? How come there is no coverage from that tier?

Janet Point

Well, I guess, we would have to see which ones of them are left. I think they are all banks now. There has been -- obviously we've reached out to those folks and have made a pretty good contact, unfortunately a lot of those folks have also experienced a ton of turnover in their business, so there is kind of been a musical chair’s challenge, but I think the one of the other questions that you heard earlier is we have a tremendous amount of free cash flow in the enterprise.

So we have not needed to do any financing for the business, which unfortunately I think the markets that are still driven partially by that in terms of coverage. But I think the analysts we do speak with know who we are. I think we've done a pretty good job of introducing them to who the company is, and I think we had recent initiation from another analyst to who was with the top tier firm at one point, but now has his own firm. So we're chipping away at it, but we do get that question quite a bit.

Bill Nasgovitz - Heartland Funds

Well, thanks Janet. While with all the cash hopefully with Nokia's cash when that comes in some time in the near future don't let those big investment bankers talking anything foolish though, okay, on the acquisition front.

Janet Point

We'll make sure of that. Thank you.

Bill Nasgovitz - Heartland Funds

Thank you.

Operator

We'll take our next question from Tom Carpenter with Hilliard Lyons.

Tom Carpenter - Hilliard Lyons

Hello, again.

Bill Merritt

Hi, Tom.

Janet Point

Hi.

Tom Carpenter - Hilliard Lyons

In the past couple of years, the model had shifted from per unit royalties to kind of ratable flat fee over a fixed time period given you guys and the other firm certainly. As you look out both this year and going forward not just 3G the LTE and maybe some new endeavors on your end. Do you think the nature of licensing deals is going to stay that way or is it going to be on a case by case basis?

Bill Merritt

I think it always will be case by case. I think that there was a level of stability in the market for a while that made fixed price deals maybe easier to do and I think not just the economic downturns, I think that's a short-term thing. But I think that the upside opportunities with respect to other wireless devices I think the shifting of the players in the market with Apple's emergence and are they going to take more share away from other folks and other things I think has created an environment where, I also want to say fixed price deals are -- you can't do, but I think you have to both sides have that things to a little harder how those deals will be structured depending upon how longer the period of time those are covering.

I think you can probably still do a short term in fixed price deal with good amount certainly and take it longer. Both sides may want to have some flexibility in that. So, again I think it is case by case and typically what has happened with us is the second and third tier have somewhat universally been running royalties, couple exceptions, but then I suspect that will be a case and the larger folks have always been fixed price and we may see that change.

Tom Carpenter - Hilliard Lyons

You guys have seen both sides of that or you have done some fix, you have had some folks drop off that either way through from a technology or sold or quit doing handsets then you had some other folks that have done fixed price that their market share has gone through the roof from initial projections?

Bill Merritt

Yes, I actually, I think the fixed price deals that we did very early in line with the company’s way. We are probably, as I think we are probably the only ones where we didn't, what were the upside that were the licensees sold lot more than we anticipated. For the most part, I think on the fixed price deals, we have either landed in the range that we modeled or we got the benefit of someone not doing it well in the market or exiting. So, on balance I think we have actually done pretty well with the fixed price deals, but going forward I do think that -- some of the factors that influence whether its fixed price or running royalties, I think they maybe leaning a little bit more corresponding royalty path.

Tom Carpenter - Hilliard Lyons

If you do fixed price, you think there might be, maybe every two years reset, if you don’t have a case and what would that through company out California that’s done extremely well, has a fixed price dealing, and you are going to walk into that for seven years?

Bill Merritt

There are definitely provisions you can put into the (inaudible) and both side can put in, that provide some market adjustments and I think -- again it depends upon the term of the deal. The sorter the term, the less you concern because there is not much that can happen. They usually have pretty good visibility for a year or two beyond that. Longer term, you can have reset provisions, or you can create hybrid models.

That could be a hybrid model where it’s partially fixed, partially variable, so that and thus in that situation you are protected to some degree, if the volumes take off because you at least have eight running royalty component but that licensee, because that running royalty component would be smaller because of the fixed component they get a benefit if they sell more. So, looking at things going forward is I think it may not be running versus fixed versus some hybrid of that.

Tom Carpenter - Hilliard Lyons

We get lots of questions about why you guys are delivering strong growth, people sometimes don't understand that it's just a readable thing that you guys have a lot more certainty than you do on the other side but they would like to see you grow, so we understand that there is a trade off when you [go there].

Scott McQuilkin

Hey Tom, I would concur with everything Bill just said and the only thing I would add is when we look at it, it's very typical for us to consider a variety of different field structures as we would expect our licensees to and fundamentally it just comes down to which one in our view generates the greatest value. And the value is a judgment based on various risks and considerations as well as cash flow. So, I firmly believe that what we do in the end is what we think maximizes value for our shareholders and there are certainly other considerations maybe earnings per share, maybe revenue growth over time, but those are lesser considerations in our mind. We are not going to sacrifice value to dress up our income statement.

Tom Carpenter - Hilliard Lyons

As long as you maximize shareholder over the next two or three weeks at the ITC we all will be very happy.

Scott McQuilkin

We’re also very focused on that. That's why I didn't say over the long run, short run too.

Tom Carpenter - Hilliard Lyons

Right. Well good luck over the coming week. We look forward to the positive 8-K. Thank you.

Bill Merritt

Thank you, Tom.

Operator

That does conclude today's question-and-answer session. And at this time, I would like to turn the conference back over to Ms. Janet Point for any additional or closing remarks.

Janet Point

All right. Well, thank you all for joining us today on the conference call. A request will be available after the call, if anybody wants follow-up questions. And we'll talk to you again soon. Thanks.

Operator

Thank you, ladies and gentlemen. Once again that does conclude today's conference. We thank you for your participation.

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Source: InterDigital, Inc. Q2 2009 Earnings Call Transcript
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