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InterDigital Inc. (NASDAQ:IDCC)

Q3 2009 Earnings Call

October 29, 2009 10:00 am ET

Executives

Janet Point - EVP, Communications and IR

Bill Merritt - President and CEO

Scott McQuilkin - CFO

Analysts

Jonathon Skeels - Davenport

Michael Ciarmoli - Boenning & Scattergood

Tom Carpenter - Hilliard Lyons

Thomas Davey - Sidoti & Company

Andy Schopick - Nutmeg Securities

Bill Nasgovitz - Heartland Advisors

Operator

Welcome to today's InterDigital’s Third 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

Thank you and good morning everyone and welcome to our third quarter earnings conference call. With me this morning are Bill Merritt, our President and CEO; and Scott McQuilkin, our Chief Financial Officer. Consistent with last quarter's call, we will offer some highlights about the quarter and our outlook 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 as thus 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.

With that, I will now turn the call over to Scott.

Scott McQuilkin

Thank you, Janet, and good morning to everyone. Our third quarter financial results reflects significantly higher earnings driven by strong growth and revenue combined with the structural reduction in expenses.

Total revenue was $75.5 million, an increase 37% from the third quarter of 2008. Expenses were $28.9 million, a 35% decrease from third quarter of 2008, excluding the third quarter of 2008 adjustment for litigation contingences. The companies of increased revenue and lower expenses drove net income to $30.6 million, an increase of $21.4 million over the year ago quarter.

Diluted earnings per share was $0.69, more than three times our EPS in third quarter of 2008, is slightly above full year 2008 EPS of $0.57. In fact our net income for the quarter exceeded net income for the entire year of 2008. Our net profit margin or net income divided by revenue was 41% in third quarter of 2009, up from 17% in third quarter of 2008. Earnings also increased sequentially due to higher revenue and lower expenses.

Third quarter 2009 net income of $30.6 million was up $4.2 million from the second quarter of 2009. EPS increased from $0.59 in the second quarter to $0.69 in the third quarter. Free cash flow for the third quarter of 2009 was $221 million. Strong free cash flow was driven by receipt of the second of the four, $100 million dollars payments from Samsung, prepayments from two licensees and a low level of cash outlays.

The cash and short-term investment balances increased to $430 million at September 30, 2009. The total revenue for the quarter consists of three components, current patent loyalties, royalties for past sales and technology solutions revenue. Current patent royalties were $72.5 million in the third quarter of 2009, up 41% over third quarter, 2008.

The significant increase in current patent royalties over third quarter of 2008, is due primarily to the contribution of $25.7 million from Samsung.. In addition, we recognized a past quarter of revenue from Pantech, as well as revenue from Cinterion, two new licensees that were added during the quarter.

The growth in patent license revenue over the last year was tempered by lower revenue resulting from a decline in sales for a number of our per-unit licensees. As a result our per-unit royalties decreased 6%, to$27.7million in the third quarter of 2009, compared to $29.6 in third quarter of 2008. However third quarter 2009 per-unit loyalties increased 17%, from second quarter of 2009. As a reminder, our reported per-unit royalties for third quarter of 2009 are based on our licensee sales for calendar second quarter of 2009.

To put this trends of perspective, industry handset volume decreased 8% in second quarter of 2009 versus the comparable quarter a year ago, however they rebounded to 12% from first quarter of 2009.

Patent royalties for past sales were $0.5 million in third quarter of 2009 compared to $1.3 million in third quarter of 2008. Our auditing programs were a routine part of licensing program, so patent royalties as a result of these efforts are regular contributor to our revenues.

Our technology solutions revenue was $2.5 million, up from $2.2 million in the third quarter of 2008. Over the last year this element of our revenue stream has shifted from services-based revenue to per-unit royalty revenue. While profitable overall, services-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, 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, it appears that the global economy has started to improve, at least to the respect to handset shipments. This is reflected in market data for handset shipments as well as the result of our per-unit licensees.

In addition, despite economic challenges 3G handsets have continued to increase as a percentage of the total market. This bodes well for royalties from a number of our per-unit licensees, especially those with significant global penetration in a very fast-growing Smartphone market.

Second our exposure to the relatively mature Japanese handset market is decreasing over time as we had significant new licensees with a diversified global customer base. Specifically in third quarter of 2009, royalties from Japanese per-unit licensees accounted for 24% of recurring revenue, compared to 40% in third quarter of 2008. Going forward we expect our exposure to this relatively mature market to decline naturally as we had new licensees and royalties from other per-unit licensees increase.

Third, over time 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. With the addition of Samsung and Pantech as 3G licensees, our share of the 3G handset market under license increased to 55%. 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 many other products with wireless capabilities that utilize our patented technology. Example of these products include, 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. For example one of the new licensees that we added in the third quarter Cinterion is licensed for machine-to-machine modules as well other devices and we expect to see royalties from this licensee grow as the M- to-M market expands.

Turning to the expense side, third quarter 2009 operating expenses were $28.9 million. This represents a $15.8 million or 35% decrease from third quarter of 2008 expenses, excluding a third quarter adjustment in 2008 for litigation contingencies. Excluding patent litigation and arbitration costs, operating expenses were $25.6 million in third quarter of 2009.

This represents a $13.3 million or 34% decrease from third quarter of 2008.Most of the decrease was driven by the reduction in development and other expenses associated with the repositioning of our business at the end of first quarter 2009.

In addition third quarter 2009 expenses had a $4million adjustments related to revised expectations for the payout associated with a long-term performance based incentive program. This adjustment is cumulative in nature covering the accrual of [incentive] compensation expenses from the beginning of 2008.

Excluding this adjustments our operating expenses other than patent litigation and arbitration costs were $29.6 million in the third quarter 2009, down $9.3 million form comparable third quarter 2008 expenses and down $0.7million from $30.3million in the second quarter 2009 excluding a small credit to repositioning expenses and $1million credit associated with a reversal of allowance for bad debt.

Patent litigation and arbitration costs were $3.3million in the third quarter 2009 or $2.5 million less than third quarter of 2008 expenses, excluding the adjustments for litigation contingencies. The decrease in patent litigation and arbitration cost is due primarily to the reduction of expenses associated with ITC proceedings with Samsung and Nokia, as well as the resolution of our UK patent matters with Nokia.

Our balance sheet is very strong. We ended third quarter of 2009 with $413 million in cash and short-term investments and virtually no debt. This provides significant capacity and flexibility to execute on our business plan and to respond to opportunities, as well as unanticipated events such as recent Nokia ITC decision.

In respect to our stock repurchase activity, through October 30 we have repurchased $25 million or 1 million shares of common stock under the $100 million share repurchase program that was authorized in March.

Looking forward, we continue to have confidence in our ability to generate value for our shareholders by licensing our significant portfolio of patents, as well as future licensing opportunities with new technologies generated by investments in core R&D.

In support of these opportunities, we intend to maintain a strong balance sheet to provide liquidity, flexibility and the opportunity to selectively pursue prudent investments that are fully aligned with our technology and business strategy.

In summary, our earnings and balance sheet are strong and they provide the capacity and flexibility to execute on our business strategy in order to drive shareholder value.

Now, I’ll turn the call over to Bill.

Bill Merritt

Thanks, Scott, and good morning to everyone. As you saw on our earnings release yesterday and just heard from Scott, the company delivered a very strong quarter. We grew our profitability substantially and delivered very solid cash flow. Today, we are in a position of unprecedented financial strength and stability.

I’ll focus most of my remarks today on our R&D initiatives, since it is our inventions and technology advances that will ultimately drive long-term value for our shareholders. Let me start however, with a recap of our options after the recent ITC decision in our Nokia case, and provide an update on our licensing programs since we received a good number of questions on the topics.

As we discussed on the conference call on October 19, we have a number of good options for dealing the ITC’s decision in asking partners to deal with Nokia.

In short, we can file an appeal, and file a new litigation against Nokia, proceed with the pending patent infringement litigation case in the Federal District Court in Delaware and also work with the US Patent office to secure a new patents that overcome these issues raised at the ITC. Some of which is already been accomplished.

For the reasons we stated on our last conference call, each of the options is attractive and we also have the ability to pursue one or more of the options in parallel. Over the next few weeks, we will further refine our strategy and move forward in what we believe will be a very effective manner. Indeed, with substantial financial strength and a portfolio of over 3,000 patents with more patents issuing every week, we continue to have a high level of confidence in our ability to secure license agreement with Nokia on favorable terms.

For the same reasons, we also continue to move forward in our licensing program, which is very healthy. Given the depth and strength of our patent portfolio, we are seeing no change in the response from our current and prospective licensees. Nor do we intend to compromise on the economic terms we seek in licensing arrangement.

Indeed since the ALJ initial determinations in the ITC case, we have continued to receive payments on a regular and timely basis from our licensee where we see substantial prepayments. We signed Pantech to a dealer worth over $100 million and we saw Cinterion on terms consistent with our strategic plan.

We also have other license discussions ongoing where we have reached economic agreement on solid terms. So, our licensing program continues to move forward for approximately 55% of the 3G market now under license.

Also, as Scott already inaudible noted, a number of our licensees are starting to see increased demand for their products as the economies turn around and the global demand for phones, especially, Smartphones improves and there is welcome news on several fronts. First, stronger demand for our licensee's product means higher licensing revenue for us.

Second, the rapid growth in Smartphones such as the iPhone and Blackberry as well as MIDS and the Netbooks confirms to us the relevance of the R&D initiative that have been underway at the company for a number of viewers. Let me explain this further.

More Smartphones means that more people are surfing the internet from their phone, downloading applications, sending pictures or watching videos on Youtube on the go. While all this is great fun for users, it also is quickly becoming industries single biggest challenge as the explosive data traffic is overloading wireless network. To how to deal with this problem, in a recent report ABI research stated that the global mobile data traffic surpassed 1.3 Exabyte sent and received during 2008.

One Exabyte equals one quintillion bytes and a scientist UC Berkeley once estimated that all words ever spoken by human beings could be stored in approximately 5 Exabyte.

By 2014 an average 1.6 Exabyte of mobile data will be sent and received each month, but definitely wireless data traffic data is expected to grow more than ten-fold in less than five years seriously outstripping the capacity of today's networks.

Already regulators from around the world are scrambling to mitigate this bandwidth crunch by trying to allocate more wireless spectrum. So simply adding more spectrum is only a part of the solution and not sustainable in the long run. This is were InterDigital comes in and why we are excited about the rapid uptake of Smartphones and other application rich devices.

Since our early beginning InterDigital has worked on solving the industry's most critical, technical challenge, that next challenges the bandwidth crunch and for the last few years we've been working on these solutions to solve it.

For example over three years ago we began our work on LTE creating numerous inventions that will drive this new high capacity networks. While manufacturer are hard at work today to deploy the first LTE system, we are hard at work on advanced versions of LTE that will deliver 10 times the data rate of the first LTE system. Equally important, we are developing the technologies that will deliver that capacities ability across the entire cell not just at its center.

We are also working on improving spectral efficiencies so that carriers will get the best returns on their investment, but that's not all, a number of years ago we also envisioned that the intelligent management of different wireless access systems could prove extremely beneficial in terms of managing capacity and enhancing user experience. From that was born the mobility independent handoff solution that is now standardized by IEEE.

At the FMCA Seamless Mobility Interoperability event this month, InterDigital and nearly a dozen other companies, operators, infrastructure vendors and handset makers demonstrated their standardized MIH solutions, successfully completing handoff for data and video calls between 3G, WiBro and Wi-Fi networks. Each of these solutions is used InterDigital technology. So the Inter mobility solution is now well on its way to becoming the industry standard for mobility.

Further we are working on technology that will improve the intelligence of how the networks are used. What if you could combine the capacity of two or three different wireless networks to drive a high definition TV on your laptop or provide a connection that is so secure and so reliable that first responders would never be without coverage.

What if handoffs move from just transferring a call from one cell to another or one network to another to moving content from device to device. If that was the case, when you walk in your home at night, the ball game you are watching on your mobile would seamlessly transfer to a PC on a larger screen. For the conference call you are on will seamlessly hand over to your home phone network.

We think about these things everyday. More importantly we are actively working on the solutions that will make them a reality. Whether it is wireless network that can move tremendous quantities of data, a connected network of wireless systems the user seamlessly accesses. Or intelligence on the network or on the device that gives the user what they need, when they need it, in the phone they need it in. Think of it as bigger pipes, more pipes and better pipes.

Our inventions will enable all three. Our invention will offer the use by partners that have got the entire value chain, including network operators, device manufacturers, software and service centers and of course, end users around the globe and of course our inventions will further strengthen our technology portfolio and will lead to future licensing of patents in know- how, both to our current customers and new ones as wireless continues to the extend its reach.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question today comes from Jonathon Skeels with Davenport

Jonathon Skeels - Davenport

A few quick questions, First could you just remind me of the details on the long-term incentive program?

Bill Merritt

The long term intensive program as it is described in our disclosure, typically it’s a three year program. They alternate between the cash programs and stock programs and goals in those programs are typically related to cash flow over those periods. Licensing penetration over those periods and we also have goal with respect to the penetration of our slim modem IP as well in some of those programs

Jonathon Skeels - Davenport

Okay.. To reduction in operating expenses you reported you have there being structural exchanges that should be in place going forward, the $4 million and lower operating expense is related to this?

Scott McQuilkin

No. that the structural expensive I referred to, relate primarily to our exit from the product and modem business at the end of the first quarter. The $4 million is a cumulative adjustment, based on the amount that we had accrued under one of those long-term incentive plans. We made an adjustment based on changing the expected payout under that plan and it was a cumulative adjustment.

Going forward, I think the expense that you should expect to see reduces from about $1.2 million a quarter to about $0.6 million a quarter and that just relating to the one plan that was affected.

Jonathon Skeels - Davenport

Okay. Great and helpful. Then the rebound in per-unit wise licensees, I guess that was mostly due to strength in the Japanese handset manufactures rebound there?

Scott McQuilkin

The big rebound I would say is related to Japan, there is significance portion of our per-unit license revenue but at the same time we had other per-unit licensees who continued to grow very rapidly I'd say, as we've seen them grow in the past.

Jonathon Skeels - Davenport

Okay, and than I guess, could you talk may be about plans for the cash balance and if you could maybe provide some detail on a breakdown may be on your priorities for cash between buyback, M&A and may be your cash that you want to keep on hand for future litigations?

Bill Merritt

I think, I'll make up a couple of points about that, the first key point is, I think what we’re going to do what we have always done, which is invest the cash based on what generates most shareholder value. I think, second, right now we’re actually fairly fortunate to have a significant cash balance at a point in the economics cycle where I think some of the market prices are adjusting and therefore afford an opportunity makes some strategic investments that have the opportunity to generate significant values.

So we’re looking very closely at these opportunities, as well as other form of utilizing cash which could involve stock buybacks and potentially dividends. However, I would also point out that we’re really not in a rush to invest this cash short-term, I think some of this strategic opportunities they don’t all line up at the door all at once.

So we’re going to be patient investors. We’re looking very looking very aggressively at those opportunities but we want to make sure that when we find them we got the cash and liquidity to be able to take advantage of those.

One final I would say is, that perspective is probably not very unique, it is quiet common for technology companies including our peers to keep pretty significant cash balances on hand for just that purpose. Rambus is an example has close to $500 million of cash on their balance sheet, Tessera, I think its about $360 million. So I think that is probably very consistent with many other folks, that we would consider peers.

Jonathon Skeels - Davenport

Then on Nokia you laid out your options going forward, I guess for the most part though, we won’t have any resolution there or shouldn’t expect anything to come up, most of those things probably for at least 10 to 12 months if I guess right, if you feel you'll take it to district courts, that’s something, that is there won’t be any resolution there for some time correct?

Bill Merritt

I think if you look at the legal path right, which is what we laid out, I think there with respect to appeal I think the major event would we a decision by the [ASE], and I think 10 to 12 months is the timeframe that we would look at and they are pretty reliable on their time table.

If there were a new action brought, I think with that creates some additional incentives for parties to start or continue discussions. So if you take a look at the legal side of things, I would say there is always the business side of things and we continue to have various dialogues, various sections within Nokia and certainly are looking for the right opportunity, aside from any legal avenue to create the right resolution with those folks. So I don’t want to have a legal path be defined as the only timetable for how we can resolve things with those folks . I think there is lot of other opportunities that are available as well.

Operator

Our next question will come from Michael Ciarmoli with Boenning & Scattergood.

Michael Ciarmoli - Boenning & Scattergood

A question, Bill I guess just to elaborate on the Nokia. Why would Nokia be incentivized to settle here. I mean, they could make a number of arguments to say, that they are losing market share to the iPhone, you got the Android based phones coming out soon. It seems that their incentive would be to just spend a couple of million dollars, whether its $20 million a year on legal fees, make a claim that they are losing market share, watch handset ASPs continue to fall and even if they have to settle, then they have got a more favorable kind of economic picture in the out period. I mean just help me understand why they would actually settle, say any time soon, six months or a year from now?

Bill Merritt

There is a couple of thing right. At first I think you look at it from the standpoint of , as we continue down the one path which is this legal path, the portfolio is getting actually proven up in a sense through Nokia’s activities as we get patents out of the patent office that resolved all the concerns that they've raised.

If we move forward and then appeal in an eight or 10-month timeframe turns around the ITC decision. I think what happens in that situation is the cost of a settlement to Nokia is going up significantly because the portfolio is being proven up. Then I think if you're on their side you're going, is it worthwhile taking it all the way to those points where InterDigital can actually command perhaps a much higher royalty at that point in time.

So I think they have to manage what they're doing because sometimes while you may be winning some of the battles along the way, ultimately you're putting yourself in a very bad position to lose that war because of all the proof the other side is putting together.

Separately, on the business side, I think that there are a number of things that we're doing on the R&D side that could be attractive to Nokia. Yes, they are losing market share, and some of the things that we're doing with respect to our technology could be innovative things that Nokia could apply to their products.

So the question is do they want to work with us on that stuff to bring it to market sooner, to drive that, and as part of that can we work out a creative solution with respect to the patent opportunities. We're not an unknown technology vendor to Nokia. We're a very good technology vendor to Nokia. They remember those projects we've done well, and I think that as we move forward with these projects I think we can create some opportunity there.

On top of that I think there are other things that we can do to create incentives in the market for them to want to deal with this issue sooner rather than later. So I kind of look at the legal path as kind of one path we can put down and one timeframe we can establish, but I want to establish that as sort of the longest timetable and do other things that will drive it to conclusion sooner than that, and I think we've got some really good opportunities.

Then Nokia at the end of the day, you don't get to be market leader without being a rational organization, and I think they can understand these risks and manage their way through them, and I think part of that management in my mind would be for them to do things somewhat sooner rather than later because I think later it becomes more expensive.

Michael Ciarmoli - Boenning & Scattergood

Sure, that's fair. That's helpful. Just can you remind me on the federal appeal of the ITC decision, if you do appeal and that decision gets overturned, does an injunction order get applied to Nokia's handsets?

Bill Merritt

No. What would happen is that the case would be sent back to the ITC. Then the ITC, depending upon what the federal circuit does, would either decide that it can issue that injunction in quick order, which we hope would be the case. They may decide that there is some level of briefing that's necessary just to kind of make sure that they've covered the issues. I don't think there would be any need for further evidence at this point, but I don't want to eliminate that as a possibility either, but I don't think that they would need that.

Michael Ciarmoli - Boenning & Scattergood

So when you're talking this 10 to 12 months, that's the federal appeal process, then it goes back to the ITC and they should move rather quickly with their decision then?

Bill Merritt

Yes, they're a quick moving organization, so while they're not under a statutory timetable at that point, I think they would move reasonably quick.

Michael Ciarmoli - Boenning & Scattergood

Then just another one you mentioned Pantech potentially being a $100 million opportunity, and I guess that license agreement goes out to 2016. Can you give us any sort of indication of where those revenues are now? I mean, what their handset penetration looks like, how you see that kind of customer relationship, the revenue related to that building over time?

Scott McQuilkin

This is Scott. It's pretty straightforward. For the license we're going to receive about $90 million in cash payments plus common stock, which we valued at $22 million, so that's about $112 million over the license term. The payments are fixed according to a schedule, and we're recognizing those pro rata over the remaining license term.

Michael Ciarmoli - Boenning & Scattergood

Okay, perfect. Then just one more, two more housekeeping. Scott, what was the per-unit license revenue in the quarter? I missed that number when you gave it?

Scott McQuilkin

It ended up I think being about 40% or so of our…

Michael Ciarmoli - Boenning & Scattergood

40% of your total quarterly revenue?

Scott McQuilkin

Yes.

Michael Ciarmoli - Boenning & Scattergood

Okay. Then just in terms of the expense line item, is this sort of the run rate we can look at on development? I should say kind of in this $13 million to $14 million range, is that maybe with some modest increases? Do you see any radical changes there to that number I guess up or down in the future periods?

Scott McQuilkin

Yes. Near-term certainly, I think on the SG&A side we're going to keep fairly tight control over those expenses as we have done in the past. I think on the R&D side we're looking at that right now in terms of our budget for next year. We are pretty bullish on our opportunities there, but we are also very cognizant of making sure that what we spend is very focused and very productive in terms of value. So I think you could see moderate increases in that line again based on opportunities we see, but very significant changes, I don't see that.

Operator

Our next question will come from Tom Carpenter with Hilliard Lyons.

Tom Carpenter - Hilliard Lyons

Bill, I wanted to drill deeper into some comments you made about your past economic discussions with potential licensees. Are the licensees your historical handset manufacturers or some of the new licensees you were talking about such a M2M or other areas that you talked about you're been working on for the last couple of years?

Bill Merritt

It's both.

Tom Carpenter - Hilliard Lyons

It's both? Okay. Would these go beyond 3G, and also consider 4G?

Bill Merritt

It depends. Yes, they would, and in many instances I think it also depends upon the manufacturer though and sort of where their focus is because you have some that are sort of very focused just on sort of 2G and 3G markets and other ones that are a little broader. So certainly we are raising LTE in all of the discussions, and it makes sense now since LTE is pretty near rollout.

Tom Carpenter - Hilliard Lyons

That would be fantastic. How many days ago did you talk to the Reuters reporter where you commented on the Apple, the Nokia Apple?

Bill Merritt

It was earlier this week, yeah, sometime this week, Tom. I forget exactly.

Tom Carpenter - Hilliard Lyons

I wanted to see if the sodium pentothal they gave you is still working. Well, you keep [an eye] on the Apple track because it's one of my favorite topics. They sold 7.4 million iPhones in the quarter and not much below that in the prior quarter, and RIM in the most recent quarter had sold 8.3 million and I think maybe just about a million less than that. Still we haven't seen Apple or RIM crack IDC's 10%.

You commented in the past that both those licensing deals are close to your historical rate. Can you help me understand why they're not showing up on the income statement it was 10% customers?

Scott McQuilkin

Yeah. I mean one reason is because it's getting harder and harder to be a 10% customer when your annual revenues are in the $300 million range you've got to be $30 million or more. I think particularly with RIM, I agree with your assessment and I would say as a per-unit licensee we've seen over time an increase, which is very much in line with the increase that you see in the marketplace.

Tom Carpenter - Hilliard Lyons

Scott, because you're probably in a generous mood after the game last night, if RIM's market share keeps progressing, or the number of units sold keeps progressing and they get to where they're doing 10 million, could they be a 10% customer in the first part of next year or the fourth quarter?

Scott McQuilkin

Wouldn't rule out the possibility, but again I have a hard enough time projecting our own financial results, much less RIM's.

Tom Carpenter - Hilliard Lyons

Sure. It sounds like that RIM is more likely to become a 10% customer than Apple based on how the deal is structured.

Scott McQuilkin

I would say yes.

Tom Carpenter - Hilliard Lyons

One final question and I'll get back in queue. As of this morning before the market opened, you guys had a $800 million market cap. Obviously we both know what the cash numbers are, so that means Wall Street was valuing the patents and your future cash flows generated by those patents at less than $400 million.

You guys think that your patents are worth a great deal more than that, especially considering from the numbers people are talking about what the Nortel LTE patents were worth? Are there any things you guys want to do to address that discrepancy whether it's got on the road more often, buy back stock, both the firm and senior management, or any other initiatives you guys are exploring?

Bill Merritt

Tom, I think it's a couple things. I mean, certainly we see these disparities in the market too. A JPMorgan analyst comes out and says that the Nortel patent portfolio is worth $2 billion, and our portfolio is actually quite substantial compared to that, but I think for us it's a couple things.

Certainly I think that there is always a continued effort to refine the communications of the company and speak to not only the high level of confidence we have with respect to resolving the license agreements for 3G with the major manufacturers, and we do have a very high level of confidence there. I think we would also speak to life beyond that.

I think that the technologies that we've been working on for the last couple years are now becoming very relevant. I think if you sort of observe conferences out there on wireless, the biggest issue has become this bandwidth crunch. AT&T is talking about it. There was actually a really good article from either Verizon or Sprint's CTO a couple days ago on the same thing. So I think what we're seeing is people are really responding to the message that we have with respect to this new opportunity and the technology we're developing there I think.

So I think the time is now to get out and sort of beat the drum with respect to where we're going as a company with that technology, and it's not obviously just a technology story. It's how do you make money off of technology at the end of the day, and I think there the opportunity is that these technologies move. While they certainly are used in the handset and will drive the handset licensing program, we think also it will open up opportunities with respect to other manufacturers and players who have substantial investment in this business and that we can certainly talk to with respect to licensing. So I think there is a real upside there, as well.

So I think the other thing beyond communication obviously is execution, and so there we have to move forward crisply with respect to the issues with Nokia, and I think we have a good plan and we will move forward on that. I think on the licensing agreements, we will also move forward on those and deliver on those.

Also I think that to move beyond just communications and make things look concrete, for example, we intend to put on a pretty good show in Barcelona next year with respect to our technology and to get people exited about what we're doing. So there is a lot we can do to move things ahead. We continue to be very excited about where we are as a company and where we can go, and hopefully we can translate that internal excitement into the market, as well.

Tom Carpenter - Hilliard Lyons

That would be fantastic. One final question. You guys also have $200 million slated to come in from Samsung next year, and Scott is going to have the problem most CFOs can only dream of, possibly too much cash on the balance sheet. Do you see a dividend withdrawal in the next year? Because you've been very guarded with the share buybacks this year. I don't know if you're going to step up the pace of that or because you just have so much cash that you guys are going to consider a modest dividend to encourage long-term ownership of the stock.

Bill Merritt

As Scott said before, one, we always have all the options on the table, and all the options are considered with a single objective of delivering the highest value back to shareholders. So I've actually never heard Scott say he could have too much cash.

Tom Carpenter - Hilliard Lyons

Well, that's a given. He's a Wharton guy. Come on.

Bill Merritt

With that being said, I think as an organization we do need to manage our cash, and I think you have to have a reason for holding cash because if you don't I think at some point you do need to return it to the shareholders. I think that the reasons for holding cash are what Scott articulated before. We see some very unique and high-value opportunities out there, one as a result of sort of the economic picture, but there is also other things going on out there, and also things that are more relevant to us now based on how we've repositioned the company and some of the R&D we're doing where those opportunities are very important to us.

So we think those opportunities could drive very significant value for us, and we're keeping power to drive for them. So we will always keep the other options on the table, as well. The Board on this issue I think does a very good job of disciplining management to say, make sure you're going to use that cash well, have a plan for using that cash, and if there is no need for excess cash then we will distribute it to shareholders in a way that returns the highest value to the shareholders.

Tom Carpenter - Hilliard Lyons

I appreciate the detailed answer to the question.

Bill Merritt

Operator

Thomas Davey with Sidoti & Company is next.

Thomas Davey - Sidoti & Company

I had a question. Are there any material patent expirations coming over the next few years?

Bill Merritt

No, not really. I mean, certainly we have patents expiring all the time, but we also have new patents being issued all the time and one of the really very nice things about the mobile handset market today is that the devices include layers of technology so it's 2G, 3G and then eventually LTE.

If you look at the licensing capability with respect to a device, it always remains very healthy because of that. So we don't really foresee any big drop in terms of the critical mass that we need to license patents. In fact, we see that going up, and some of the R&D we're doing, actually much of the R&D we're doing is intended to drive that licensing IPR up even higher.

Thomas Davey - Sidoti & Company

Okay, great. How substantial are 4G patents to the portfolio right now?

Bill Merritt

I'd say a couple things. One, we are in a very good position from a licensing standpoint with respect to LTE. When we talked with Pantech for example, the LTE was including the license because of the strength of that portfolio already. If you look at the filings being made today by the company, I would say that the majority, and probably not a vast majority, but I think the majority of the filings being made today are probably LTE-based, or it's actually probably at this point LTE advance based so that we are building even more capability in that area. So I think a good portion of the portfolio today is represented by LTE.

Thomas Davey - Sidoti & Company

Okay, great. Could you go over how Nokia's actions against Apple would affect the proceeding again for me?

Bill Merritt

In some respects it's not relevant to us. It's a separate dispute between Nokia and Apple, right. The only issue that we see in that dispute, which could be relevant to us, it's almost the same issue that resident in the Nokia-Qualcomm dispute, and that is this whole discussion around FRAND, and what is Fair, Reasonable And Non-Discriminatory really mean in terms of royalty rates and things like that. That issue did not actually get resolved in the Qualcomm litigation, and whether the Apple and Nokia case ultimately goes to judgment and there is an answer on that question we'll see.

Certainly we believe that our rates satisfy any FRAND obligation. In fact, I think we've mentioned this before in the Broadcom-Qualcomm suit we were actually rolled out for the company that demonstrates FRAND because of the way we approach licensing. So we're not particularly worried about it, but that's the only one ruling that can come out of that case that could be relevant to us.

Thomas Davey - Sidoti & Company

Okay. Very good. Are there any sort of comments or guidance you could give us on LG's approaching license renewal?

Bill Merritt

I think one is, as with any licensee, we always try to get processes going in advance of the renewal so that we can sort of have it be a smooth transition from one agreement to the next. I think with respect to the patent position we have for presentation to LG, it's very strong and I think I mentioned it when I talked before about as a result of the ITC decision, it's sort of counterintuitive, but actually now you can actually talk with very specific about here is what the Court found and here is where our patents sit today and it answers all those questions so it becomes actually a fairly compelling story for a prospective licensee.

So they're among the folks that we reach out to and fully intend to roll that agreement over to a renewal that like I said ends in 2010, so get them re-signed up come 2011.

Thomas Davey - Sidoti & Company

Okay, great. Scott, a question for you about the shared buyback. You said how much was bought back?

Scott McQuilkin

Under the $100 million authorization we bought back $25 million and about a million shares.

Thomas Davey - Sidoti & Company

That's in the quarter or so far this year?

Scott McQuilkin

That's so far this year. We started the program at the end of March.

Thomas Davey - Sidoti & Company

Okay. So that was $25 million, how many shares again?

Scott McQuilkin

One million shares.

Thomas Davey - Sidoti & Company

One million.

Scott McQuilkin

It's basically over two quarters.

Thomas Davey - Sidoti & Company

Okay. All right. Then you said you had recognized some revenue from Pantech in the third quarter that's worth about $112 million. How much in revenue can we expect to see in a full quarter from Pantech?

Scott McQuilkin

I think the easy math to do there is you take the $112 million I mentioned responding to Mike's question and it's a little over seven years, so you just do the division. I think it comes pretty close to about $4 million a quarter.

Thomas Davey - Sidoti & Company

Okay, great. Then what was the line, the fixed, the amortization revenue for the quarter?

Scott McQuilkin

I want to make to make sure its the fixed revenue?

Thomas Davey - Sidoti & Company

Yes.

Scott McQuilkin

Yes. If you look at our total revenue and just take out the past sales related revenue, it ends up being about 40% per unit based and about 60% fixed.

Operator

(Operator Instructions) Our next question will come from Andy Schopick with Nutmeg Securities.

Andy Schopick - Nutmeg Securities

Good morning. I just wanted to ask for a little clarification on the deferred revenue and the recognition of deferred revenue. Can we assume that the recognition of current deferred revenue will be about the same as it was in this current quarter, in the December quarter?

Scott McQuilkin

Yes, I think that's a pretty good guess. LG is going to be pretty fixed quarter-to-quarter. Samsung is the same. We added Pantech, which will increase the deferred revenue recognition, so yeah, I think it's going to be up slightly for fixed payment licensees, and hopefully based on sales, if we see an increase there, there are some prepayments related to licensees and we could see potentially an increase there as well.

Andy Schopick - Nutmeg Securities

Could you add a little more color to the actual contribution to the existing deferred revenue in both the period ended September 30, as well as for the nine-month period? Can you be more specific about the major composition of what comprises the 220 and 605?

Scott McQuilkin

Yes, sure. In the third quarter of '09, there is basically three contributors. One is the Samsung payment, and there we booked as deferred revenue the payment that's due in July of next year.

Andy Schopick - Nutmeg Securities

Which is how much?

Scott McQuilkin

That's $100 million.

Andy Schopick - Nutmeg Securities

Yeah, okay.

Scott McQuilkin

The $100 million that's due in January, it was already included in deferred revenue previously.

Andy Schopick - Nutmeg Securities

Okay.

Scott McQuilkin

We also had a significant prepayment from one of our licensees in excess of $100 million. That went into deferred revenue. Then the Pantech deal where we basically received some cash and stock, that receipt ended up going into deferred revenue, so those are the three big components.

Andy Schopick - Nutmeg Securities

About how much was the Pantech that's included in this current deferred revenue?

Scott McQuilkin

Well, we received about $15 million as a first payment plus $22 million of common stock.

Andy Schopick - Nutmeg Securities

Was that common stock included as part of this deferred revenue?

Scott McQuilkin

It was.

Operator

Next is Bill Nasgovitz with Heartland Advisors.

Bill Nasgovitz - Heartland Advisors

Two questions. First, R&D, what do you expect R&D will be in 2010 versus '09? Should be expect any substantial changes?

Scott McQuilkin

As I said before, I think from a total cost perspective, SG&A, we continue to manage that very tightly. I think you will see very modest growth there. On the R&D, I think it's run pretty close to a $13 million quarterly run rate. I would expect that that will increase moderately next year. We're working on the budget, but I think based on some of the opportunities we see, there are good opportunities there to spend a little more money, but I don't think you'll see a very significant change outside of any kind of fundamental additions or redirection of our business.

Bill Nasgovitz - Heartland Advisors

Okay. Thank you. In terms of cash, what are we earning on our cash?

Scott McQuilkin

Well, it's a very low rate. I mean, it's somewhere between 0.5% and 1%, and the reason for that is because we keep it in very safe, very liquid, very short-term type of investments.

Bill Nasgovitz - Heartland Advisors

Okay.

Scott McQuilkin

Basically we had next to no losses over the last couple of years, so that's the good news. The bad news is yeah, the rates are low for right now.

Bill Nasgovitz - Heartland Advisors

Okay. I appreciate that. Well, Bill, getting back to your previous statement, trying to achieve the highest value to shareholders. Just a couple comments. With the stock trading at essentially at below $20 a share, and estimates I've got a 250 estimate. Maybe you're going to do it for the year. We'll see, but if so, that's an 8 PE, about a third of what QUALCOMM is selling at, but an earnings yield of 12.5%, I'm a bit puzzled by why you don't think that that's a very extremely attractive return for shareholders?

Bill Merritt

I think that if you look at the investment opportunities, and you're right though. You have to compare what you can achieve in terms of shareholder return in a buyback versus what you can achieve in a shareholder return through investment in the business and as Scott and I both mentioned, we see some very significant opportunities out there to make some investments that we think would create greater value than share repurchase.

Obviously in looking at that you have to think about the risk of execution on those strategies and compare that against the buyback of stock which some people would say, well, isn't that less risky? Well, it can be or can't be because obviously you have to think about what the stock is worth versus what you're buying it at. So I would I tell you, Bill, it's a very active dialogue within the company.

Bill Nasgovitz - Heartland Advisors

Well, I would hope so, Bill. Because the company in the past has had a history of diversifying outside of its main business and not really making any money for shareholders, losing a ton. So to me a low-risk, very prudent approach would perhaps to do step up the buyback activity substantially here. Hell, you're going to have well over half a billion dollars in cash or $600 million. If you spent $200 million yesterday and today you could have bought back a quarter of the company. A quarter of the company for $200 million for a business, which today is being valued at $400 million net of cash that has thrown off over a billion and a half in royalty revenues. Is that right, $400 million for a billion and a half of previous royalties? You're talking about a pretty optimistic future here?

Bill Merritt

Yes.

Bill Nasgovitz - Heartland Advisors

Or am I wrong? Or are we just [de-essing] here?

Bill Merritt

Yes. I mean, I believe we do have a very strong future.

Bill Nasgovitz - Heartland Advisors

Well, 12.5% seems to make a pretty good sense versus 0.5% or 1%, so I really urge the Board to consider, if you like the stock at $30 or $35, my god, at $19 or $20 a share it would seem to make sense and a dividend to shareholders might cause other people who invest also for dividends to take a look at this thing. My god, you're selling for $400 million net of cash. Am I wrong? Is my math wrong or what?

Bill Merritt

No, I think your math is probably right, and as I said, it's a very active dialogue within the company and I think that we have a lot of good opportunities to drive value here.

Bill Nasgovitz - Heartland Advisors

Do you expect earnings to be up next year?

Bill Merritt

We don't tend to give earnings guidance, and we never have, but certainly with respect to the business, we see a lot of opportunities to drive value.

Bill Nasgovitz - Heartland Advisors

Okay. Well, I wish you well on that, but certainly give this I think a low-risk approach some serious discussion, and in my view there is a sense of urgency to take advantage of these disappointments with Nokia when the stock is selling for a ridiculous price at a fraction of your peers. The shareholders would certainly appreciate more value being recognized. The intrinsic worth of this company is I think we would all agree substantially higher than $19 a share?

Bill Merritt

I appreciate your comments, Bill.

Operator

We have a follow-up question from Jonathan Skeels with Davenport.

Jonathan Skeels - Davenport

It's been answered. Thanks.

Operator

That does conclude our question and answer session. I will now turn the conference back over to Janet Point.

Janet Point

All right. Thank you everyone and thanks for tuning in on the call. If you have any follow-up questions, I'll be available to answer them. Thanks.

Operator

That does conclude our conference call. Thank you for your participation.

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