Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Janet Point – EVP, Communications and IR

Scott McQuilkin – CFO

Bill Merritt – President and CEO

Analysts

Charlie Anderson – Dougherty & Company

Tom Carpenter – Hilliard Lyons

Chris Versace – Think 20/20

Kevin Ciabattoni – Boenning & Scattergood

Bill Nasgovitz – Heartland Funds

Jonathon Skeels – Davenport

Wey Simmons [ph] – The London Company

InterDigital, Inc. (IDCC) Q1 2010 Earnings Call Transcript April 29, 2010 10:00 AM ET

Operator

Good day, everyone. Welcome to today's InterDigital first quarter 2010 earnings conference call. As a reminder, today's conference 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, Jason; and good morning everyone, and thanks for taking the time to dial in to our first quarter 2010 earnings conference call. With me this morning on the call 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 the company, and then open up the call for questions.

This quarter, in order to provide an opportunity to all members of the investment community to ask questions of the management, we will ask that you ask one question and one follow-up and then please hop back into the queue.

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 risks 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 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.

So with that taken care of, I would like to turn the call over to Scott.

Scott McQuilkin

Thanks, Janet; and good morning to everyone. I am pleased to report that our first quarter results were very strong. The combination of solid revenue growth and expense reduction drove net income to $48.8 million, up from $15.4 million in the first quarter of 2009, excluding a $37.1 million pre-tax repositioning charge. The charge is associated with the cessation of further ASIC development of our SlimChip modem.

Fully diluted EPS was $1.09 in the first quarter of 2010, up from $0.34 in the first quarter of 2009, excluding the repositioning charge. Revenue was $116.2 million up from $70.6 million in the first quarter of 2009. Expenses totaled $41.5 million, down from $47.2 million in the first quarter of 2009, excluding the repositioning charge. Free cash flow was $65 million in the first quarter of 2010, up from $43 million the first quarter of 2009. Cash and short term investments totaled $482 million at the end of the first quarter 2010, up from $410 at year end 2009.

Our revenue had three components, current patent royalties, past sales royalties, and technology solutions revenue. Current patent royalties were $78.1 million in the first quarter of 2010, up $8.8 million or 13% over the first quarter of 2009. The increase was driven by a combination of higher royalties from several of our per-unit licensees, new patent licenses added since the first quarter of 2009 with Casio, Pantech, Cinterion, and Enfora, and a full quarter revenue from our license with Samsung. On a sequential basis, current patent royalties increased to $78.1 million from $72.5 million in the fourth quarter of 2009. The increase is due to solid results from a number of our existing licensees, as well as contributions from new licensees. It is worth noting that current patent royalties have increased in each quarter since the first quarter of 2009, due primarily to higher 3G unit sales volumes and the addition of new licensees.

Past sales royalties were $35.7 million in the first quarter of 2010, compared to a negligible amount in the first quarter of 2009. The significant amount of past sales royalties with due to the new license with Casio and the results of a routine audit with an existing licensee.

Technology solutions revenue was $2.4 million, up from $1.3 million in the first quarter of 2009. The increase was due to growth in per-unit royalties related to our licensing of our SlimChip modem core. I am also pleased to report that in the first quarter 2010, we added a new customer for our SlimChip modem core, Beceem Communications. Beceem Communications of Santa Clara, California, a leading supplier of WiMAX semiconductor solutions, will integrate our modem core into their 4G products. This new relationship is consistent with our plan to monetize the core modem platform, and we will begin generating revenue in the second quarter. The deal is profitable near term and provides further upside when the scene starts shipping shifts.

Consistent with past practice, we will provide guidance on our revenue expectations for second quarter 2010 after we receive the relevant royalty reports.

Turning to the expense side, first quarter 2010 operating expenses were $45.5 million, this represents a $5.7 million or 12% decrease from first quarter 2009, excluding the repositioning charge. Excluding patent litigation and arbitration costs, operating expenses were $34.9 million in the first quarter of 2010. This reflects a $9.7 million or 22% decrease from first quarter 2009, excluding the repositioning charge. The increase was driven primarily by the reduction in development and other expenses associated with the repositioning of our ASIC development activity at the end of first quarter 2009.

Patent litigation and arbitration costs were $6.6 million in the first quarter of 2010, up from $2.6 million in the first quarter of 2009. The increase from a relatively low level in 2009 is due primarily to a number of factors, including our appeal of the recent ITC decision involving Nokia, and our continuing work in characterizing our patent portfolio. As I have mentioned before, this element of our expenses can vary from quarter to quarter based on the level of activity. As a perspective, our patent litigation and arbitration costs, excluding insurance reimbursements and adjustments to contingency accruals, have averaged $5.4 million per quarter over the last two years.

On a sequential basis, first quarter 2010 expenses were $41.5 million, compared to $34 million in fourth quarter of 2009, excluding the repositioning charge. Litigation and arbitration expenses account for $1.7 million of the increase, and an adjustment to the accrual for long-term compensation accounted for $0.9 million of the increase. The remaining increase is due to a variety of factors, including seasonal increases in vacation, French, and trade show expenses, and annual merit increases, which are effective at the beginning of each year. We also had increases in sales commissions, which are directly related to revenue generation, and patent amortization costs, which reflects success in generating more new patent applications over time, and a reduction in this quarter's Canadian R&D refund, which varies from quarter to quarter.

Importantly, our head count in outside services costs, other than patent litigation and arbitration, both declined slightly. For second quarter 2010, a portion of the seasonal increases will recur. In addition, we expect to see a moderate increase in development expense relating to our SlimChip modem core platform, which will be offset by increased revenue. Expenses for litigation and arbitration will be driven by the level of activity in those areas.

Our balance sheet is very strong. We ended first quarter 2010 with $482 million in cash and short term investments. The increase from $410 million at year end is due primarily to the receipt of the third and fourth payments relating to our patent license agreement with Samsung in January 2010. The fourth payment is due in the third quarter. With respect to the $35.7 million of past sales revenue recognized in the first quarter, only $3.9 million was collected in cash in the first quarter. The remaining $31.8 million was collected in April, and will be included in our June 30 cash balance.

Let me take a moment to describe our view of this cash position. We think of cash in terms of three buckets. The first bucket is the cash we maintain on the balance sheet for financial strength and stability. InterDigital has been involved in licensing both with and without substantial cash balances in hand, and I can tell you that the process moves much better when you have a cash position well in excess of $100 million. The second bucket consists of prepayments of future royalties that are intended to support our normal operations. The size of this bucket can vary over time, depending on the timing and amount of prepayments. Over the past year and a half, we have received some significant prepayments, so this bucket is fairly meaningful at this point. The third bucket is discretionary or strategic cash. This is the cash we can use for acquisitions, investments, or capital return, either in the form of a buyback or dividend. How we use this bucket of cash over time can vary, but the objective is always the same, to generate the highest value for our shareholders.

As we have stated on a number of these calls, a return of capital would deliver value to our shareholders. However, we are currently seeing potential opportunities to generate even greater value through selective acquisitions of patent portfolios, as well as investment in or acquisition of smaller, technically-deep businesses with assets that help drive our road map such as our recent investment in Acela Technologies. In both categories, there is a lot on the market right now, with some of the patent portfolios being of possible high value. As a perspective, the present value of a 10-year royalty stream, based on a rate of just 0.1% for 3G and 4G handsets is over $900 million. So far, for the time being, we intend to maintain our strong cash position at a strategic asset to help drive value. That said, we intend to aggressively manage and use this cash, not just hoard it and we will return it to shareholders when that path delivers the highest value.

In summary, we believe that we have many opportunities, as well as the financial capacity, flexibility, and discipline to execute on our business strategy and draw on shareholder value.

I will now turn the call over to Bill.

Bill Merritt

Thanks, Scott; and good morning to everyone. I would like to cover three things on the call this morning. The first is our continued success on our licensing program. Second is the progress we are making in growing our licensing business, and third is some recent changes to our Board of Directors and to our corporate governance.

As to the first item, we had a very active first quarter, signing new license agreements with Enfora and Casio, and resolving an audit dispute with a current licensee. With the addition of Enfora, we now have over 50% of the emerging cellular machine to machine market under license. Also, our overall 3G license penetration continued to be strong, despite some shifting of the market share among the cellular manufacturers.

As Scott mentioned, we were also pleased to secure a new customer, Beceem for our SlimChip modem core. For those that don't know, Beceem is a current market leader in WiMAX ASIC sales, and is looking to leverage that success into a broader and more lucrative 4G market, combining their 4G solution with our 2G and 3G modem cores. We believe they are well positioned. Beceem is doing well and they are seeking to do an initial public offering in the coming months. Assuming success with that IPO, Beceem should be in even a stronger financial position to drive ASIC sales in this new market. All that is great for them, and for us as well, as we receive not only milestone payments from Beceem, but also royalties on their sale of ASICs incorporating our technology.

The Beceem agreement represents some great effort by our modem sales team in monetizing the efforts we made on SlimChip technology over the past three years. And they are not done. We see more opportunities in the market, as other WiMAX players seek to make the shift to 4G and other multimode devices, and other non-traditional players look to adjust new types of wireless devices. As a result, we will be stepping up our investments subtly in this area to not only support Beceem but also drive other sales. With continued success, we would hope to see nice sequential increases in our technology revenue line.

Second, the quarter also represented another strong period in terms of expanding our patent licensing business. As we have mentioned before, we intend to both increase the value of the handset licensing business, and extend our licensing reach into new markets such as machine to machine, new connected devices, infrastructure, data services, and consumer electronics. All in, these markets represent a three to seven times increase on our adjustable market. To drive this success, we are creating the technologies that will bring the next revolutionary change in wireless networks. I appreciate this as a pretty bold statement. However, this is something that we have done before. Indeed, the first generational shift in wireless was from analog voice to digital voice, and it was in InterDigital in the mid-1980s that drove that process in the United States. The shift from 2G to 3G was a revenues to remove from voice to date. Again, it was InterDigital, nearly five years before the WCDMA standards were adopted that advocated the need for wideband systems, and deployed the world's first broadband CDMA system, delivering video over the air to customers in the five regions around the world.

The next revolutionary change is coming, but we think it is different than most people think. Many people believe 4G is simply LTE technology, a larger pipe capable of delivering more data. We disagree. While LTE may help create a 4G world, 4G itself is another revolutionary change from people connecting to people to people connecting to things, and things connecting to things, seamlessly and intelligently across a myriad of wide, local, and personal area networks. In a 4G world, your wireless devices will always be connected, but that connection will change based upon what you are doing, where you are doing it, and how you may want to do it. So for a period of time, you may be on a cellular connection. Later, that will shift to a WiFi connection and later, to a WiMAX connection, and later, to a combination of LTE and WiFi channels. All of this will happen seamlessly, and transparently.

You also will not be able to distinguish the performance of applications at home on your home computer network from how things perform on your mobile device on the go. Also, not only will you and your mobile device – you and your device be mobile, but also will your content. So you will not see the difference in the content available to you when you are home and on the road. For example, when you switch on your laptop, and hit your cable provider's icon, your screen will look like that on your home TV, and you will be able to access the same content in the same way, with all this delivered to you by a highly intelligent, adaptable, wireless network of networks. You will also be able to move content on your command, or based on presence from device to device. So as you walk into your office, the video call you were using on your iPhone will seamlessly transfer over to your office desktop computer.

To some, this may seem very futuristic. That is true, much of it is. But as that always been the nature of our work, dreaming what people want to do with wireless technology and creating the inventions that make those dreams a reality. And frankly, not all of this is a dream. Some of it is already becoming very real. For example, Verizon has already announced its launch of LTE by the end of the year. InterDigital has already established a strong licensing position for LTE, and we are building an even stronger position through our work on LTE and advanced technologies. Moreover, since LTE would be deployed as a new layer of technology on top of 2G and 3G, we believe our licensing position will be the best ever, supporting greater revenues from LTE products. But as I said above, 4G is not just about LTE. It is about a suite of technologies that facilitates billions of connections, each dynamically tapping this network of networks. This is starting to happen as well.

In its most recent earnings report, AT&T, for the first time, began speaking about wireless connections other than handsets. Indeed, you hear more and more about machine to machine connections. Here, as I noted above, we are already well positioned with over 50% of the cellular machine to machine products under license. We are also developing technology in our labs that will further drive the machine to machine market, as these devices require unique capabilities to deliver best performance.

You also see many operators talking about the need to offload cellular traffic onto other wireless networks. For the most part, operators use proprietary solutions. What they desire, however, are standardized solutions that can address multiple air interfaces. This bodes well for InterDigital. Our Media Independent Handoff solution does exactly that, providing a standard means of handing off seamlessly between any wireless interface. As a result, after years of R&D, standardization, and multi-vendor trials, we are actively marketing this technology, offering it as a software solution that can be readily adapted into any mobile device. That process is proceeding well. We are having meaningful customer discussions about commercializing MIH on a broad scale, and are also receiving promising initial feedback on our comprehensive product roadmap that incorporates several complementary technologies we have working in our lab today.

Of course, we understand the challenges in getting meaningful penetration in the terminal unit market. However, we believe we have a different stated product roadmap, with its first supporting seamless handover between different wireless access systems, but also in future versions, incorporating the technology that enables a user to aggregate the wireless capacity of different channels, and also the ability of the device to hand off the content to another device. We believe this road map is unique in the industry, and is the reason we are having active customer discussions.

You also see the market increase needs for new technologies that can fit more content into the wireless pipes. This can be better compression technologies, local raving schemes, better cashing, and the like. InterDigital is involved here too. Indeed, these and the efforts described above are all part of the unified strategy of the company seeking to enable the 4G world, while also dealing with the single digit problem this industry will face of delivering all this content over what is a physically limited resource, spectrum. By now, I am sure you have heard the stories. Within a week of the iPad being launched, universities, and in one instance, an entire country, shut down the product on its networks because of the bandwidth it consumed. You hear how AT&T is working to upgrade its networks in New York and San Francisco to handle the proliferation of smart phones. You see the disappearance of all-you-can-eat data plans on many carriers, as these plans overburden the networks.

From our perspective, a great future market that requires some key inventions to enable it is a perfect fit for us. We see 4G as a great market, and we see it happening through the inventions and work we are doing in our labs today. With continued success, we believe we can drive substantial new value for the enterprise, as we increase the value of our handset licensing business, and drive new value from other key markets.

Now, we have every reason to be confident. We have the engineering talent to create the inventions; we also have the financial capacity to drive our work. As Scott already discussed, we are in the best financial position in our history. Our revenue and profitability are excellent, as is our cash position. We certainly intend to leverage that strength to the benefit of our shareholders.

Which brings me to last topic, our Board and corporate governance. We have made a number of very positive moves in the past few months. As you know, we have a new Chairman, Terry Clontz, with over 30 years of experience in the industry. Terry is certainly having his impact on the organization. We also added a new Board member, Jeff Belk, an ex-Qualcomm executive with great expertise in the wireless space and our specific business model. Jeff is also having a very positive impact on the organization. We are also actively recruiting another industry-savvy executive to further enhance the strategic capacity of our Board. Given the financial strength of the company, its technology vision, and its future potential, I can tell you we are finding a wealth of very qualified industry talent.

We also made some meaningful changes to our governance, illuminating the shareholder rights plan, and including a proposal in our proxy to declassify the Board. We think these changes put our corporate governance at the leading edge of best practices, and also we believe it adds to value.

All in all, we are off to a tremendous start in 2010, and we intend to keep it up. With that, let me open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will go first to Charlie Anderson with Dougherty & Company.

Charlie Anderson – Dougherty & Company

Scott, I wondered if you could just address legal expense, if there was any legal expense in the quarter related to that resolve in the audit dispute? And then, just looking at the calendar on the ITC appeal, I wonder how you kind of see legal expenses linearly throughout the rest of the year?

Scott McQuilkin

Yes, Charlie, that said, the litigation and arbitration expenses, they can vary the quarter to quarter, we saw, you know, a fairly significant increase from the first quarter of last year, but that was from a relatively low level. Because they are subject to change quarter to quarter based on the level of activities, we really don't provide guidance in that area. In terms of your specific question about the audit resolution, there was a portion, I would say a relatively small portion of the expense associated with that.

Charlie Anderson – Dougherty & Company

Okay, and then a follow-up question for Bill. Bill, I wonder if you could talk about the pipeline. You guys just, you know, signed a number of deals in the quarter and just kind of wondered, you know, what is next for you, you know, how many deals do you see in the pipeline and kind of what sizes, you know, are you targeting?

Bill Merritt

Sure. You know, the pipeline is very active. I have been talking about a couple of different areas of the pipeline. I think on the machine to machine side, I think they do have the benefit of momentum there in terms of having done a couple of deals in that space, with some fairly big players in that space. So that helps to drive progress in that space. So they are certainly targeting that area. We are very focused, of course, as well, on the top prize, and so we keep discussions going there as well. So, because we appreciate the value there. And then there is also the opportunity within China. I think certainly that is one that has probably got a longer process associated with it, but I would also say we are probably more active there than we have been in the past, because we see some good opportunity there as well.

Operator

And we will go next to Tom Carpenter with Hilliard Lyons.

Tom Carpenter – Hilliard Lyons

Good morning, everyone. Bill, thank you for the good descriptions on the call about how the industry is going to change over the next couple of years. I agree with you. What also may change is how licensing works, if you are going to get money directly from the handset manufacturers, if you might also work with the operators, since you are going to have solutions. Can you talk about that, I heard all this stuff back in 2001 about 3G, and how your patent position was stronger in 3G and how the rise in 3G data was going to play to your sweet spot, yet in 2010, we are still waiting for Nokia, Motorola, and Sony Ericsson for 3G. So can you talk about how you are going to license the leading manufacturers with these changes in the wireless industry over the coming years?

Bill Merritt

Sure. You know, a couple of things. One, I think to put that 2G-3G transition in perspective, if you think about when we got up to these levels of licensing penetration, it was fairly late in the 2G market cycle. We are at 55% to 60%, I guess, depending on how you measure it. So we are pretty high already and it is actually still early in the 3G cycle. So I think the strength of those different layers of technology now played out well for us in 3G. I appreciate we have some folks that we have got to get on board for 3G as well. But I think we are moving quicker and at higher value than we did on 3G and we would hope to make the same kind of transition when we get to LTE, both in terms of speed and value.

Second, in terms of the possibly changing landscape, I am not sure that the handset licensing business changes all that much. I think that for us, it is a question of how we access those other markets in a way that doesn't – in effect, cannibalize any business, the 2G or the handset licensing business, and I think we have got some good ways to do that. I think a portion of that is doing, with respect to those adjacent markets, probably somewhat more software licensing as opposed to peer patent licensing. I think that that is certainly the preferred play into the operators in terms of software back as we talked about can enable access to many different systems and do that in a very efficient way and make those operator networks cost less and do more, and I think that provides a nice way to compliment the patent licensing on the handset, with the software licensing at the operator. So, I think that, you know, the core business will I think continue the run at least generally the same way that it has, and as I said, we are hoping this step up to pay, and a step up to value as we get to LTE. The adjacent spaces could be a little different.

Tom Carpenter – Hilliard Lyons

Okay. And then as a follow-up, Qualcomm hasn't announced all the names of its licensors for Gbit. It sounds like it signed all the majors and then a bunch of the seconds here. I guess Qualcomm will set the rates for the market. As you look out into this year and next year, can you talk about your LTE effort, when you think you will have one or two of the major side, I know you have a 3G agreement coming up for renewal with LG at the end of this year.

Bill Merritt

Yes, I think that, you know, with respect to LG, that will be a topic of discussion, because any license that covers any reasonable period of time would cover LTE sales. So, I think, certainly with them, that will be a topic of discussion. I think with the other majors as well, I think it is going to be on the table, because an LTE is rolling in some volumes over the next few years and probably meaningful volumes because in any reasonable term of any license agreement. That said, there is still some other manufacturers in the market who would probably be latecomers to LTE, so it could be that you do have license agreements that get down with some folks that may not cover LTE, because they don't really have it on their roadmap. But I think we are definitely going to push LTE as a component of the licensing. I think our license position there is very strong, I think the patent position, both on its own, and when you think of that, the total IPR content that we will have on a device, I think supports a very high value program.

Operator

And we will go next to Chris Versace with Think 20/20.

Chris Versace – Think 20/20

Can you guys hear me?

Bill Merritt

Yes.

Chris Versace – Think 20/20

Just really two questions. I guess this might be more for Scott, but you went through some detail on how the OpEx is up sequentially, you know, and I know you guys aren't fans of giving quarterly guidance. So I want to try and hone in on this kind of a 2010 versus 2009. I know there are some things that are, you know, moving around, some research and development efforts and the like. Conceptually, can you give us the high level on how we should think about OpEx in 2010?

Bill Merritt

Yes, you know, I think, you know, first the fall, it is difficult to give guidance on a quarterly basis, it is probably more challenging to give meaningful guidance on an annual basis, but the first comparison I would make is looking at 2009 post our exit from the ASIC development activities in the first quarter. You know, and we had a run rate in the final three quarters that I think is meaningful. In terms of 2010, you know, a number of things. One is, a big component of the expenses is litigation and arbitration. That was probably at a relatively low level, at least compared to history in 2009, it was up a bit in 2010, but again, that varies quarter by quarter. In terms of development, you saw that I think ramp up a bit as we deployed resources, and entered into licensing agreements based on the redirection of the R&D activity throughout 2009. I think that you will see that reflected in 2010 expenses.

You know, and third, there is kind of the normal merit increases and such that you expect to see every year. So, you know, I think our overall strategy is to, you know, look at the expenses from an investment point of view. We are very disappointed about deciding and managing where we spend that money. We see plenty of opportunities, and you know, our – with Beceem as an example, may have increases associated with those opportunities, but we also look at those in terms of their ability to generate revenue near term.

So, you know, those are some of the key factors that are going to affect our expense levels this year. We are always careful about SG&A and kind of keep good control over those. So, I would say any increases in spending for the core business are going to be moderate, and you know, tied to either current or future revenue generation opportunities.

Chris Versace – Think 20/20

Okay. And then, just a second one, you know, on the heels of HP and Palm last night, that just reinforces the notion of moving beyond, you know, smart phones or other connected devices and just from a strategic perspective, is things like this happening, is this going to change in any way when you guys go to market and try to seek additional licensing with other players as they enter the market, you know, whether it is Acer, Lenovo, and the like, does that mean we will see a higher headcount, get more bodies to do this? Anything different other than normal?

Bill Merritt

No, I think that in terms of the capacity of the licensing team as it relates to the terminal units, and that includes laptops and machine to machine and handsets, I think the size of that organization is in pretty good shape. I think they can certainly go after those markets pretty efficiently. You know, I think that some of these other markets in terms of opportunities, you know, there may be some need to sort of supplement our workforce there, but again, it probably wouldn't be anything dramatic. You know, you can be pretty efficient with a fairly tight patent licensing team, and so I think that that organization should be – it is pretty well sized for what we wanted to do and if it has got to add a head or two to go after some of these new markets, you know, we will do that.

Chris Versace – Think 20/20

Great, thanks. I will hop back in the queue.

Operator

And we will go next to Kevin Ciabattoni with Boenning & Scattergood.

Kevin Ciabattoni – Boenning & Scattergood

Good morning. Just following up on Tom's remarks regarding LG, so if that doesn't happen before about the end of the year, are those revenues just going to basically drop off until that gets done?

Bill Merritt

Right. If there is not a license agreement in place, then we wouldn't recognize any revenue.

Kevin Ciabattoni – Boenning & Scattergood

Okay. And then, Bill, since you brought up – does your contract with Apple allow for you guys to cut royalties on their 3G iPad sales, and if so (inaudible) material?

Bill Merritt

Yes, as far as what the scope of that license is, or people ask that we unfortunately always have to point back to the origin of press release and say that is currently the extent of what we can say. That was a highly negotiated item with Apple. But, you know, what I will tell you with respect to devices like the iPad is I think, you know, overall, they are very, very positive events for us, because there is the iPad and then there will be all the iPad clones that come out, and that is going to drive all these new connected devices, which we think really drives the terminal unit numbers higher than perhaps was currently forecasted. So, you know, as I said to Chris actually, was we certainly have this team in place already to go after those new devices. So, I mean overall, we see those events as positive events.

Operator

And we will go next to Bill Nasgovitz with Heartland Funds.

Bill Nasgovitz – Heartland Funds

Good morning. Congratulations on a good quarter. And also on those corporate governance moves, I think it is fantastic; heading in the right direction and certainly positive people to join the team. You talked about use of cash with potential acquisitions, and I think favorable prices. Could you describe in more detail what types of return you are looking for on the use of this cash in those particular venues?

Bill Merritt

Sure. We talked about them in terms of the two different types of acquisitions we looked at, right? Certainly, patent acquisitions. We would be looking for a very, you know, good level of return on that and certainly a better level of return then you would get through a return of capital to shareholders, because there is going to be an element of added risk associated with that. That said, I think that –

Bill Nasgovitz – Heartland Funds

Well, Bill, exactly what kind of return are you looking for, double digit returns on our cash or specifically, what is the hurdle rate?

Bill Merritt

Well, yes, I think we are looking for at least double digit returns on these types of investments, right?

Scott McQuilkin

Yes, absolutely. Double digit after-tax results, you know, and I would say double digit at a minimum. And, you know, we obviously look at the potential returns related to the risk, but I think even for an investment with limited risk, we would be looking for double digit.

Bill Merritt

And Bill, it is also in the area when you think about patent acquisitions. It is certainly a space that we are very familiar with in terms of how you evaluate a portfolio, and how you stress out a portfolio, what is the opportunity for the portfolio, and how can you leverage the internal team to monetize that portfolio? So we think that that is a good place for us to make investments in and deliver really good value back to the shareholders. That is on the patent portfolios and I would say of the investments we would make that they would certainly be the larger of the two buckets we talked about in terms of dollars.

The other ones which are is the Acela type investments. You know, they are a little bit more strategic, in the sense that they are helping drive our road map faster on the technology development, and as a result of that, they are going to be a little bit smaller, all right, and tactical. And so, that gives you a sense hopefully on the two buckets or the two different types of acquisitions we are looking at.

Bill Nasgovitz – Heartland Funds

Well, with your stock, I would like to point out and again emphasize that your stock today is trading around 27. If you can use $3 in earnings, earning power, gosh that is 11% after-tax return to shareholders on their money. So, thank you again.

Bill Merritt

Thanks, Bill.

Operator

(Operator Instructions). We will go next to Jonathon Skeels with Davenport.

Jonathon Skeels – Davenport

Could you remind me of your past patent acquisition history? Have you purchased assets in the past or has everything been generated internally?

Bill Merritt

We have done some limited patent acquisitions. Over the whole history, actually if you start at the very first acquisition we did, we actually did the acquisition of FCS Mobilcomm. We did a company acquisition on that, but that company included a wideband CDMA patent portfolio, we did that back in the early-90s. The second meaningful patent acquisition we did in early 2000s and that was the Tantity [ph] patent portfolio. That was principally a CDMA 2000 also wideband CDMA patent portfolio. Very successful with that portfolio. I think we spent $12 million to $15 million on the acquisition. You know, rough guess, it has probably generated a couple of hundred million dollars in revenue, that program. Similarly, the FCS Mobilcomm acquisition was very powerful in terms of a $10 million or so acquisition, probably driving as well $100 million worth of revenue. We have done a couple of other small acquisitions. You know, one patent here, a couple of patents here, which have topped into the portfolio, they tend to be less than $1 million type of acquisitions, so they are not real big. So, we tend to be very discriminating purchasers. We tend to be careful, but when we do pull the trigger on one of these patent acquisitions, we have been very successful of generating very good value.

Scott McQuilkin

The only thing I would like to add to that, I think, you know, our view of acquisitions is we, you know, primarily develop patents organically and we look at acquisitions as, you know, an opportunity to fill gaps and strengthen the portfolio in areas, you know, where we have confidence that it will really add value. There is a lot of junk out there in the marketplace. We look at it and pretty quickly turn away from it. So I would characterize it, as Bill said, as a very selective purchaser. But at the same time, I think we have got opportunities, because, you know, relative to some of the other potential buyers out there, I think we are very well positioned to generate, you know, good economics from acquisitions that makes sense to us.

Jonathon Skeels – Davenport

Great, thank you.

Operator

And we will now take additional follow-up questions from Charlie Anderson with Dougherty & Company.

Charlie Anderson – Dougherty & Company

Yes, thanks for getting me in again here. Bill, I wondered if you could just address MtoM again. You know, I am just going to assume it is maybe 1% or 2% at most of revenue now, and correct me if I am wrong, but I wonder when you see that scaling up to you know, maybe 5% of your revenue or more?

Bill Merritt

Yes, it is a small piece of revenue today, because the cellular machine to machine market is actually still relatively small. As far – and there are forecasts out there which show it growing nicely over the next few years, and with the success we have had in penetrating that market and I think the continued traction we have in that market, we definitely could see that as a body of nice revenue bump for us over the next few years. I think the other thing that is important on machine to machine is our standardization effort is underway in Europe on machine to machine technology. And, you know, one of the issues in that market has been some lack of standardization on deployments and other things, and I think if they can get over that hurdle, and create truly standardized machine to machine products, then I think the volumes could go up even more. So, and we are working very actively within the European standardization process to drive that.

Charlie Anderson – Dougherty & Company

And then a follow-up for Scott, just housekeeping. Can you tell me Japanese royalties percent, and then, on the expenses again, development, I wonder if you could just talk about, you know, what you are spending the money on incrementally there, are you hiring additional engineers or are you hiring contractors to do some of that software development work? Just a little bit more color.

Scott McQuilkin

Yes, the – let me see, the Japanese royalties, you know, if you take out the non-recurring amount in the first quarter, we are down around 20% or so of our revenue. So that is getting, you know, quite low over time. In terms of the development spending, you know, as I said, in total over the past few quarters, we haven't really added people, but we have, you know, shifted some of our resources trying to reduce some of the SG&A and increase our capacity to support revenue-generating development activities. You know, going forward, I think I said in my comments that we might see a moderate increase there, particularly related to revenue-generating opportunities. Some of that, you know, we can handle, you know, with full-time people, and others, you know, we might add some contractors, you know, and those would be low-cost contractors, you know, over in India and such. But we are very careful about, you know, managing the company in a manner so we have good control over what I will call structural expenses.

Operator

Thank you. And we will now take additional follow-ups with Tom Carpenter from Hilliard Lyons.

Tom Carpenter – Hilliard Lyons

Good morning again. Bill, can you talk about your efforts over the past couple of months or quarters at the patent office, either working on continuation patents or the review the rulings on the patents that you had at your recent ITC case?

Bill Merritt

Yes, we have had actually very good success at the patent office with respect to both patent families that we are involved in the Nokia ITC case. And so we think we have actually addressed all of the issues that were raised by the ALJ, so whether – we disagree with his position, and we have taken that appeal up to the Federal circuit, we have also gotten patents to issue officially over his objections in terms of the patent office. So we are kind of due to go on either path.

Tom Carpenter – Hilliard Lyons

Later on this year, you guys are getting another $100 million from Samsung. I think right now, you are right about $10 per share in cash and if you get that, you will be closer to $12. When you subtract cash from your current market cap, the market is giving you guys about a $660 million market cap and I would think at minimum, your patents are worth $1 billion. So there seems to be a disconnect between investors and what you guys are capable of. Can you talk about, I know you guys are obviously working on closing deals and things of that nature, but how can you convey your 4G, LTE, WiMAX, machine to machine, and all the patents you guys have to the Street? I know you guys are going to continue to be a cash flow machine in the next generation of technology.

Bill Merritt

Sure. You know, I think – we just spent some time out there with investors, talking to them. We actually had a good session last week with a number of folks. And I think that one of the things that we have got to do very effectively is deliver on LTE. Now we have every confidence on what we will, because it is – one, it is what we do for a living, I used the example sometime last week, but you know, no one asks Boeing if they are going to sell another plane, that is what they do, and I think we are very confident with respect to our LTE position. It could be though that the market just wants to see us not cross such a deal, and I think once we do that, and then I think that any question around LTE, even though I don't think there should be any, any question around that will largely go away. I think that that kind of addresses the sort of the handsets licensing business.

You know, with respect to these other markets, you know, I think like on machine to machine, you know, I think there that has been a recent success by the company in terms of gaining a good market share in that space. I think, as Charlie mentioned, it is still a small piece of the market. So you are not seeing it hit the revenue line, but I think if people begin to understand the amount of machine to machine connections that may be created out there and our licensing position and see the revenue opportunity, I think we will be given some better future credit for that and that is certainly a message that we are working on getting out into the market right now.

And then I think, third, beyond machine to machine, in terms of all the other technologies we talked about in 4G, which enabled, you know, dynamic, intelligent, and efficient connections, you know, I think, there, you know, traction with respect to our MIH technology, I appreciate we have talked about it for a number of quarters. It was a very futuristic technology we developed, a standard. I think it is now becoming very relevant and I think some success in penetrating the market with that technology, which then sort of clears the path for all the future technology, which gives the market a lot of comfort with respect to the roadmap around. So, I think we are doing very well. I think what we did out there, we chat with folks, we see what is on their mind and I think if we can knock off those three things, I think we will be doing exceptionally well.

Tom Carpenter – Hilliard Lyons

Excellent. Thank you.

Operator

And we will again take follow-up questions from Kevin Ciabattoni with Boenning & Scattergood.

Kevin Ciabattoni – Boenning & Scattergood

Thank you. Just a couple of quick follow-ups. As it relates to the LG contract, can you give us any kind of confidence level that you have in resigning that, I guess looking at it kind of from a modeling perspective for next year?

Bill Merritt

Sure. I mean I think from a – certainly from the position of the patent portfolio and where we are generally in our licensing programs, you know, we have good confidence that we will get that agreement renewed. I think the fact that they were a prior licensee and this is a renewal on the same technology is a very important aspect of the renewal, so it is not like you are renewing on something different, you are renewing on what is the same. You know, you are also built into their – to some extent, built into their cost structure, and so, that is another positive vibe. So we have been pretty effective at getting renewals done without any gap. And certainly, that is the goal here and Larry and his team are driving towards that.

Kevin Ciabattoni – Boenning & Scattergood

Is there any chance that the LTE portion of that kind of gets separated out if it becomes, you know, a point of contention with them?

Bill Merritt

You know, it could. It is one of those things where you – you know, you could kick that can down the road a little bit. But what I found in discussions with these folks is you try to wrap everything up at the time you are doing it, because they are running multiple discussions with multiple parties, we are doing the same, and when you finish up, it is one you really want to be able to take it off the table and be done with it. So, I think theoretically, that could happen, but realistically, I don’t think it does.

Operator

And we will again take a follow-up from Chris Versace with Think 20/20.

Chris Versace – Think 20/20

Bill, just a quick question on LTE and conceptually, the way to think about it. You know, it is obviously not all done as it were, I mean, the cage is not truck, and I think the European litigation standards as you guys is number two on LTE patents today. But they are also saying there is only a certain number of potential LTE patents. Obviously, that is going to grow. Is it fair to think that your positioning today, if we look out over the next future years for LTE, is it fair to think you are positioning against – stay the same, or can get stronger? How should we think about that?

Bill Merritt

Yes, certainly, our goal in the realignment back in March was not in line with the push those technologies even harder. So if you think of that as a position, we gained – what we have today, that is largely the result of efforts from a couple of years ago. We have now stepped up our effort, both in the standards bodies and then on our R&D team, which we expect the technologies there. There is a lot of work we are doing on what is in effect I guess we are at Release Ten of the standard. Release Eight is what is going to come out first, probably quickly replaced by Release Nine, but we also think fairly quickly replaced by Release Ten. Release Ten is LTE Advanced, and we have got a good portion of our workforce focused on that piece of the standard or that standard, and onto some particular technologies that we think would be deployed there. So our goal is to grow our position over time. And I think that we have certainly the resources in place to do that. Again, it is kind of what we do for a living here. So, you know, we have good confidence that we can drive that. We actually monitor it also very closely. We look at the contributions we are making and look at the patent applications that come out of those contributions, and how well our contributions get accepted, so it is not a – it is a very closely monitored effort by the company to make sure that we are getting the value out of that R&D.

Chris Versace – Think 20/20

Great. Thanks, Bill.

Operator

And we will go next to Wey Simmons [ph] with The London Company.

Wey Simmons – The London Company

Good morning. Thanks for taking my question. Bill –

Operator

And it looks like we have lost that questioner. So with no further questions in the queue, that does concludes today's Q&A portion of the call. I would like to turn the conference back over to management for any additional or closing remarks.

Janet Point

All right. Thank you very much, and this is Janet, and I will be available after the call, if anybody has a follow-up questions. So, thanks, and we will talk to you again soon.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: InterDigital, Inc. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts