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InterDigital, Inc (NASDAQ:IDCC)

Q3 2010 Earnings Call

October 28, 2010; 10:00 am ET

Executives

Bill Merritt - President & Chief Executive Officer

Scott McQuilkin - Chief Financial Officer

Janet Point - Executive Vice President - Communications & Investor Relations

Analysts

Ron Shuttleworth – M Partners

Charlie Anderson – Dougherty & Company

Michael Cohen - MDC Financial Research

Chris Versace - Think 20/20

Bill Nasgovitz - Heartland

Andy Schopick - Nutmeg Securities

Operator

Please standby, we’re ready to begin. Good day, and welcome to the InterDigital Third Quarter 2010 Conference Call. As a reminder, today’s call is being recorded.

At this time, I’d like to turn the call over to Janet Point. Please go ahead.

Janet Point

Alright. Thank you, Ruth and Good morning to everyone and welcome to InterDigital’s third quarter 2010 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, our outlook and then open up the call up for questions.

Before we begin our remarks, I need to remind you that in this call, we will make forward-looking statements regarding our current beliefs, 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 results and events contemplated by such forward-looking statements.

These risks and uncertainties include those set forth in our earnings release published yesterday, as well as those detailed in our Annual Report on Form 10-K for the year ended December 31, 2009 and 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 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.

In addition, today’s presentation contains references to free cash flow, which is a non-GAAP financial measure. It scheduled turning out a reconciliation of free cash flow to net cash provided by operating activity and most comparable GAAP financial measures is included at the back of our earnings release issued yesterday, which also has been posted in the press center of our website at www.interdigital.com.

So with that, taken care of let me turn the call over to Scott.

Scott McQuilkin

Thanks, Janet, and good morning to everyone. I’m pleased to report that our third quarter 2010 results were very strong. Year-over-year revenue increased 22% to $91.9 million, and drove net income up 16% to $35.5 million. Diluted EPS was $0.79 in third quarter 2010, up from $0.69 in third quarter 2009.

Free cash flow was a positive $75 million in third quarter 2010; and as a result, cash and short-term investments increased to $564 million at September 30, 2010, up from $410 million at year-end 2009.

Our revenue for the third quarter 2010 consists of three components: current patent royalties, add sales royalties and technology solutions revenue. Current patent royalties were $85.4 million in third quarter 2010, up $12.9 million or 18% over third quarter 2009. The increase was driven by a combination of higher sales by nearly all of our per unit customers and new patent licenses added since third quarter 2009.

Add sales royalties were $0.7 million in third quarter 2010, due to the addition of a licensee and the resolution of the routine audit. Add sales royalties were up slightly from $0.5 million in third quarter 2009. So the effect of this component on our strong year-over-year growth was negligible. Technology solutions revenue was $5.8 million, up $3.3 million or more than doubled the level in third quarter 2009. The significant increase is due to the addition of new customers for our SlimChip modem core.

On a sequential basis, revenue increased to $91.9 million from $91.2 million in the second quarter 2010 driven by current patent royalties, which increased $5.2 million or 6% from second quarter. It’s worth noting that current patent royalties have increased sequentially in each quarter since the first quarter 2009, due primary to higher 3G unit sales volumes and the addition of new or renewed license agreements.

The $5.2 million increase in current patent royalties was partially offset by a $4.2 million decline in add sales royalties, which vary from quarter-to-quarter based on the results of orders and the addition of new license agreements. Consistent with the past practice, we will provide guidance on our revenue expectations for fourth quarter 2010 after we received the applicable patent license and product royalty reports.

Turning to the expense side, third quarter 2010 operating expenses were $37.5 million, up $8.6 million from third quarter 2009. Significant portion of the increase is due to a reduction of an accrual for a long-term compensation program in third quarter 2009. Our long-term compensation program consists of a multi-year performance-based plans and covers a substantial number of our employees. From an accounting perspective, we assess our expecting performance relative to plan goals on a quarterly basis.

In effect of any changes in expected performance and cumulative plan-to-date accrual, which recorded as a current period expense. In addition to this factor, expenses increased $6.1 million due to a combination of expenses related to revenue-producing technology solution agreements, R&D initiatives and due diligence expenses related to potential patent acquisition opportunities. These increases were offset by $1.9 million decrease in intellectual property enforcement costs. It’s worth noting that the increase in expenses related to tech solutions it was more than offset by the revenue contribution from these solutions.

On a sequential basis, third-quarter 2010 expense have decreased $0.6 million from second-quarter 2010. The decrease is primarily due to a $1.1 million reduction in intellectual property enforcement costs, which was offset by a $0.4 million increase in other expenses. Our balance sheet continues to be very strong. We ended third quarter 2010, with $564 million in cash and short term investments. The increased from $410 million at year end is primary due to strong cash receives from our customers especially Samsung.

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 driving shareholder value.

Now I will 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 it from Scott, the company delivered another very strong quarter. We grew our revenue and profitability substantially, maintained a very strong balance sheet and grew our customer base.

Today, we are in a position of unprecedented financial strength and stability. In so to call provide a review of our operations including our ongoing patent licensing activities, our SlimChip modem IP business and our continuing R&D. I will also comment on the boards important decision to initiate a regular dividend.

First, our licensing business and I think it has never been stronger. Since the beginning of 2009, we have signed or removed a dozen patent licensing deals, which has broaden about $600 million in cash and receivables and contributed to an 85% increase in current patent royalties, which is great work by Lawrence Shay and his team. And we still have significant growth prospects.

The 3G-handset market, which is driving our revenue, is expected to grow by more than 20% per year over the next four years. We also have the opportunity to double our penetration into that market with today having about 50% of the market under license but working to get 100% coverage in that market. The combination of those two factors alone bowed very well for our long-term revenue and cash flow opportunities.

With regard to adding new licensee we continue to have productive discussions with major players as well as others in the market. Our balance sheet allows us to be patient and creative. Our R&D initiatives allow us to bring more elements of value to the discussions. And our experience in these all allows us to be confident that we will get these deals done on terms that will drive the value of the business and deliver value to our customers.

That confidence extent to our opportunity with Nokia. We continue to have dialog with them on how to resolve the outstanding licensing issue. We would certainly hope that the parties can arrive at a resolution that makes commercial and business sense outside the legal process. That said, we continue to believe we should have won at the ITC. We also believe we have a very strong case on appeal with argument now set for December 9th, 2010. So while we prefer a negotiated solution, we’re also comfortable continuing with the legal process, which is now moving towards a very key milestone.

So in summary, our core handset licensing business is very strong. We also believe there are good growth prospects in adjacent markets, where our inventions are being used, and those are large and growing markets.

For example the Machine-to-Machine state, where we already have good licensing penetration is expected to grow dramatically. The infrastructure market is over $40 billion per year. We also see our inventions being deployed in operating systems in middleware. All these markets are very attractive and can largely be addressed using our current patents and patent pipeline.

We are also encouraged by the success of our SlimChip Modem core licensing business. When we organize our chip business 18 months ago, we believe good opportunities existed to license our modem designs driving good profit and cash flow. Our licensing team has done just that adding deals that we expect could contribute up to $14 million in revenue in 2010 and we believe there are some additional opportunities.

With that said, we continue to view this part of our business as a hardest operation. So as we move into 2011, we will evaluate our abilities further drive revenue, based on the level of customer interest. Moving to our R&D initiatives, we continue to see very good opportunities for the suite of technologies we are creating to deal with the emerging bandwidth crunch. And beginning two years ago, we were a lone voice on this topic. Today, operators and consumers alike are experiencing the issue daily. That creates a great opportunity for us.

For example, we’ve recently demonstrated our Machine-to-Machine platform at a European Telecommunications Standards Institute Meetings, our plan was simple. Today just a few million iPhones are burdening in that network with their signaling needs. Think about the impact that billions of additional Machine-to-Machine connections would creat.

Our solution must have moved that new signaling burden from the core to the edge of the network, through the use of trusted devices or gateways located at the network edge through which a Machine-to-Machine connection can be made. That trusted device could be a box at the edge of the network of femtocell in your home or your own mobile phone. Industry participants actually were very impressed with our solution and see it as a critical component in driving widespread adoption of Machine-to-Machine technology.

The success of this initiative is meaningful on a number of ways. First, it is evidence of InterDigital’s continuing leadership role into designing the wireless networks of the future and our ability to bring significant value for the wireless industry. Second, if this initiative is successful, we believe that number of Machine-to-Machine connections will grow significantly, which boards well for our terminal unit licensing business, which Machine-to-Machine devices will use our inventions.

We are also seeing success with our other R&D initiatives. Indeed our larger vision of a network of networks, but all of those connections functioning intelligently and transparently is starting to materialize. For example, we were happy to see the FCC open up television wide space for use by wireless networks. Doing so, can help elevate the bandwidth crunch, but require some significant technological advances, which were already on our roadmap.

We also see concepts like bandwidth aggregation, segregation and handoff becoming important topics in standards bodies. Our experience with these new concepts and our reputation in the standards bodies positions us well to have some of our important inventions adopted, which can further strengthen and grow our licensing business.

All in all the company’s prospects have never been brighter. For that reason, the board took a significant step this week in announcing our intention, to begin paying a regular dividend. The board anticipates announcing this policy this quarter, and mentioned in the earnings release, we anticipate that the level of the dividend will be consistent with recent practice in the tech space.

As you might know the level of dividend in the technical sectors tend to be more modest than in other sectors, this is consistent with the fact that most tech companies continue to have meaningful growth opportunities that require capital as well.

So as Terry mentioned in the earnings release, we intend to continue to use a balanced approach in deploying our cash. That balance includes investments in internal R&D, investment in patent portfolios get back and enhance the value of our core licensing business, and opportunistic in stock repurchases. A regular dividend is now being added to the mix.

The overall goal remains the same however, to use our cash position in a manner that drives to greater shareholder value. Thanks again for your support. We can now open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) our first question comes from Ron Shuttleworth from M Partners.

Ron Shuttleworth – M Partners

Good morning, and congratulations on your quarter.

Bill Merritt

Thank you.

Ron Shuttleworth – M Partners

Couple of intuitive questions we noticed that Sharp became the pretty notable contributor to revenue this quarter. Can you elaborate on the drivers behind that?

Scott McQuilkin

All right, this is Scott. The Japanese market is as we’ve said a number of times before it’s relatively material in terms of 3G volume. We like other parts of the market experienced a decline in volume just associated with the general economy. We’ve seen the overall market bounce back and the Japanese market I would say is not an exception Sharp, actually had a pretty good quarter. It was probably among the stronger players in the Japanese market driven by introduction of some new products they’ve had. So Japanese market overall is doing well and as the overall market for handsets and Sharp did particularly well this quarter.

Ron Shuttleworth – M Partners

In Sharp, on a relative basis, sort of a higher royalty rate than some of the other per unit licensees?

Scott McQuilkin

Yeah, we haven’t really disclosed any kind of royalty rates, but I would say if you look at Sharp’s market share, they tend to be higher than the others.

Ron Shuttleworth – M Partners

Okay. Cool. Well your litigation expenses appear to drop for this quarter. And they have a [Inaudible] appeal we know one would expect that the actual litigation expenses would probably increase ahead of that. Do you see that occurring in the fourth quarter?

Scott McQuilkin

Yeah, we don’t really give guidance on litigation expense but that number can go up and down from quarter-to-quarter. Certainly the number we reported for the third quarter is low relative to recent history and I would just suggest you put it in that perspective.

Ron Shuttleworth – M Partners

Okay, cool. Beceem and Infineon are both acquired recently and by Broadcom and Intel respectively is there any impact in your licensing arrangements with those two providers was for your technology or is it simply a carry forward?

Bill Merritt

With respect to be seen the acquirer there is Broadcom and they have a 2G and 3G solution. So we have it worked out with Beceem the ability to actually terminate our agreement, not withstand that we can still earn a very healthy profit from that agreement and further details on that will be I think in the quarters Q. And then on the Infineon Intel’s acquisition by Infineon since they are acquiring the whole business and it was not a substitute solution within Intel. We have to get all the details on that transaction but we don’t see new transactions having an impact on the relationship.

Ron Shuttleworth – M Partners

Okay. Well your future licenses increased by in the quarter by about $1.3 million, is there a new license fee?

Scott McQuilkin

That’s correct.

Ron Shuttleworth – M Partners

Okay, that’s cool. Now your deferred revenue also increased by $22 million again these are – are these new customers or they pop ups of some of the existing clients or it’s a combination of both?

Scott McQuilkin

Yeah, it’s really a combination of both.

Ron Shuttleworth – M Partners

Okay, now the – now you are looking at a renewal on the LG 3G license I guess you know they are targeted by the end of the year can you give us a status on progress there, if any?

Bill Merritt

Typically, we don’t get into the details of any of our negotiations but as I mentioned in the script this morning I think all of our discussions are productive and also as we’ve said with respect to LG it does expire at the end of the year certainly we would like to see it renewed without any lapse in the license. But if it doesn’t that’s fine because typically on a renewal you we capture those past sales in any event and it’s more important for us to get the right deals and it is to – try to force a deal by the – by year end. But, yeah certainly our goal is to get it done by year end.

Ron Shuttleworth – M Partners

Okay. We are seeing based on what we see in the market, we see an acceleration of the deployment of some 4G networks globally. And in some impression that you got pretty significant 4G licensing portfolio potentially, how are you seeing an increase an activity in that area, as it relates to your negotiations for in that area?

Bill Merritt

Yes, I would say that it’s a more common topic. Now with the licensees because the networks are being lid up and you will start to see some shipments that turn on units by year end and some next year. Although I would say that the ramp of LTE handsets I would still believe it’s going to be pretty modest, but in our licensing to that discussions it is definitely becoming one of the topics that’s on the table.

Ron Shuttleworth – M Partners

Okay. Then Pantech is I think they are your first 4G licensees correct?

Bill Merritt

Correct.

Ron Shuttleworth – M Partners

And are they will be are you seeing is there an indication to them shipping soon?

Bill Merritt

You know I don’t know exactly what Pantech’s plans at this point are certainly they have gone through financial reorganization there. I think they are doing reasonable well with respect to that but exactly, but their 4G roll out plans are they have not informed us.

Ron Shuttleworth – M Partners

Okay. Pegatron is a 3G licensing correct?

Bill Merritt

Did you say Pegatron?

Ron Shuttleworth – M Partners

Yes.

Bill Merritt

Yes.

Ron Shuttleworth – M Partners

Okay. Have you heard anything back as it relates to their CDMA rollout in for H1 2011. Have you been getting any – have you been receiving any indications from then on the impact on your license agreement with them?

Bill Merritt

You know what I have seen in effects with respect to Pegatron is in fact there was a report yesterday on their expected shipments of CDMA 2000 products as well. So that was a good information in the press about their, their expectation.

Ron Shuttleworth – M Partners

All right. But your current license is with them it’s a prepaid license or is it a fixed and prepaid or what’s the structure there?

Bill Merritt

I think it’s.

Scott McQuilkin

It’s mostly variable.

Ron Shuttleworth - M Partners

It’s variable, okay, all right. Last question on [Inaudible] so you talked a little bit about the M2M, M2M standards and you’ve got a couple of significant licensees there. Without providing any guidance is that something that will – is it something that will begin to show up, I guess more notably on – in your performance in 2011 as until deployments begin to kick out you know with some pretty good growth at Verizon and other networks, what is your thought there?

Bill Merritt

Yeah, I think that – it gave us some level of bump already this year, in terms of some of the licensees. You’re also right that there is a lot of activity in space like there is an announcement by Sprint. We estimate with respect to Machine-to-Machine capability. I think a ramp there is still a little bit uncertain. So I would be probably a little bit more cautious about 2011.

So but beyond that I think, ultimately that is a part of the market that is going to grow substantially. I just know, I am not sure if that will happen, next year if it happens a little bit beyond that. Because some of the technologies that are needed to really make it go and we talked about one of them this morning the signaling burden is a big issue and they have to come, figure that, answer out and we think we have the answer out the answer before they can remarkably deploy machine-to-machine network.

Ron Shuttleworth – M Partners

Great, okay. You know what I’ll jump back in the queue and let someone else ask some questions. All right. Thank you very much and again congratulations on your quarter.

Bill Merritt

Thanks.

Operator

Your next question comes from the line of Charlie Anderson with Dougherty & Company.

Charlie Anderson – Dougherty & Company

Good morning everyone and thanks for taking my questions.

Scott McQuilkin

Good morning, Charlie.

Bill Merritt

Sure.

Charlie Anderson - Dougherty & Company

I wanted to ask first about the dividend, I wonder if it provides any change in strategy in terms of what kind of deals that you guys like to do in terms of pre payment versus variable more match the income statement and do you want to be more smooth in your cash flows as a result of having a regular dividend?

Bill Merritt

No, I don’t think it suggest any change in our strategy. I mean ultimately the type of deals we do will be the ones that have the biggest economic value right. And one of those are running royalty deals, prepaid deals, checks price deals. We don’t really look at the form of the agreements so much as we look at its value. You know I think that the dividend really thus reflects confidence in the current business model.

Charlie Anderson – Dougherty & Company

And then in terms of why we are not seeing the amount well it’s TBD or is it sort of related to sort of opportunities you have in the near-term, sort of uses of cash you could just kind of speak of that?

Bill Merritt

Yeah, generally it’s not really contingent upon those items. Again, certainly, as the Board considers the policy, some of that will be discussed and I would tell you that those contingencies are not going to have a significant effect on complaints. Jan and I was chatting this morning, have we not going out with an earnings release this morning, we probably would not have gone out with the indications on a dividend and we would have later detail for the piece were crafted and the eyes were guarded.

But since we we’re going out with revenues with earnings today and that they had made the decision to initiate it and think upon. So we changed and we ruled out in the press release. So, not finished up their work this quarter, as I said it’s not highly contingent upon other things and you’re really kind of get everything, done everything done to get it opportunistic.

Charlie Anderson - Dougherty & Company

Great and then just a couple housekeeping questions on the quarter. In terms of tech solutions, the 5.8 million I know, last quarter 3.1 or something like that was related to be seen in CapiSemi. I wonder if you could update on that in this quarter how much new from those new deals and then also Japan’s would you gives us, and how much Japan growth is worth of recurring revenue? That will be great.

Scott McQuilkin

Yeah, I can tell you the amount that came from the scene and other customers increased from the prior quarter, by about a half a million. The amount of our patent royalties that came from Japan and we do pretty amount of royalties which is about 23% of the total, which is not too different than what we’ve seen in prior quarters.

Charlie Anderson - Dougherty & Company

Yeah, absolutely, and then just going back to the scene it sounds like we will see more in the Q, but was there a breakup fee there?

Scott McQuilkin

Yeah, you’ll see in the Q there, there was actually the agreement had a pretty good structure in terms of these type of events. We have to work out a couple of details with them and did so in a very amicable way with them they’re actually ready to come in appreciated working with them. And you’ll see there further details in the Q. But nothing on the inventories.

Charlie Anderson - Dougherty & Company

You still might end up one in their chips and then royalties off, is that correct?

Bill Merritt

Yeah, it’s actually – the transaction closed and then they terminated the agreement because they don’t have use or read to the technology again their obligation is actually to pull our technology out and not ship any products with our technologies.

And again, one of the reasons we – again, the deal is going to be profitable, because the structure of these deals would have make NRE upfront to make sure that we can meet the quarter at some level of profit and understand what part of we’re in are the nice track.

Charlie Anderson - Dougherty & Company

Got it and then just the take on to that, I mean that’s impacted your development expense line, I wonder is that does that unwind; what kind of impact that will have Scott?

Scott McQuilkin

Yeah, no I think to the extent we recognize those revenues and obligations go away and the expenses will go away as well. As Bill mentioned that those deals have been profitable to us, but there is both revenues and expenses.

Charlie Anderson - Dougherty & Company

Yeah, I noticed two development took that by about a million sequentially, but then your patent additions on the cash flow statement went down a million, so was that just sort of like an allocation, to that issue there?

Scott McQuilkin

No. I think, on the development side that’s been trending up since the repositioning that we announced in 2009. I think we are getting pretty close to where we need to be on that. In terms of patent additions on the cash flow, that’s a number that’s driven both by new applications that we file all the time, but also there are a number of applications that are currently in process. And that number has generally trended up over time, but again from quarter-to-quarter, it can go up and down.

Charlie Anderson - Dougherty & Company

Yeah, that’s it from me. Thanks guys.

Scott McQuilkin

Thanks Charlie.

Operator

Your next question comes from Michael Cohen from MDC Financial Research.

Michael Cohen - MDC Financial Research

Congratulations on another nice quarter and thanks for taking my call.

Scott McQuilkin

Sure.

Michael Cohen – MDC Financial Research

I noticed that Nokia council previously requested a delay in oral argument at the CFC when it had been still scheduled for December 9. In that scheduling order, the merit panel said that they could decide the case based on briefs, are still deciding. Do you have a preference to whether there would be oral arguments or whether they decide when to brief?

Scott McQuilkin

No. I always trust our argument because I think it allows folks to, especially if you have really good arguments, it allows you to kind of make those clear to the panel, so in my experience it has been - argument is better. And also, the benefit of argument is also that it – while every panel behaves differently, some times panels can indicate where they may be heading.

It does provide the parties an opportunity with that information to perhaps resolve things, because they kind of – it’s a motivator, right? So, generally I think argument is a good thing. I think our case is very strong on the paper itself. So they are going to do it on the papers. I don’t think our case weakens at all, it’s very strong.

Michael Cohen - MDC Financial Research

Okay, great. And my remaining questions have to do with the ramp to LTE. What year and quarter do you think would kind of be the kind of sweet spot in terms of where you would expect kind of the bulk of people top sign licenses, how far out?

Scott McQuilkin

It will be driven by a couple things, right? It’s driven by deployment and while networks begin to operate at the end of this year. As I said before, I don’t think there is mass deployment for quite some time actually.

Second, it will be driven by the renewal cycle on license fees as well. So if you have something that funds the license agreement now and it doesn’t renew for 3, 4, 5 years and you wouldn’t expect to have that discussion with LTE until that time, but that kind of makes the most sense though. I would hope to have a moderate level of activity this year, next year and then I think LTE becomes more of a mainstay in the licensing agreements 2, 3 maybe 4 years out.

Michael Cohen - MDC Financial Research

Okay. Organizations like Informa had you ranked number one in LTE patent portfolios. FC [ph] had the rank as number two. Do you think those sorts of reports are accurate?

Scott McQuilkin

No, we don’t endorse any reports because the math that they use is not often disclosed and so we don’t really know how they arrive with their numbers. That said, we have posted on our website our position on LTE. We believe it is very strong and continues to grow based upon a lot of investment in the States. Also, as we have noted before, LTE is a layer of technology on top of 2G and 3G, where we continue to have a strong patent position.

So we are very encouraged by the LTE licensing opportunity. So, I would refer you to the website and you can get a little more information on our LTE division there.

Michael Cohen - MDC Financial Research

Okay and those sorts of reports have, you up there with Qualcomm and Qualcomm asks 3.25% requested rate on LTE? Do you think that your royalty rights might be and were in that range?

Scott McQuilkin

Qualcomm gets to wherever it gets to for a variety of reasons, a lot of it historical. Where we end up at the end of the day is, and I talked about this before, we have a certain level of royalties that we get today on 3G products. Given the very strong position we have on LTE and again that it’s a layer, we believe we can move those rates up. I would suggest it’s not a dramatic move, it will be more that wedged up. But even a small move in rates in this market can be very, very significant in terms of revenue and profits.

Michael Cohen - MDC Financial Research

Okay, we’ll thank you. And that’s on the call.

Scott McQuilkin

Yeah, thank you.

Operator

Your next question comes from the line of Chris Versace from Think 20/20.

Chris Versace - Think 20/20

Good morning gang, how are you?

Bill Merritt

Good. How are you?

Scott McQuilkin

Hey, Chris.

Chris Versace - Think 20/20

Pretty good, pretty good. Just like everybody else, I just going to run through couple of questions if that’s all right. Looking that at the results last night better than the Street expected and higher than even the guidance you guys gave, I think it s great. Can you talk a little bit about where the incremental strength was on the revenue side, compared to what you have expected?

Bill Merritt

Okay. I think it was characterized as across the board as opposed to related to one or two licensees. I would say certainly, the overall rebound in 3G volume for handsets was a factor and is kind of the first driver.

Second driver, I would say there are a number of our licensees who are relatively concentrating and relatively successful in smartphones and as you know that component, that handset market has been growing very significantly. And third and not necessarily last, I think we have been successful adding to our customer base and that showing up in the numbers.

We had one customer and that may not be materially at 2 to 3 and over a period of time that cumulates to something that’s relatively material in terms of our growth. As also I’m sure you’re aware that the way our business model works that increase in revenue is really for the most part drops to the bottom-line.

Certainly in terms of patent royalties and has even more pronounced effect on our growth and net income.

Chris Versace - Think 20/20

Okay, okay. And then, when I read to the release last night, I kept circling the word renewal, I cant kind of make time for - but could you talk a little bit about that - the words [inaudible] kind of thought the commentary?

Bill Merritt

Yes, we are careful to included renewals as well as new licenses that we sign with our agreements, with our licensees and the results that you saw were a combination of both.

Chris Versace - Think 20/20

Okay, can give any kind of color on the number of renewals you might have signed during the quarter or at least year-to-date?

Bill Merritt

Yes, I don’t have those numbers in front of me. But I would say there is a handful.

Chris Versace - Think 20/20

Okay, okay and then well I guess for you Scott before jump in to it. You commented on the incremental operating expenses in your prepared remarks, can you kind of break those down on a year-over-year basis, including the amount for the long-term incentive comp?

Scott McQuilkin

The amount for the long-term incentive comp, we actually had a reduction in expenses back in the third quarter ‘09. It was $4 million adjustment, so that accounts for close to half of the increase. The remainder of the increase was mostly driven by investment that we’ve targeted on the development side and as I think I indicated previously that’s part of ramp in the business from a relatively low level back in Q3 last year. Where we were basically redeploying our resources following the repositioning of our business and that’s ramped up according to plan over there last year.

Chris Versace - Think 20/20

Okay. And then the last one for you would be at the end of the June, I think you guys had 485 million in cash and then by $100 million payments coming from Samsung correct?

Bill Merritt

Yeah.

Chris Versace - Think 20/20

Okay, so that should put us about 585 in cash and I think you guys reported 560 something, what was the cash consumption in the quarter?

Scott McQuilkin

You have to do a couple of things; one is even though Samsung paid us a 100 million they were strong with holding taxes on that, there about 16.5% percent. So we get the net of that and secondly, on an income tax basis, yeah the more profitable we are the more taxes we pay, and it’s actually a tiny differences particularly related to some prepayments that were made last year.

We don’t pay all the taxes on the amounts of cash we receive at the time. Some of those can be deferred for up to a year and so we saw some significant cash payments sort of reflected in the cash flow for the quarter.

Chris Versace - Think 20/20

Okay, okay. Then, just switching over to Bill, real quick. Bill, I understand the dividend and it seems to be in role - not too long ago, CSR a couple of days ago and I’m looking at the long-term deferred revenue kind of creeping down quarter-over-quarter. I’m just wondering you guys have to have a lot of confidence to continue to pay the dividend on a quarterly basis on an ongoing basis.

I’m just wondering if you could share with us, where is that confidence? Then, just if you want to lump in, the LTE negotiations obviously there is no gain, some other, I’m really curious as to the manta as to why now?

Bill Merritt

Yes, good question. I think a part of it is really good performance over the last two years by the licensing team. They’ve done a great job and we see every reason for them to continue doing that. The portfolio is very strong, notwithstanding the setback at the ITC, we’ve done very well; it keeps showing that the portfolio is very deep in terms of what we can bring public license negotiations, so that’s one in past performance.

You look at just the activity level that they’re involved in, the team is bigger than it’s ever been and they’ve got a lot of irons in the fire and in terms of different types of the market, so its not only the majors but it’s the machine space, it’s the laptop, it’s all those spaces, other consumer electronics that are wireless enabled. We just observe the activity level there and we get very encouraged that they can continue to do the great job that they’ve been doing.

Third, with respect to the technology that we’re creating, we see them as having great value, long-term of course in terms of how they would drive new inventions into the licensing space.

But even short term may create added value for some prospective licensees in ways we can work together. So, we’ve confirmed a bunch, we don’t then to overreact at things, but we’ve just had such a good history of performance and every reason to believe that that will continue that I think the board and management effort, then we can know this is something that we can do, we can do it on a sustained basis and there is no better time than now to do it.

Chris Versace - Think 20/20

Let me come at it, maybe a different way. I know in the past, you guys said that given the nature of the licensing business, you need a short strength on the balance sheet and a certain cash level. You guys have also commented about potentially bidding for a small piece of the Nortel patent pool that’s coming.

So if you guys are successful in winning all or part of that bid, you can see a fair amount of cash throughout the door. Alright, and then you are going to want to maintain that cash, so again to announce the dividend, I understand the scope of activity that’s going out there and whether it’s pads or other connectivity devices, I mean can you talk about maybe or quantify if you can the number of conversations you are having compared to three quarters ago, a year ago, but did you get the confidence for this?

Bill Merritt

Well, a couple of things. I mean in terms of the number of conversations going on, there will be dozens of different companies that we’re engaged with, right? So, it’s a very broad range of -and second and Terry made this clear in his comment, we intend to be able to have all the capacity we need to go after all the opportunities we see and declaration of the dividend is not intending at all to the fact of that ability.

And, so I think that again we just kind of matured as an organization to a point where we have very good current financial strength. We have very good indicators of our future financial strength. We have very good visibility and so what we need to do as an organization to grow and we can do all that, as well as commence regular dividend. As you would expect from an organization, this was a very good dialogue with the board and one that we didn’t waste it to make this decision. They did it in a very deliberate way, but there is a high level of confidence in the business and I think there are other reasons to be confident.

Chris Versace - Think 20/20

Okay and then just one last, Infineon is a SlimChip modem core customer correct?

Bill Merritt

Yes, they are…

Chris Versace - Think 20/20

Alright and can you give us a sense of either in the quarter you indicate how much they were in that revenue stream?

Bill Merritt

Yes, we don’t break it down by customers because they are not a 10% customer. But they had been a nice contributor to revenue, they’ve had good success, both with Apple and with other folks. So, there has stated with a good relationship with those folks and it helped us to validate that platform and the fact that - and actually Infineon service as a partner with us in terms for another PDS [ph] is doing. So it gives us strength in those transactions because not only it’s the technology coming from us, it’s coming from Infineon as well.

.

Chris Versace - Think 20/20

Thank you very much, Bill. Thanks Scott. Thanks Janet.

Operator

Your next question comes from the line of Bill Nasgovitz from Heartland.

Bill Nasgovitz - Heartland

Good morning.

Bill Merritt

Good morning Bill.

Bill Nasgovitz - Heartland

Congratulations on a great quarter. Bill, could you give us a little more color on Nortel in terms of the process and interest in these patterns?

Bill Merritt

Sure. And to some degree, we have to be a little less open because we’re into the process now and the folks that our running the process asked us to sign on the disclosure agreements with respect to the process.

But I can give you some high level of it. One, the process is moving forward, we are part of the process going forward. We continue to believe that there is value in that portfolio, obviously its value at the right price and we are pretty discriminating in terms of what we believe patents are worth because we have a – we always had the other option, which is to rely on the internal patent generation.

As far as when it will play out, I think we’ve generally talked about early next year, we actually don’t have a specific schedule from them. So, we’ll see how that works out. But it is underway and we are in the process.

Bill Nasgovitz - Heartland

Okay. Good luck with it.

Bill Merritt

Thank you.

Operator

Your next question comes from the line of Andy Schopick from Nutmeg Securities.

Andy Schopick - Nutmeg Securities

Good morning and thank you. Couple of financial questions if I can? Can you tell us what the legal or patent IT related litigation costs were in the quarter and year-to-date?

Scott McQuilkin

Yes sure. I think I mentioned that, it’s about $1.4 million or so.

Andy Schopick - Nutmeg Securities

For the quarter?

Scott McQuilkin

For the quarter.

Andy Schopick - Nutmeg Securities

And year-to-date?

Scott McQuilkin

Year-to-date, $10 million.

Andy Schopick - Nutmeg Securities

$10 million? And would you care to offer any expectation or guidance associated with the upcoming panel meeting and what the implications may be depending on how that decision occurs?

Scott McQuilkin

Yes, certainly the level of expenses there is driven by the level of activity, but at this point, we’ve done our homework pretty well, we’re prepared and although you might see a slight up tick in expenses from the next step in that process, I don’t think that would be a huge affect on our overall expense level, it’d be more – if you look at the high levels in the past, it’s been related to very significant activity for ITC cases with Samsung and Nokia.

Andy Schopick - Nutmeg Securities

Okay. Couple of other ones here, R&D tax credit and tax rate for the company going forward, will there be much if any material impact should the R&D tax credit get renewed in whatever form, in terms of your effective rate in 4Q and adjusted rate for the year and possibly next year?

Scott McQuilkin

It has a, I will say, modest effect on our overall tax rate, which has been pretty stable between 35% and 36% and who knows what’s going to happen with taxes next year. But outside of major changes and tax law I would say it’s probably going to stay within that range.

Andy Schopick - Nutmeg Securities

Well, again, I’m just talking specifically about the R&D tax credit as it may offset your R&D cost and tax rate should that be renewed and retroactive.

Scott McQuilkin

Yes. As I said, that’s had a modest effect on our overall expense levels and it wouldn’t be a huge factor.

Andy Schopick - Nutmeg Securities

Okay. But there could be some modest adjustment then in the rate in the fourth quarter, should it be renewed and retroactive?

Scott McQuilkin

Potentially.

Andy Schopick - Nutmeg Securities

Yes, okay. Last thing here is on the dividend, has the board determined that the dividend will be paid based on some type of a payout ratio of your earnings. I mean we know that you’ve made the decision to pay a quarterly dividend, but have you made any decision on the basis by which this dividend will be determined?

Scott McQuilkin

Yes. With respect to the dividend as we noted today, we will provide the guidelines and the policy during the quarter. So, that’s as much as I can say on at this point.

Andy Schopick - Nutmeg Securities

Okay, thank you.

Scott McQuilkin

Okay, thanks.

Operator

(Operator Instructions) We will go to our next question from Ron Shuttleworth from M Partners.

Ron Shuttleworth - M Partners

Hi, guys. Just a follow-up, a couple of follow-up questions. Over the last few months you have been granted some continuation patents on your 3G portfolio. Can you apply those patterns or are they applicable to the discussion on December 9th, like will you be able to add to the strength in your position with those continuation patents?

Scott McQuilkin

Yes, exactly the patent was issued. Patents issuing every Tuesday is the off, but typically you don’t have that opportunity because it’s a – you’re usually tied into a record that was established below that said, from time to time, if there are some sort of a public information that would be relevant, it can be used, but I’m not aware of any particular patent that we will be using on any argument.

Ron Shuttleworth - M Partners

Okay. Then the last question is LG renewal, do you anticipate that there will be in that renewal any discussion regarding 4G?

Scott McQuilkin

LG is one of those customers that I think would be shipping 4G product in any reasonable sort of capture period of a license revenue reaching 5, 7 whatever year or so. It’s certainly on the table with them.

Ron Shuttleworth - M Partners

Okay, thank you. That answered most of other two questions. Thanks.

Operator

There are no further questions in queue.

Janet Point

Alright, we’ll, thanks to everyone. Just a note, the LTE disclosure was updated to bring in some of the additional declarations were made to SE body, so the numbers have been updated on the website. So if you look in the patent section, you’ll see fresh numbers there. And if you have any questions, feel free to call us up and we’ll entertain them individually. Thank you.

Operator

This concludes today’s conference call. Thank you for your participation.

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