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Executives

Janet M. Point – Executive Vice President, Communications and Investor Relations

Scott A. McQuilkin – Chief Financial Officer

William J. Merritt – President and Chief Executive Officer

Analysts

Robert Labick – CJS Securities

Ron Shuttleworth – M Partners

Charlie Anderson – Dougherty & Company

Michael Cohen – MDC Financial Research

Rahul Gorawara – Rivanna Capital

Brett Simpson – Arete

Eugene Fox – Cardinal Capital Management

Bill Nasgovitz – Heartland Funds

InterDigital, Inc. (IDCC) Q4 2010 Earnings Call February 24, 2011 10:00 AM ET

Operator

Please stand by, we’re about to begin. Good day and welcome to the InterDigital Fourth Quarter 2010 Conference Call. As a reminder, today’s call is being recorded.

At this time, I’d like to turn the conference over to Ms. Janet Point. Please go ahead, ma’am.

Janet M. Point

All right. Thank you, Albert, and good morning everyone, and welcome to InterDigital’s fourth quarter 2010 and year-end 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’ll offer some highlights about the quarter and the company 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 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 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 pro forma net income and free cash flow, both non-GAAP financial measures. Schedule setting out reconciliations of pro forma net income to net income and a free cash flow to net cash provided by operating activity and most directly comparable GAAP financial measures are included at the back of our earnings release issued yesterday, which is also posted in the Investor Relations section of our website at www.interdigital.com.

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

Scott A. McQuilkin

Thanks, Janet, and good morning to everyone. I’m pleased to report that our fourth quarter 2010 results were very strong. Net income was $34.3 million, a 46% increase over the pro forma net income in the fourth quarter 2009.

Diluted EPS was $0.76 in the fourth quarter 2010, up 43% from pro forma diluted EPS in the fourth quarter 2009. The fourth quarter 2009 results exclude a $1.6 million repositioning charge and a $16.4 million tax benefit related to foreign tax credits.

Top line, we reported $95.3 million in revenues, a 25% increase year-over-year. Our revenue consists of three components, current patent royalties, past sales royalties and technology solutions revenue.

Current patent royalties were $85.1 million in the fourth quarter 2010, up $12.7 million or 17% over the fourth quarter 2009. Our per unit patent royalties accounted for $35.6 million or 42% of current patent royalties in the fourth quarter 2010 and increased by $11.1 million or 46% from fourth quarter 2009. This increase was driven by growth in customer smartphone product sales.

Our fixed fee patent royalty revenue was $49.6 million or 58% of current patent royalties in fourth quarter 2010, an increase by 3% year-over-year. There were no patent sales royalties in the fourth quarter 2010 and only $0.1 million in fourth quarter 2009, so the impact of this revenue component on our fourth quarter results is de minimis.

Technology solutions revenue more than doubled to $10.1 million in fourth quarter 2010, up from $3.8 million in fourth quarter 2009. The significant increase is driven by the recognition of $8.2 million associated with the final deliveries of technology under existing engineering service agreements. In the future, revenues associated with these customers would be driven by their success in the marketplace or any additional engineering services provided.

Our technology solutions revenue has also been affected by discussions with one of our customers regarding the royalties owed on specific product classes. While this customer continues to pay us the entire amount owed under the agreement, we are deferring revenue recognition on royalties for these product classes until we resolve the discussion. Through December 31, 2010, we have deferred approximately $9 million in related revenue.

With respect to our expectations for first quarter 2011, we expect revenue contributions from existing agreements to be in the range of $76 million to $77 million. This range includes an increase in current patent licensing royalties from the same set of patent customers of 5% over fourth quarter 2010 and15% year-over-year.

We are also continuing to negotiate new agreements, extensions and renewals, including LG, as well as to pursue resolution of audit-related findings. Any of these agreements if completed prior to March 31, 2011, would likely contribute to first quarter 2011 revenue.

Turning to the expense side, fourth quarter 2010 operating expenses were $41.6 million. As we noted in our press release, the increase in operating expense included some expenses that are essentially non-recurring in nature.

Taking these items out, the increase in our core operating expenses, which are without litigation and arbitration costs, was $4.0 million over fourth quarter 2009. This moderate increase reflects the planned ramp of the last year of our investment in the development of our suite of technologies and the growth of our patent portfolio. That ramp of R&D spending is now substantially complete.

Going forward, we will continue to aggressively manage our expenses. In the first quarter 2011, we expect that our expenses will not include these non-recurring items mentioned in the release. However, we do expect to see some normal seasonal increases related to personnel and trade show expenses. Of course, expenses associated with intellectual property enforcement will vary in accordance with the level of activity.

Our balance sheet continues to be very strong. We ended fourth quarter 2010 with $542 million in cash and short-term investments. The increase from $410 million at the year-end is primarily due to strong cash receipts from our customers, especially Samsung.

In summary, we believe that we have many near-term opportunities to drive revenue and cash flow as well as the financial capacity, flexibility and discipline to execute on our business strategy.

Now, I’ll turn the call over to Bill.

William J. Merritt

Thanks, Scott, and good morning to everyone. As Scott has already discussed, we delivered a very strong year in 2010 in terms of revenue, profit and cash flow. The year was equally strong in terms of strategic initiatives, technology take-up and driving shareholder value.

Let me address those topics, our goals for 2011 and the reasons we continue to have significant confidence in the business going forward. As Scott mentioned, our revenue in 2010 was just under $400 million and 33% increase over 2009 revenue. That revenue growth obviously reflects the strength of the 3G handset market, something that we will continue to benefit from this year.

Equally important, our revenue growth reflects the solid execution by our patent licensing and modem sales teams. If you look at our revenue performance in 2010, approximately $325 million was based on agreements that were in place at the beginning of 2010.

Approximately $75 million of revenue or about 20% came as a result of agreements and audit resolutions reached in 2010 reflecting the hard work by those teams in identifying and executing on new opportunities. Those deals include new license agreements, renewed deals, modem IP licenses and agreements resulting from our comprehensive audit programs. In fact, over the last 18 months, we have added over a dozen new and renewed agreements.

We expect that hard work and success to continue this year. Indeed, coming into 2011, our licensing and sales teams have active negotiations ongoing with over 25 companies around the world. Those discussions are with top tier manufacturers like LG and others, as well as, a wide range of other companies involved in the sale of handsets and other connected device.

We also continue to be engaged with semiconductor companies on licensing our SlimChip modem IP. Given the pace and tender of all these discussions, we are confidant that we can close a number of deals this year on financial terms that will drive value.

Among the reasons for our confidence is the high value of the technology that we bring to the discussions. For modem IP, we remain the only company in the world offering a complete field tested 2G/3G modem IP solution. As a result, we continue to see interest in the technology from startup semiconductor companies and established semiconductor companies looking to expand their offering into the wireless market.

We also have one of the larger patent portfolios in the wireless industry. As of December 31, 2010 our patent portfolio had increased to over 18,000 patents and pending patent applications. In 2010, we were granted approximately 150 U.S. patents and over 1,200 patents internationally. That is more than three patents issuing every day.

In addition to size, our portfolio was also understood to be among the more valuable wireless patent portfolios, given the long number of the years we have participated in developing fundamental wireless technologies. So when a company signed a license agreement with InterDigital, it gains access to thousands of inventions created by our engineers over the years that can improve the performance and reliability of handsets. For that reason not only are we confident we can close deals, we also believe we could increase the value of our licensing program particularly when it comes to LTE capable devices.

Meanwhile, the LTE licensing program is still at its early stages. We’re seeing success and modestly increasing the royalty on multimode LTE capable devices, reflecting both our strong LTE position and the many layers of InterDigital inventions resident on the device.

We also anticipate continued success in expanding our licensing program into adjacent markets where our inventions are used. Last year, we were successful in penetrating the machine space, putting agreements in place covering over half of that market. For 2011, we will also begin to further expand our presence in terms of consumer electronics.

Our entry into the adjacent markets is obviously driven by the proliferation of wireless technologies. We are also well equipped internally for expansion into these new markets. As InterDigital’s reputation for innovation and portfolio management has grown, so as our ability to attract and retain some of the best licensing talent in the industry.

We now have 40 people in our patent and legal group, which is comprised of lawyers, business executives and engineers, nearly double the staff we had three years ago. Of course, our licensing success leverages off the continued inventiveness of our core technology development team. In 2010, that team delivered another superior year in terms of creativity and innovation.

As many of you know, InterDigital has been warning the coming bandwidth crunch for some time now. In 2010, networks began to experience that crunch as smartphones and other high-end connected device came onto network. Calls dropped, e-mails hung and web pages timed out. As a result, the company’s holistic bandwidth solutions captured under the banner of bigger pipes, more pipes and better pipes, began to gain market traction.

First, our system design for machine-to-machine communications where we moved signaling and intelligence to the edge of the network, those embraced by ETSI, a prominent European standards body and endorsed by other manufacturers.

Second, our innovative work on improving sales performance for advanced LTE network designs began to be picked up in the groups driving future wireless standards. Third, our suite of technology for creating a network of networks also gained market and standards body attention.

Last, our new work on compression technology excited operators and manufacturers alike and began to move into field trials. All of this was very evident last week at the Mobile World Congress Show in Barcelona where we demonstrated each of these technologies.

During the course of the four-day show, we hosted over a hundred planned and impromptu meetings, talking with operators, product manufacturers and content providers. We left the show with a long list of opportunities as our holistic bandwidth solutions struck a cord with everyone.

All this bodes well for the long-term vitality and strength of InterDigital. The wireless industry continues to be one driven by innovation and those who can solve the hard problems will be rewarded. InterDigital will continue to do just that.

More over, we will do so in an environment that is placing increased value on patents. Indeed, 2010 saw patents and patent portfolios emerge as a highly priced asset class and for good reason. Valuable patent portfolios well managed can secure product differentiation, they can provide revenue and they can provide defense.

In the wireless industry, patent portfolios are particularly valuable given the significant number of devices shipped, the intense price and feature competition, and the value of these devices. Consider the more Nortel patents, while the auction process is not yet over, the Nortel patents are expected to sell for a significant sum, perhaps more than some of the other Nortel business lines.

2010 also saw companies focused on intellectual properties rising value, attributable again to the rising value of patent assets. InterDigital is well-positioned to benefit from this trend.

Unlike other companies in the patent space, we are both skilled inventors and strong portfolio managers. Our inventive skills and knowledge of the wireless ecosystem have allowed us to create innovations that are used in billions of wireless devices today. That same set of skills also allows us to identify promising nascent invention created by others.

With the strength of our R&D and standards team, we can mature those invitations and drive them into future wireless standards. For that reason in 2010, we expanded our efforts to acquire patents and we’ll continue to press on this front in 2011 as we believe our deep knowledge of heritage in wireless gives us a competitive edge in identifying promising technologies that may be widely adopted in the future.

In short, InterDigital is uniquely positioned to profit from the explosive growth of wireless. As an independent supplier of essential wireless technologies, we are indifferent to who wins the hardware race. We are indifferent to whether Google, Apple or Microsoft prevails on the software. We are indifferent to whether operators control the content on their networks or relegated to just pipes or find a place in between. Regardless, our inventions are used in every device. So as long as the wireless market continues to expand, we will benefit from that expansion.

So it was a terrific 2010. We also expect strong results in 2011. Wireless continues to expand at a fast clip with innovation driving that growth. Innovation is what we do and will continue to do for the benefit of the industry and our shareholders.

With that, let me open it up for questions.

Questions-and-Answers Session

Operator

(Operator Instructions) Our first question comes from Bob Labick of CJS Securities.

Robert Labick – CJS Securities

Good morning.

William J. Merritt

Good morning.

Scott A. McQuilkin

Good morning, Bob.

Robert Labick – CJS Securities

Hi. Couple of questions, first, you obviously have had some recent success in signing up some new customers including for LTE and you alluded to better rates there. Could you just elaborate a little bit more on the order of magnitude of the increase that you’re getting and how negotiations are growing as it relates to including LTE licenses?

William J. Merritt

One, the negotiations on LTE are going very well. I think that’s supported by the significant patent position the company holds on LTE as well as I mentioned in the script, multiple layers of technology within an LTE capable device.

As far as the increase, it’s early in the program, so the increases we’ve seen so far have been pretty good. I would we expect over time that we will still see a good increase in the rates as we talked about. It doesn’t take a large increase in rates to reflect – or to result in the significant value gain, 0.01%, at the end of the day on the market is about $1 billion in revenue, net present value revenue. So I’d say at the end of the day we’re going to nudge it up. That’s probably the best way to put it and right now we’re certainly doing pretty well with respect to that program.

Robert Labick – CJS Securities

Okay. Great. And you just also alluded to additional new ventures including compression software and other things. I think you said, you have some pilots going on there. Could you just talk a little bit more about that opportunity and when you’ll know if this – it’s successful and the likelihood in timing there?

William J. Merritt

Yeah, we have a number of initiatives underway. I’d sort of put them in three categories. We have the mobility technologies that allow folks to move between networks or to access the capacity of different networks, we have the system design for advanced LTE and then we have some work we’re doing on compression technologies.

To some extent the last one probably maybe the nearest-term one in terms of market engagement. It’s still early in our process there, but we’ve done some pretty innovative work and we’re engaged with some folks on trials and so I certainly think that this would be a year we would see if there’s going to be some market take up of that and then we would move forward with some partners with respect to that program.

The mobility solutions is probably next up and there the push is to get the technology into standards and really drive the future licensing program although as part of the that there could be some near-term product collaborations that we would do, but again I think those are mostly designed to drive take up of the technology long-term. And I’d say the LTE network design is probably the farthest out of the three, but also very compelling in terms of the technology solution.

Robert Labick – CJS Securities

Okay, great. And then obviously you discussed your substantial cash balance and the fact that there is Nortel assets out there and others. Just taking Nortel off the table for a minute, assuming for whatever reason you don’t get the highest bid, what are your other thoughts and expectations for uses of cash?

Scott A. McQuilkin

There is couple other opportunities that we see and it kind of relates to this – those two things at work. As people understand the value of patents and we actually see the opportunity for more of those assets to come on the market, that could also be the result of consolidation and shifting in the wireless market as well as companies combined or move out of the market and a lot of that is underway those assets come on to market. So we’re certainly getting indications that assets beyond Nortel may come on the market.

Second, in terms of some of the nascent technologies and nascent may not be exactly the right word, but some technologies that are apparently pervasive on handsets, but could be pervasive on hand sets. We see some opportunities out there and for us taking an asset – a patent asset that may relate to some technology that could be pervasive in the next couple of years on handsets.

That’s a very good opportunity for us because we have obviously a very well-run licensing program. If we can pull those assets into that program, we can pretty quickly get a return off that again on the same basis we’ve been talking about with respect to Nortel, which is, it only takes a modest increase in the rates to drive very significant increase in value and we benefit from the fact that our licenses actually come up for renewals on a regular basis. I know that creates some anchorage for some, but actually we see it as great opportunity to keep purposing the – or nudging the rates up again, I think that’s the best way to think about it because it only takes a small amount of movement to create a great amount of value.

Robert Labick – CJS Securities

Okay. Great. Thank you very much.

Operator

Our next question comes from Ron Shuttleworth of M Partners.

Ron Shuttleworth – M Partners

Good morning, folks. I apologize about my voice, but I’m dealing with a little bit of a cold, so if I’m not clear, please help me and ask for clarity. So I just wanted to confirm that the $6.7 million fee – sort of the sublicense fee, is that in your R&D line item?

Scott A. McQuilkin

There’s two components to that, about 4.6 is a sublicense fee that would be included in the development line.

Ron Shuttleworth – M Partners

Okay.

Scott A. McQuilkin

There is another approximately $2 million or so that relates to an adjustment to the accrual for a long-term incentive plan and that’s split by each of the lines, probably SG&A maybe a million, patent licensing, I would say most of that is probably in development.

Ron Shuttleworth – M Partners

Okay. So if you back out the $4.6 million of R&D from 21.5, you should be in the $17 million range. Is that correct in terms of sort of normalized R&D?

Scott A. McQuilkin

Yes. There is a few other adjustments. I think if you look at that number, it’s probably been running in $16 million to $17 million range, I think. Something in that range is a reasonable kind of normalized level of expenditures for Q4.

Ron Shuttleworth – M Partners

And should we expect that to continue for the next couple of quarters in that range?

Scott A. McQuilkin

I’d say generally yes in terms of the level of resources that we have planned. The only qualifier I’d put on there is at the first quarter of every year we normally have an uptick in our expense levels. That’s due to personnel costs and trade show costs. So vacation accrual, fringe benefit accrual and such go up normally every quarter and we have to merit increases as well. That’s probably a $4 million increase in aggregate and I guess about $2 million or so of that applies to development.

Ron Shuttleworth – M Partners

For Q1?

Scott A. McQuilkin

Yes sir.

Ron Shuttleworth – M Partners

Okay, thanks. And sublicense fees, is that, can you just describe that a little bit in terms of a little bit more detail on what that’s for and what’s involved?

Scott A. McQuilkin

Yeah. When we license our modem IP to a customer, some of the technology included in that is from a third-party and so depending on the nature of the deal and so we will pay that third-party sublicense fees. But we structure the deal so it’s profitable.

Ron Shuttleworth – M Partners

Okay. Now, in terms of the fixed royalties to be amortized in 2011, is it going to be similar to that in 2012 or 2010? Sorry.

Scott A. McQuilkin

I would say generally yes. Again with two qualifiers, in our guidance we have not included at this point in time anyway LG. That was about $14.4 million per quarter of fixed fee amortization.

Ron Shuttleworth – M Partners

Yeah.

Scott A. McQuilkin

And of course it makes no assumption for any new deals that we might do, which would obviously increase that.

Ron Shuttleworth – M Partners

Okay. Sounds good. Enfora was acquired by Novatel, does that have an impact on any of your licensing arrangement with them?

William J. Merritt

No.

Ron Shuttleworth – M Partners

Okay. Nice, quick answer. Thank you. So I just – I know you stated this during the – I just need a clarification. In Q1, do you see – you had 42% in Q4 coming from per unit license fees of your license revenue, do you see that continuing to be at that level or do you see that increasing?

Scott A. McQuilkin

Well, again, it depends on when we renew LG and what other deals we put on the books and the nature of those deals. But I would say if you do the real simple math, in the first quarter and you assume that LG is not included in there, which is a fixed deal that their per unit percentage would go up.

Ron Shuttleworth – M Partners

Okay. All right. Now, the $9 million in deferred revenues, that’s a longstanding customer, correct?

William J. Merritt

It is.

Ron Shuttleworth – M Partners

Okay. Is there any litigation risk there?

William J. Merritt

If the parties can’t work it out, there’s always a process in the agreements for taking care of that, so you always do build that in, but as we typically do with these things we try to find the resolution that makes sense to both parties, so we would pursue that path and also pursue the other path so that the dispute doesn’t also go on forever.

Ron Shuttleworth – M Partners

Okay.

Scott A. McQuilkin

Obviously from a financial point of view, we’re taking a very conservative posture in terms of revenue recognition and only recognizing that part, that part of the revenues for which there’s no discussion or disagreement.

Ron Shuttleworth – M Partners

Okay. Acer deal, where does that show up? Is that showing up in Q1 or is that subsequent quarter?

William J. Merritt

Yeah, that will show up in Q1.

Ron Shuttleworth – M Partners

All right. Now, the $10.1 million in tech solutions does that include the same payment as well?

Scott A. McQuilkin

It does. The $10 million or so includes about $8 million of revenue from deals where we were delivering engineering services, which are now substantially complete.

Ron Shuttleworth – M Partners

Right. Now, I know you can’t provide guidance on that, but the trajectory on your tech solutions revenue streams, is that going to go up or down in subsequent quarters. I know you’ve delivered the solution to current customers, are there other customers in the pipe that in which you will be delivering in subsequent quarters? And then the follow on I guess maintenance or whatever fees are associated with the current clients what does that add up to? Does that add up to a declining trajectory in that area or an increase in trajectory?

Scott A. McQuilkin

Yeah. I think at a minimum, you can take the $10 million and assuming that none of that $8 million that we recognized in the fourth quarter repeats itself, you’re down to two. But that doesn’t take into account any new deals that are in the pipeline right now. We’re aggressively going after new deals which would generate revenue very quickly.

Second, it doesn’t factor in any kind of follow on royalties that we may receive once our customers start shipping product. And third it doesn’t include any kind of recognition of any portion of this deferred revenue that we have.

Ron Shuttleworth – M Partners

Right. Okay. All right. And then finally now in your forward-looking statements, you are saying that there is an expectation of the LG deal closing and expanding and I’m assuming that’s an expansion of the current license value for LG. It looks as though, are your expectations, are you going to be able to renew this in a fairly short period of time?

William J. Merritt

Yes. On LG as well as others, we tend never to give timelines because frankly it’s counter productive in the negotiation to put a timeline on the table, a public timeline on the table because if I’m on the other side I immediately use that against you.

So as we have said we’ll close the deals when if that is a number that makes sense typically with all these deals, there’s obviously numbers we can get today if we wanted to, but we’re just not going to take the number that’s there today. We want to upgrade the number. LG will, as part of the discussion with LTE, as part of the discussions since that will be part of their product profile over any deal that we do with them and also the 3G volumes for this deal are larger than the 3G volume in the prior deals. So that will be reflected as well. So we continue to move forward on all these deals comfortable with how they’re going, but also being very patient.

Ron Shuttleworth – M Partners

Okay. All right. I will leave the questions for now. Thanks for your time and I will go back in the queue.

Janet M. Point

Okay.

Operator

Our next question comes from Charlie Anderson of Dougherty & Company.

Charlie Anderson – Dougherty & Company

Good morning. Thanks for taking my questions.

William J. Merritt

Good morning.

Charlie Anderson – Dougherty & Company

So Scott, I wonder if you could talk about tax rate, it was a little bit higher in the quarter. What do you think as sort of the ongoing tax rate for you guys? And then also sort of litigation expenses, I mean you’ve had a couple quarters here below sort of your average and you have the oral arguments in Q1. I wonder if you could just kind of talk about litigation expense relative to the average in Q1, now that, a lot of the expenses concentrated in the January time frame. And then lastly, Scott, if you could talk about sort of cash burn, excluding LG, if LG doesn’t come in soon, what kind of cash burn you guys would see, that would be great. Thanks.

Scott A. McQuilkin

So yeah, three things. One on the taxes, I think a typical book tax rate for us would be in the 36% range or so. I think that’s reasonable to assume going forward. In terms of litigation expenses, certainly if you look at the level we’ve had in the last couple of quarters it’s been on the low side, about $1.4 million in Q3 and $1.8 million in Q4.

For the year, litigation and arbitration expenses $12 million in 2010, about $16 million in 2009. I’d say going forward, that’s a very difficult number to predict mainly because it’s very dependent on the level of activities. We did have a hearing, but a lot of the preparation for that hearing also occurred in 2010 and really the real driver there is going to be a function of what if any activity we have in 2011. And at this point, we’re not really in a position to comment that?

Charlie Anderson – Dougherty & Company

And then cash burn ex-LG?

Scott A. McQuilkin

Yes. Cash burn ex-LG, LG has really contributed to our cash flow for a couple of years. That contributed to revenue, but cash flow. Samsung contributed about $200 million or so to our cash inflow and they have now made all the payments under their current license. If I take Samsung out of our 2010 numbers, the cash inflow that we received totaled about $170 million or so. Call that somewhere between $40 million and $45 million a quarter.

Our cash outflow other than taxes, maybe in the $35 million a quarter range. So I think pre-tax, our cash flow is somewhere close to break even, but again that provides very little credit for new business and as Bill pointed out in 2010 alone we generated about $75 million of revenue from…

Charlie Anderson – Dougherty & Company

A question for Bill on that, you mentioned the $75 million of new business generated in ‘10, I think $40 million of that was from the past royalties so sort of $30 million as of ongoing business. You talked about a really strong pipeline. Could you kind of compare the pipeline as you entered 2010 versus 2011, you had one pipeline that gave you $30 million plus of ongoing. What does 2011 look like comparatively?

William J. Merritt

I’d say the pipeline is deeper in 2011 and probably has some bigger companies where the discussions are a little bit more mature than when we came into 2010. That’s on the patent side. I think part of that reflects also the bigger patent team, patent team grew during 2010, so they’re able to put more irons in the fire.

On the modem IP side, I’d say that the pipeline is about the same between the two businesses. So a good pipeline there and with the companies that we talked about in terms of some startups and then some more mature companies, but it’s a smaller pipeline. The patent pipeline is definitely the deeper of the two pipelines.

Charlie Anderson – Dougherty & Company

And then just one more from me. The dispute over the product classes, does that refer to the chip or the end product, like a handset versus tablet?

William J. Merritt

It’s the chip solution.

Charlie Anderson – Dougherty & Company

Chip solution. Okay. Thanks so much.

Operator

Our next question comes from Michael Cohen of MDC Financial Research.

Michael Cohen – MDC Financial Research

Great. Thanks for taking my call. I understand Alcatel-Lucent to be a licensee, but in the press release at the Mobile World Congress you also referred to them as a partner and I was wondering if we should make a distinction between those two terms and how you look at the difference between licensee and partner?

William J. Merritt

Right. So from a licensee perspective, actually Lucent was a licensee on the infrastructure side. Alcatel itself was a technology licensee for many, many years back. So those are sort of the existing contractual relationships between the parties. The work going on today with Alcatel-Lucent is really a product collaboration relationship. So it’s an informal relationship going on, but very, very productive in terms of advocating some new technologies.

Michael Cohen – MDC Financial Research

Okay. Is Alcatel-Lucent cube technology something that you believe you have IP in?

William J. Merritt

This is a very small base station technology. So, I mean, one basic modem technology in there, so the wireless functionality, we have IP that covers both sides of the link so whether it’s the handset or the infrastructure it would cover all the device.

Michael Cohen – MDC Financial Research

Okay. And I was wondering if you could share if any of your existing license agreements have any kind of clauses that could actually increase over time with certain milestones such as signing a significant competitor, certain percentage of the market or any other milestones that could increase payments from existing licensees?

William J. Merritt

I wouldn’t say there is anything meaningful out there that comes to mind in terms of triggers like that. I mean, typically we try to avoid agreements where the rates can move around based upon what other people do because it just adds a layer of complexity in there. So I can’t think of anything like that off the top of my head and if there is something, I don’t believe it would be meaningful.

Michael Cohen – MDC Financial Research

Okay, great. Thank you very much for taking my questions.

William J. Merritt

Yes.

Operator

Our next question comes from Rahul Gorawara of Rivanna Capital.

Rahul Gorawara – Rivanna Capital

Thanks for taking my question. Great quarter, guys. I do have two questions for you about ongoing Nokia litigation and the recent oral arguments at the federal court of appeals. I’m just wondering if InterDigital wins in that case, can Nokia appeal the decision and if so, how does the appeals process work?

William J. Merritt

Sure. They would have at least two opportunities, I’m not saying that they would – either would be successful, one they could petition for a review by the entire federal circuit. That happens from time to time. Most often they’re denied. They typically only arise in cases that have unique legal issues associated with them and I don’t believe that this is a case that presents such an issue, but they could ask for that.

And similarly they could petition for a review by the Supreme Court, but again, people do that all the time routinely denied. Again, typically it would only be taken up if there was some unique issue in the case that would extend beyond the case to many other cases and I don’t think that is the situation here.

Rahul Gorawara – Rivanna Capital

Sure. And just a quick follow-up. So if InterDigital wins in this case, how will the amount owed for past infringement and the new 3G license be decided? Who decides that and what’s sort of the rough timeline for that?

William J. Merritt

Okay. So at the ITC, the only power the ITC has is to actually stop shipment, but they actually don’t award monetary damages. But obviously, in order to see shipments is a pretty large motivator for the parties to work out an arrangement. But absent that, there is a separate case that we filed alongside the ITC case that was filed in Federal District Court in Delaware and that is actually the venue where you would then seek capacity advantages, because obviously the courts – that’s what the courts can do. They can not only issue injunctions but they can also award royalties or damages for past sales. So I think the most likely path, though, would be if we are successful in the ITC issues that injunction that a settlement would most likely follow from that.

Rahul Gorawara – Rivanna Capital

Okay. Great. Thanks for the clarity.

William J. Merritt

Sure.

Operator

Our next question comes from William Bogle of [Merrill Lynch Securities].

Unidentified Analyst

Good morning.

William J. Merritt

Good morning.

Janet M. Point

Good morning.

Unidentified Analyst

I was wondering if you all had a sense if to the extent that you were to win the Nokia litigation whether the arrangement would be a unit volume or a flat rate arrangement?

William J. Merritt

One, we typically are indifferent to that and as you can see we have a mixture of both kinds of deals. Historically, I would have said, it would be most likely a fixed price deal because Nokia’s market share was pretty stable, pretty strong and they had a strong balance sheet and they’ve leveraged that. And not all that is true with Nokia anymore. So not to say that it couldn’t do a fixed price deal, there is a level of complexity in it now, because you need to figure out what their shipment success or sales success is going to be. So it’s hard to predict which one would be again, we’re largely indifferent, but it’s probably more of a jump ball now than it was before.

Unidentified Analyst

And to the extent what would be the probability of layering on an LTE agreement post a win, if that was the case?

William J. Merritt

I think, the same as with LG, I think any resolution with Nokia now would likely include LG – LTE as well.

Unidentified Analyst

Great. Thank you.

Operator

Our next question comes from Brett Simpson of Arete.

Brett Simpson – Arete

Thanks so much. I have a question just on the cash movements last quarter. Can you maybe just breakdown how much of the revenues came from deferred revenues and how much came from cash receipts and maybe you can also disclose if there’s was any prepayments that you received in the quarter?

Scott A. McQuilkin

Yes. No prepayments received in the quarter and $95 million or so of total revenue you will see on our cash flow statement I think it’s in the press release that we recognized $74 million of deferred revenue.

Brett Simpson – Arete

So the balance about $21 million came from cash payments in the quarter?

Scott A. McQuilkin

I think it was slightly higher than that, but yes, that’s not far off. And that was certainly a below average quarter for us. It goes up and down depending on timing of certain receipts from different licensees. As I said, if you go back through 2010, take out Samsung, which is $200 million, you end up with about $170 million of cash receipts or roughly $43 million or so a quarter.

Brett Simpson – Arete

Okay. So just trying to understand the run rate of cash inflow for InterDigital. The Japanese, they’re the ones that are mainly paying cash to you on quarter-to-quarter basis. Is there any other licensees you can disclose that are in the same – paying on a quarter-to-quarter basis?

Scott A. McQuilkin

The Japanese, certainly, yes, big part of it. We don’t normally disclose specific licensees in the terms of their agreements, if there are others.

Brett Simpson – Arete

Okay. So if I look at the last quarter, you had negative free cash flow of about $38 million and just looking at the guidance for revenues, if we assume that you’re coming around the guidance level and there’s no new deals to boost the cash receipts. Can you give us a sense for how the free cash position looks in the March quarter?

Scott A. McQuilkin

All right. Yes. I would say not markedly different. As I said, the Q4 was probably below average in terms of our typical cash receipts and cash spending prior to taxes, that’s going to be relatively stable. And obviously, no credit in there for any new deals that we would do.

Brett Simpson – Arete

Okay. And just looking at your tax solutions business, if we back out what you sometimes disclose around the same, it look likes your Infineon business has dropped off in the last few quarters and you’ve also suggested that the $9 million deferral is related to tax solutions, so I’m sort of putting two together, but can you just give us a bit of backgrounds in terms of why we’re seeing this drop-off at Infineon?

William J. Merritt

Well, we kind of gave you the number for Q4 for the IP licensing activities associated with engineering services. So you can back that out and future revenues from that activity will depend on additional deals through the sale of additional services to those customers.

In terms of the deferred revenue that we backed out, we’d say approximately $9 million or so, that reduction came in the third and fourth quarter, so there’s about $4 million or so backed out in Q3, close to $5 million backed out in Q4. So that gives you an idea of the cash that’s coming in that we are not choosing, not to recognize as revenue at this point. Conservatively, I believe that probably it provides a pretty good explanation for why you see that going down over time.

Brett Simpson – Arete

And this is a technology solutions deferral essentially?

William J. Merritt

It is.

Brett Simpson – Arete

Okay. Okay, super. And one other question, your absolute royalties in the quarter fell excluding technology solutions despite the boost from smartphone. Can you just maybe tie up what was the puts and takes here, because you can clearly see (inaudible) in the next and HTC is doing well of late, but what’s been declining in there?

William J. Merritt

Yeah, well, you know, actually I think the royalties for the quarter were very, very strong. The way I would think about it is, we had about – we reported total revenue 95.3, okay. Take out LG, which is 14.4, take out the IP licensing, which is 8.2 and you get 72.7, okay. That excludes, any credit for LG, any credit for IP licensing, any credit for new deals we do this quarter. So you start with about a base of 73.

I’d say as a perspective, I would compare that with our guidance right now which again doesn’t give credit for any of those new activities we might do of 76 to 77. So the way I think about it is our guidance on an apples-and-apples basis excluding those items is up four to 5% sequentially for the quarter. So we’re seeing good solid growth there.

Brett Simpson – Arete

Thanks so much.

Operator

Our next question comes from Eugene Fox of Cardinal Capital Management.

Eugene Fox – Cardinal Capital Management

Thanks. I was just wondering whether the turmoil at – within the management of Nokia has presented a challenge for you all working with them, but if there’s a change there does that represent an opportunity?

William J. Merritt

A couple things with respect to Nokia. You’re right, any time you have shifting around in management like they’ve had, obviously you have to deal with that and sometimes there’s new people, new places and you have to get used to them. And so there is certainly little bit of that going on with respect to Nokia.

Generally though, I’d say the fact that Nokia does not command the same position in the market is helpful. If you think about it, they used to have 40% market share and people predicted they would have similar market share for ongoing 3G and with that dominant market share (inaudible) and IPR included base, commanded a discount. So in effect we are giving a discount to a good portion of the market. We’re then losing that market position and I can tell you this is true for parts lenders they don’t command the discounts any more, so to that extent Nokia’s change in fortunes is helpful to us.

Eugene Fox – Cardinal Capital Management

Thank you.

Operator

At this time we have one question remaining in queue. (Operator Instructions) Our next question comes from Ron Shuttleworth of M Partners.

Ron Shuttleworth – M Partners

Hi, guys. A quick follow-up on the amortized royalties for 2012. In the last 10-K you indicated that there’s about $110 million of fixed price and royalties to be amortized in 2011. Is that still consistent? Has that changed?

Scott A. McQuilkin

Yeah, well, it has changed, the biggest change is going forward, we won’t be – until we renew LG, there’s about $14.4 million of fixed revenue that we were amortizing for LG that is no longer in the books.

Ron Shuttleworth – M Partners

Okay. And what about 2012?

Scott A. McQuilkin

2012, I would say that that’s not markedly different, only because the Samsung deferred revenue will continue through the end of 2012. And in terms of some deferred revenue from pre-payments that I expected, most if not all of that will continue through 2012.

Ron Shuttleworth – M Partners

All right. So when you did the last 10-K, $110 million, you actually included LG?

Scott A. McQuilkin

Yes. Yes. I think so.

Ron Shuttleworth – M Partners

Okay. All right.

Scott A. McQuilkin

I’m not sure I understand your question, Rob. You’re pausing.

Ron Shuttleworth – M Partners

Yeah. Well, I think the last – so the last 10-K that was published you indicated the amortization, so it was --

Scott A. McQuilkin

The one that – so there is a 110 include LG?

Ron Shuttleworth – M Partners

Yes.

William J. Merritt

No.

Ron Shuttleworth – M Partners

Say that again.

Scott A. McQuilkin

Okay. Well, I’m beeping.

Ron Shuttleworth – M Partners

I didn’t hear you actually. I didn’t.

Janet M. Point

The part where we talked about the expected amortization going forward for the K?

Ron Shuttleworth – M Partners

Yeah.

Janet M. Point

Yeah, the numbers for ‘11 are primarily Samsung, which is $100 million.

Scott A. McQuilkin

For ‘11, I’m sorry. That’s where I misunderstood. The number for ‘11 would not include.

Ron Shuttleworth – M Partners

Okay.

William J. Merritt

Okay.

Ron Shuttleworth – M Partners

Okay. All right. And so that’s pretty – so you expect that to continue to be the same going forward?

William J. Merritt

Yes, roughly. I mean we obviously have puts and takes every quarter.

Ron Shuttleworth – M Partners

Right. Okay. Thank you for clarifying that. I’m done.

Janet M. Point

All right. Feel better.

Ron Shuttleworth – M Partners

Yes. I apologize about the cold, must be a Barcelona thing. I don’t know.

William J. Merritt

Thanks.

Scott A. McQuilkin

All right, thanks.

Operator

And we do have one more question at this time. That comes from Bill Nasgovitz of Heartland Funds.

Bill Nasgovitz – Heartland Funds

Good morning and congratulations on a terrific year.

William J. Merritt

Thanks, Bill.

Bill Nasgovitz – Heartland Funds

Could you just run through what if you lose – what if we lose Nokia, what are our alternatives?

William J. Merritt

I think we’re in a pretty strong position sort of regardless of which way it goes and I think that’s reflected by the fact that the licensing program has continued notwithstanding the sort of this deal with Nokia.

So couple of things that can happen is, obviously, we win and that would be very positive event. If the Appeals Court would reject our appeal, as I’d mentioned before, we’ve already taken the patents back to the patent offices, had new patents issued that addressed the concerns that Nokia raised.

On top that, we have other parts of the portfolio, which are very strong and getting stronger. So there is a whole another set of patents that you can leverage against Nokia. So it doesn’t have any meaningful impact – a loss doesn’t have any meaningful impact on the licensing program.

I think a win is – would be pretty positive in terms of timing on Nokia because I think it creates some significant change in the risk profile there. And I think, it would also have a good effect on other licensees, but today, they’re moving along regardless of the Nokia event.

Bill Nasgovitz – Heartland Funds

All right. Thank you.

William J. Merritt

Thanks, Bill.

Operator

And at this time there are no further questions.

Janet M. Point

All right. Well, thank you everyone for dialing in on our call and we are certainly here and available to answer any additional questions if you have them, so we’ll talk to you again soon. Thank you.

Operator

And this does conclude today’s conference call. We thank you for your participation and have a wonderful day.

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