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Executives

Janet Point – IR

Bill Merritt – President and CEO

Scott McQuilkin – CFO

Analysts

Amir Rozwadowski – Barclays Capital

Charlie Anderson – Dougherty & Company

Michael Cohen – MDC Financial Research

Ron Shuttleworth - M Partners

Jonathan Skeels – Davenport

Brett Simpson – Arete Research

InterDigital, Inc (IDCC) Q1 2011 Earnings Call April 28, 2011 10:00 AM ET

Operator

Good day, everyone and welcome to the InterDigital First Quarter 2011 Conference Call. As a reminder, today's call is being recorded. At this time I'd like to turn the call over to Ms. Janet Point. Please go ahead.

Janet Point

All right. Thank you, Dana. And good morning, everyone and welcome to InterDigital's first quarter 2011 earnings conference call. With me this morning are Bill Merritt, our President and Chief Executive Officer, and Scott McQuilkin, our CFO. Consistent with last quarter's call we will offer some highlights about the quarter and the company and then open up the call for questions.

Before I 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 press release published yesterday as well as detailed in our annual report filed on Form 10-K/A for the year ended December 31st, 2010 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 as except as required by law we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

In addition, today's presentation contains references to free cash flow, a non-GAAP financial measure. A schedule setting out a reconciliation of free cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measure, is included at the back of our earnings release that we issued yesterday. This release has also been posted in the Investor Relations section of our website at interdigital.com.

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

Bill Merritt

Thank you, Janet. And good morning to everyone. As you saw in last night's release, we delivered a solid first quarter. While our total revenue was down sequentially that was driven by the absence of any current revenue from LG. As I will discuss later, discussions on renewing that agreement continue.

Other than that, we actually saw strong growth with our per-unit royalties, which grew 11% quarter-over-quarter and 32% year-over-year. So the core business is in very good shape.

With that, I want to focus on three things. First is a bit more detail on our licensing discussions. Second, I wanted to address our recent capital raise. And third, I want to talk about how we believe the added capital can help drive our core terminal unit licensing business.

First, on licensing, we continue to have a deep pipeline of discussions, falling basically into three groups. The first would be the discussions with the top unlicensed manufacturers like LG. The second group contains other unlicensed terminal unit manufacturers.

The scope of the discussions being discussed in both of these groups are generally the same – multiyear deals covering 2G, 3G and LTE technologies and all types of connective devices, whether they're handsets, laptops, tablets or other consumer electronic devices.

The third type of discussions we're having are with existing customers for 2G and 3G, which now need to upgrade to LTE, some of whom may also need to extend their license terms. In these discussions we are leveraging our 2G portfolio, our deepening 3G portfolio, as well as our LTE portfolio.

We highlight a broad range of inventions covered by patents, issued and patent applications filed all over the world. Based on the quality and quantity of the patents discussed, as well as our continuing pipeline of inventions, we leave little doubt that InterDigital is a significant contributor to the worldwide cellular standards.

Given all that, it's not surprising that the nature of the discussions generally comes down to economics. For both sides, these discussions pose some challenges, since whatever deal is struck can have financial ramifications both directly from the deal but also as – from the impact of the deal on other patent licensing arrangements.

For the prospective customer, InterDigital is not the only company from whom it must take a license. So, whatever deal it strikes with InterDigital can become at least a reference point for deals that others may seek.

The same is true for us. Whatever deal we strike with one party, can become a reference point for deals with others. Hence, if we do the correct deal this multiplier effect can be very powerful in a positive way. The reverse is also true; which is why we take our time in getting the right deal done.

As we all know, the value of the business is driven by the royalty rates we achieve in our market penetration. To build the most value overtime, it’s important that we be patient and remain firm.

Intellectual property is a precious asset that takes time to build, time to bring to market and time to create value. For these reasons, we are holding the line on the royalties we are seeking to secure with those royalties being fair and consistent with the value we now bring to the table.

More specifically, we are continued – seeking to continue our 3G program and to modestly increase our rates for LTE. With time and persistence on our part, customers come on board, like Acer in the first quarter of this year. We expect others will do the same.

As they do, we expect to see our revenue steadily increase due to our increased market share as well as the substantial uptake in 3G-enabled devices. Of course, it may be uneven along the way, as it can be with licensing models. That said the long-term story is very compelling.

Indeed, probably the most compelling part of this story which is not new, but that we highlighted for new investors in connection with the convertible debt offering was the significant revenue and profit opportunity we have. We already have the patents. The 3G market is already there and rapidly growing and LTE is now on the way.

All we have to do is sign license deals for our inventions that are already in use in billions of devices across the cellular market. If we can do so and we have a successful 10 year track record in doing so, we can substantially grow our revenue, with the bulk of that revenue net of tax, dropping to the bottom line.

Which brings me to the next topic. The capital raise we completed in early April was extremely successful on all measures. The demand for the bonds was very strong, giving us the opportunity to upsize the deal the terms were very attractive to us, essentially debt at 2.5% with an attractive conversion feature that with the help of the related call spread transactions, eliminates any net increase in outstanding shares from the transaction until our stock exceeds $66.35 per share. The bonds also continue to trade very strong.

As a result of the capital raise, we have seen an increased investor interest from high-quality accounts. While the convertible offering was privately marketed to the convertible portfolio managers at major investment firms, we've found that the equity buyers in those firms also participated in the conference calls and meetings. The result was that not only did the companies participate in the convertible debt offering, but we believe they also began to buy equity directly.

The capital raise process also helped to raise our profile across the market, as evidenced by an increase in demand for meetings and participation in conferences. We have believed for some time that the company is under recognized and underappreciated.

The capital raise, as well as the Nortel auction process which I'll discuss in a bit, have certainly raised our visibility within the capital markets both with buyers and potential high quality analysts. The impact of all this should be better market clarity regarding our business, its success and its additional potential, which we believe ultimately translate to higher shareholder value.

Moreover, our story has become more compelling now that the market recognizes intellectual property as an asset class and respects companies that know how to build and monetize these assets.

Of course, first and foremost, the capital raise has provided us with added cash, which we are confident we can deploy in highly value-creating ways. First, as a general matter, licensing businesses are businesses of scale. The more quality assets you bring to the licensing discussion, the higher rates you typically get.

We have experienced that directly at InterDigital. For 2G we brought a smaller portfolio of 2G related patents, backed by a company of smaller size. Roughly, we received close to $1 billion in royalties for that portfolio.

When it came to 3G products, we brought a 2G portfolio and a larger 3G portfolio and we were bigger. The net result is that we increased the rates we received and as a result have already collected almost $2 billion for 3G products and that is from only 50% of the market and that market is still growing rapidly.

For LTE we bring a third portfolio, our LTE portfolio and we are also bigger. So again, we are looking to push the rates up. And as we have spoken about many times before it takes only a modest step up in rates to achieve a significant step up in revenue.

Indeed, a rate increase of just 0.1% would result in an additional $1.2 billion in revenue on a net present value basis, based on sales of 3G and LTE enabled handsets over 10 years. On average, that is over $150 million in additional revenue per year assuming the entire market is licensed.

So consistent with our experience, we believe if we can purchase the right patent portfolio with meaningful size or the right company with such assets, it can quickly translate into higher rates and deliver substantial value to shareholders. We believe such assets are on the market and more will come.

One such asset, of course is the Nortel patent portfolio, which we have spoken about before. As you all read, Google was the – there’s stalking horse bidder with a bid of $900 million. Obviously the bid reflects the ever increasing value of patents in the mobile space, which itself reflects very positively on InterDigital.

As we have mentioned before, while the Nortel patent portfolio reflects the rich tradition of invention at Nortel, that invention was spread across many markets, wireless, wireline, security, et cetera.

InterDigital has been focused on fundamental invention in cellular. As a result, we believe our portfolio there to be deeper and stronger. Moreover, our portfolio continues to grow and develop and many of the inventions and families of technologies have shown their worth in licensing.

That said, we continue to be interested in participating in the Nortel process through the right partnership. Those opportunities continue to exist and it may provide us the opportunity to secure a meaningful portion of the Nortel asset. Of course, we would only do at an appropriate price and we'll see how all that plays out.

The capital raise was not all about Nortel, however, given the spotlight being placed on patents generally and in mobile particularly, we believe the supply of patents that will come on the market will increase. Scott and I have spoken about this and he remarked once that it is pretty basic economics. If the demand for patents increases, so will the supply. We are seeing that now, as many companies are evaluating their patent assets and deciding whether they should sell them.

As the supply increases, I believe InterDigital can leverage certain key skills into value for its shareholders. First, we are very adept at analyzing patent portfolios. Given our experience in licensing and litigation we know what to look for and what to avoid. Second, because of our R&D and standards skills, we can take a patent portfolio and enhance its value overtime, contributing the inventions into worldwide standards.

Third, as a partner for our company looking to secure profit for its patent portfolio, we are probably one of just a few companies that have actually secured high value licenses in the mobile space. This makes us an attractive partner. For those reasons, we are seeing an increase in the patents that are available to buy, which is why we believe having additional capital on board is a strategic plus.

All-in-all, the business is in very good shape. We continue to deliver solid financial results, we have a very solid plan to grow our revenue and profit and we also have the cash to accelerate our growth through the right investments and we have a growing market appreciation of who we are and what we do.

With that, let me turn the call over to Scott for the details on the first quarter financial.

Scott McQuilkin

Thanks, Bill. I'm pleased to report solid results for first quarter 2011. Revenue totaled $78.5 million, net income was $23.3 million and diluted EPS was $0.51. While these results represent a decline from the previous quarter, as Bill mentioned we believe that this is a temporary issue driven by the timing of getting new agreements and renewals in place.

As we have said before, the value in building a successful licensing business is recognized over a longer time and it is necessary to continue negotiations until the appropriate value’s obtained.

Our revenue consists of three components, current patent royalties, past sales royalties and Technology Solutions revenue. Current patent royalties were $74.6 million in first quarter 2011 down $3.4 million from first quarter 2010. The decrease was due to the absence of $14.4 million of revenue from LG Electronics, which became subject to renewal at the end of last year.

Excluding the impact of LG, our current patent royalties increased by $11 million or 17% from first quarter 2010 to first quarter 2011. On a sequential basis, our current patent royalties without LG increased 5%.

Per unit patent royalties accounted for $39.5 million or 53% of current patent royalties in first quarter 2011 and increased $9.5 million or 32% from first quarter 2010. This increase was driven primarily by growth in customer smartphone product sales.

Our fixed fee patent royalties revenue was $35.2 million or 47% of current patent royalties in first quarter 2011. Excluding LG, fixed fee royalty revenue increased by $1.5 million due to the addition of a new customer in second quarter 2010.

As you may expect, we have received a number of inquiries about the impact of the Japanese earthquake and tsunami. The full extent of the impact is still unknown, but early evidence indicates that it may well be moderate and temporary. Any disruption to handset sales because of issues in the supply chain could have an impact on the entire industry.

In addition, sales of products inside Japan either due to manufacturing or lack of customer demand could see some impact. With respect to sales of products by Japanese OEMs, our per unit royalties from customers based in Japan accounted for $16.7 million of revenue and $16.5 million of cash receipts in first quarter 2011.

As most of you know, we report our per unit royalties on a one quarter lag basis. Per unit royalties that we recognized as revenue in first quarter 2011 were based on our customer sales in fourth quarter 2010, therefore our first quarter revenue did not reflect any impact from the recent earthquake and tsunami in Japan. Because these events occurred late in the first quarter, we expect that the impact of these events on second quarter 2011 total revenue will be modest.

Past sales royalties were $2.3 million in the first quarter of 2011, compared to $35.7 million in first quarter 2010. The first quarter 2011 amount reflected the results of a routine audit of an existing customer as well as past sales recognized upon signing a new license agreement.

The unusually large amount of past sales royalties in first quarter 2010 was due to a new patent license agreement with Casio and the results of a routine audit of an existing customer. Technology Solutions revenue was $1.5 million in first quarter 2011 down from $2.4 million in first quarter 2010.

In the last three quarters, our Technology Solutions revenue has been affected by a dispute regarding the royalties owed on specific product classes under one of our agreements. While we continue to be paid the entire amount owed under the agreement, we’re deferring revenue recognition on royalties for these product classes until we conclude the related arbitration or otherwise resolve the issue.

Through March 31, 2011 we have deferred approximately $12.8 million in related revenue. Consistent with past practice, we will provide guidance on our revenue expectations for second quarter 2011, after we have received the applicable patent license and product royalty reports.

Turning to the expense side, first quarter 2011 operating expenses were $41.2 million, a $0.4 million decrease from first quarter 2010 the change was primarily due to three factors. First, our intellectual property enforcement costs decreased from $6.6 million in first quarter 2010 to $3.8 million in first quarter 2011.

Second, long-term compensation costs decreased by $0.7 million due to a first quarter 2010 charge to increase the accrual rate for a period under our long-term incentive program. And third, these decreases were partially offset by a planned $2.9 million increase in expenses associated with the resources that drive the development and licensing of patents.

Our balance sheet continues to be very strong. We ended first quarter of 2011 with $527 million in cash and short-term investments; a $15 million decrease from $542 million at year end is due to timing of cash receipts.

In April 2011, we completed the issuance of $230 million of 2.5% senior convertible notes. Because this transaction closed after the end of first quarter 2011, it will be reflected in our second quarter 2011 financial statements. We will provide more detailed disclosure of the accounting treatment for the note transaction, as well as related hedge transactions, in our first quarter 10-Q, which we expect to file in the next day or so.

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 back over to Janet.

Janet Point

All right. Thank you, Scott. Before we open up to questions, I'd just request that folks ask one question and then hop back in the queue, so that we can accommodate as many folks as possible.

So, with that operator, if you want to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll take our first question from Amir Rozwadowski.

Amir Rozwadowski – Barclays Capital

Thank you very much. And good morning, Bill, Scott and Janet.

Janet Point

Hey, Good morning.

Scott McQuilkin

Good morning.

Amir Rozwadowski – Barclays Capital

Bill, you talked a bit about the renewal process right now with LG and highlighted that oftentimes a lot of your renewal processes or what goes on with one licensee can impact what happens with another. I was wondering if you could talk to us about sort of the characterization of the LG renewal and whether or not they themselves are waiting to see certain resolution that maybe occurring with your discussions with other licensees or potential litigation. And if that could ultimately impact the overall economic value of the LG deal?

Bill Merritt

Sure. And obviously the licensee never tells us everything that's going on inside their head? What I can tell you though is that I think that if you look at the overall mix of sort of top tier licensees we're dealing with them, right. What I like in terms of those discussions I think that they're focused on the right issues. We're operating at the right level within those organizations. So, you're not sort of buried down in the weeds in the organizations, you're up at the right levels.

I think our presentations in terms of patents, is very strong. I went through the LTE presentation actually and it's very strong in terms of what we have, in terms of issue patents. And so, I think all of that's very positive. I think that folks probably, as I've said before, are observing the Nokia situation. Whether they're waiting for that decision or not, it's hard to say, because I think that's sort of a double-edged sword.

If it's a positive decision in our favor, we continue to believe we should win that case. That certainly can have an economic effect on the customer. The reverse of that is, we're already in a situation where we've lost below, so we actually don't view a negative decision as changing the economics that we've offered to folks. But the other side could think that. And so, I think you have a lot of things going on out there – what people look at. You're right that also, in terms of these discussion, it's – they need to look at the cumulative effect of what a deal with us can mean in terms of other deals that deal with others and then how that translates into their competitive positioning with other folks.

So, I haven't seen anything unusual in what's going on now. These are high value discussions and they take time. But, consistent with what I've seen in 15 years here, that they're kind of moving in a way that it tells me that we have a good shot at getting these things done on the right terms. And that said, we always have the option, if we want to exercise it, to push things along through litigation if we need to go down that path. And you could be assured that we're always ready on that side too.

Amir Rozwadowski – Barclays Capital

And if I may just clarify a quick point there, Bill, if I think about the pool of assets that you folks are discussing right now with LG, is it stand to reason that they have validated your pool or recognize that that pool of assets is – of the certain level of value? Or are you still, as you transition to 3G and 4G discussions, still in the sort of proof point, standpoint where you need to introduce the new licensees or, pardon me, the new technologies and sort of demonstrate their value there? I'm just trying to understand how they're viewing your assets at the moment.

Bill Merritt

Sure. To break the assets down to two components, you have 3G assets and the LTE assets. They already took the license for 3G. And so, I think they validated that when they took that license last time.

Now, what will go on in these discussions, because it's what patent lawyers do, is they will continue to take shots at assets, which is fine, because we're able to respond very well to that and it actually helps us build our case against them to the extent if we're able to provide that very high-quality response. So, there's – that will always go on. But on 3G I think it's already been validated by the prior agreement.

LTE obviously is new technology and so there, with all the customers, we're needing to go through the presentation. And I think they're – there's two components of what we can pitch. It's the very detailed claim charts and showing how our patents map directly to the standard and I think that is, as I've mentioned before, a very compelling presentation.

And we do get feedback from licensees on that and actually that feedback is very useful for us, because to the extent they do spot any issues, because of the way we manage our portfolio. We can then address those issues and typically the patents end up being stronger as a result of that process.

We can also, though, point to the external reports on the portfolio. We're very careful. We don't endorse those reports, because then we don't know exactly how the evaluations were done. But there hasn't been a report put out by a third party that says that InterDigital is other than on – in the top class on LTE patents.

So, I think that's also very helpful for a prospective licensee, because ultimately they've got to take the economic proposal up to their senior management. And if you can show very specifically on certain patents, how you read on the standard and then generally how the industry views the portfolio, I think you've got a pretty good case for getting that economic proposal approved.

Amir Rozwadowski – Barclays Capital

Great. Thank you very much for the incremental color.

Bill Merritt

All right. Thank you.

Operator

We'll go next to Charlie Anderson with Dougherty & Company.

Charlie Anderson – Dougherty & Company

Good morning, everyone. Thanks for taking my questions, or question, I should say. So, Japan. I'm curious – you obviously have a number of licensees there, like Sharp and NEC, et cetera, who don't sell all of their phones inside of Japan. I wonder if you can maybe help us quantify, how much of that is domestic sales and that being sort of the piece, we should really pay attention to, as we kind of see what the demand situation shakes out as?

Scott McQuilkin

Yeah, Charlie. I would say – I mean, the key licensees we have over there are Sharp, NEC, Panasonic, Kyocera, in terms of per unit licensees and with the possible exception of Kyocera I'd say most – vast majority of their sales are in Japan.

Charlie Anderson – Dougherty & Company

Got it. And then for everybody else, your few other per unit licensees – have you been able to determine sort of their Japanese exposure yet?

Scott McQuilkin

We haven't looked at that specifically. I would say for the others, their sales are very much global in nature. Japan represents a fairly small percentage of the – certainly of the 3G market overall.

Charlie Anderson – Dougherty & Company

Great. I'll hop back in. Thanks.

Operator

And we'll go next to Michael Cohen with MDC Financial Research.

Michael Cohen – MDC Financial Research

Good morning. To date I believe I've just seen two licenses on 4G. I believe it was Pantech and Acer. I was wondering if you can confirm if that's the total amount that you have currently licensed in 4G or is there anybody else?

Bill Merritt

No. Those are the two.

Michael Cohen – MDC Financial Research

Okay. Next question is, you’ve seem like you're very positioned to acquire more patents that weren't internally developed. Are you looking at any areas outside your core focus area, 2G, 3G and 4G? Would you be open to potentially synergistic areas or other areas?

Bill Merritt

Yes, we would.

Michael Cohen – MDC Financial Research

And my final question is, could you describe some of the areas that you might consider asset purchases?

Bill Merritt

I don't want to get into too much detail, but I would tell you that generally the types of things that would be attractive to us. One would be – it would be, I think, useful for us to expand our coverage on the device, right? The handset, so we have a lot of focus in terms of the modem technology, the 3G modem technology.

But there's a lot of other connection technology and a lot of other just high-value property on that device. So, to the extent, I think if we could expand into other parts of the device, I think that would be a good plus in terms of the licensing program.

I think the second is, areas where there can be synergy between the development we do on the wireless side and whatever that other technology may be. And it could be that we understand, for example, the radio link very well. And our understanding of that link allows us to enhance the performance of some other feature on the device, in a way that ultimately enhances the performance of the device. And so, not only it is giving us greater coverage but it's allowing us to leverage, sort of, our historical skills. And I think there's some good assets in both of those categories in the market.

Michael Cohen – MDC Financial Research

Is it fair to say that you wouldn't focus on any technology that might bring you to additional types of licensees? It would still be your core target based license?

Bill Merritt

I think it – we'd like to do both, right? So, I think if you can find assets that, one, drive the core terminal unit licensing business, but then had an extension into an adjacent space and I'll just use an example. For example, a Bluetooth technology or some other connection technology. Obviously very resonant on handsets, but Wi-Fi technology is also pervasive in lots of other devices too, so you could – it could allow us to begin that expansion of the licensing program into those adjacent markets while also driving the core business.

Michael Cohen – MDC Financial Research

Okay. Great. And good luck on your upcoming CAFC decision.

Bill Merritt

All right. Thank you.

Operator

And we'll take our next question from Ron Shuttleworth with M Partners.

Ron Shuttleworth - M Partners

Hi, folks. How are you?

Bill Merritt

Good. Thanks, very well.

Ron Shuttleworth – M Partners

Good day. I guess I'm going to ask my one question. I've got a bunch, but I've got to pick one, I guess. So, let's talk about the Acer license. You announced it in the first quarter. When do you – when will we start seeing the impact of that license showing up in performance and is it going to be a license that will eventually hit the 10% mark?

Bill Merritt

Well, I think since we signed it in the first quarter, what you would have seen in the first quarter is any past sales associated with that agreement and then the per unit revenues will begin to hit in the second quarter as they report. And we'll see how they do in terms of sales.

Ron Shuttleworth – M Partners

It's for – just to confirm, that's for 2G, 3G and 4G?

Bill Merritt

Yes. It was all three technologies.

Ron Shuttleworth – M Partners

Okay. And that's related to tablets as well as their netbooks and laptops, correct? It's all of their hardware?

Bill Merritt

I don't know what we disclosed in terms of the actual connective devices there. But we'd have to go back and look at the press release and see what we actually disclosed. I know we disclosed the technologies.

Ron Shuttleworth – M Partners

Is Seiko a 4G licensee, or is it just 3G?

Bill Merritt

Seiko was initially just a 2G and 3G licensee because that was their current product mix at the time, we negotiated that deal. So, they would fall into the category of customers where, as they move to LTE, they need to be upgraded.

Ron Shuttleworth – M Partners

Okay. All right. Thanks and I'll jump back in the queue.

Bill Merritt

Okay. Thanks.

Operator

And we'll go next to Jonathan Skeels with Davenport.

Jonathan Skeels – Davenport

Hi. A two-part question on acquisitions. First, just what is your buying power right now, I guess, with the cash and the convert and how much cash do you want to keep on the balance sheet? And then secondly, on the acquisition front you mentioned partnership opportunities. Are these primarily just with other patent entities or also with operating companies where you could jointly acquire portfolios? Thanks.

Bill Merritt

I'll take the second part. Later, Scott can handle the first part. On the second part, in terms of partnerships, it would be both. Certainly there are patent acquisition companies out there that could make attractive partners for acquisition opportunities for us.

But we also see the benefit of partnering with strategics – operating companies out there, because it could be that the patent acquisition can be part of a larger relationship between the parties. So, we actually would include both types of companies in terms of potential partners.

Scott McQuilkin

Yes. On the capacity, we finished up the quarter with, I think, close to $530 million in cash. The net cash we brought in from the financing was a little over $210 million, so I think we got $740 million if you put those two numbers together. We're happy with that number. We think that provides us capacity to pursue opportunities, both immediate and potential.

I would say that that cash is not all discretionary cash. We've kind of laid out before that some of that is cash that we keep on the balance sheet just to make sure we have a strong and flexible position. We think that's important in terms of executing on our licensing program. But still, I think that provides us with a significant amount of discretionary cash.

The other thing I would point to is, to the extent that we wanted to use stock in a transaction, if it were something other than cash, we have that as an option, although given the kind of cost to capital that you see on the convert deal, we think that's a very cost-effective and I'll say shareholder-friendly way to finance an acquisition. So, I think basically we're in good shape. We're happy with that. We have no immediate plans to raise additional capital.

Jonathan Skeels – Davenport

Thanks.

Operator

And we'll go next to Brett Simpson with Arete Research.

Brett Simpson – Arete Research

Yes. Thanks very much. Bill, just – I’ve got a question on HTC. When I look at the 10-K filing back in 2009, for example, I see that InterDigital booked about $15 million from Taiwan and HTC was almost all of this, so – back half with them shipping over $12 million on a quarter adjusted basis, it's about $1.25 per unit or so. When I look at the December quarter just gone, HTC shipments were about $9 million – just over $9.5 million and you've booked $8 million from them, so translates to about $0.85 with these guys and just like to understand why this sort of deflation is happening in some of the key OEMs and – yes, maybe you can – I've got a quick followup.

Bill Merritt

In a way, I think – I'd have to go back and check your number, because that – your last statement that there's deflation happening at the key OEMs – I'm not sure that that's correct. And I think you got there by making some calculation on the front end which I'm not sure is correct either.

Brett Simpson - Arete Research

Okay. Okay.

Bill Merritt

So, I think you'd have to go back and check your math there. Generally, we're very happy with how HTC is performing as well as RIM. I think the returns we're seeing there are very solid from those companies, obviously driving good revenue for us. And so, again, I'm not sure if that’s the way your starting foot for your analysis was, so we can certainly follow up with you on that, if it makes sense.

Brett Simpson – Arete Research

Well, maybe just to turn it around a little bit. You said in your prepared remarks that as the business gets bigger, you can get higher rates going forward and maybe you can just sort of pinpoint where we might be seeing that in the business today? What sort of indications as you're comparing sort of 3G to 2G on a like-for-like basis, where the rates are specifically going up in your favor?

Bill Merritt

Well, to date on LTE, for example, we've seen – we've been able to secure higher rates, okay? So, obviously LTE shipments are not large in quantity right now. So they're not going to show up in – be meaningful in the revenue line yet.

3G, we've actually been holding our program there. Obviously, the royalties are a result of two things, all right? I mean, royalties are a result of both the rate and the selling price. And so, to the extent the selling prices decline on a certain vendor, then even with the same rate, the per unit will come down, right.

Brett Simpson – Arete Research

Okay. Thanks very much.

Operator

(Operator instructions). We'll go next to Charlie Anderson with Dougherty & Company.

Charlie Anderson – Dougherty & Company

Thanks for allowing the followup here. I know and it sounds like, Scott, you want to sort of wait to the cue on sort of the impact of the deal, but I wonder if you could just share a little bit on sort of diluted impacts there – sort of, cost of the hedge and how that impacts things and maybe tax rate as well? That would be helpful.

Scott McQuilkin

Sure. Yeah, on the – the accounting is a little bit complicated, but fundamentally what you do is you take the $230 million, split it between a straight debt component and an equity component. And you recognize interest expense for book purposes on the debt component at an arm's length rate.

So, for book purposes we will probably end up with $170 – $187 million of debt. We're applying a 7% market rate to that. And that gives us interest expense of about $3.6 million pretax per quarter. And we will tax effect that expense. There will be no increase in shares on a fully diluted basis, if and until our price goes up above the, I think $66 that Bill referenced.

Charlie Anderson – Dougherty & Company

And then what about the cost of the hedge? Will there be an income statement impact there, maybe amortizing some of that?

Scott McQuilkin

Yeah. Yes and no. I mean, basically the – all the transaction costs are reflected in the discount on the debt and therefore we essentially amortize those straight line over the five-year length of the debt. And that is included in the $3.6 million that I referenced.

Charlie Anderson – Dougherty & Company

In that 7%. Got it. Okay. And then just a real quick followup on the balance sheet. I just noticed just some new and different revenue. You added some here. Could you just tell us kind of total cash receipts, what they were in the quarter and if you could put that in the bucket of fixed fee and per unit that would be helpful?

Scott McQuilkin

Sure. Yes. The kind of simple math to get from revenue to cash receipts, you start with $78.5 million of revenue, deduct the deferred revenue component of that, which was $61.5 million and this will all be laid out in the 10-Q. Add increases in deferred revenue, which should basically be cash that we've received from customers. And then add any decrease in receivables. So, it ends up being about $45 million or so of cash receipt from customers.

In terms of per unit and this is – it is a revenue number. It's about 53%, is per unit and 47% is fixed. And I would say because that fixed amount includes a substantial amount of Samsung, which isn't associated with cash we received in the first quarter, I would say the vast majority of that cash we received was per unit based.

Charlie Anderson – Dougherty & Company

Great. Thanks very much for the color.

Scott McQuilkin

Yes.

Operator

And we'll take our next question from Ron Shuttleworth with M Partners.

Ron Shuttleworth – M Partners

Hi. Thanks again for the – taking the second call. I just want to talk a little bit about the video compression technology. I have a couple of questions around that. I understand that you now – do you have it in market testing yet?

Bill Merritt

We are working with a couple potential customers out there, so – and things continue to go pretty well. We had very successful demos both at CES and Mobile World Congress and certainly the environment out there in terms of the challenges that network operators and others – and it's not just wireless. It can be wireline as well, are facing, certainly creates the right environment. So, we're engaged with some folks and we'll see how it all goes.

Ron Shuttleworth – M Partners

And do you have any sense yet of how you're going to monetize this?

Bill Merritt

Yes. It's a good question, because there are companies out there that provide compression technology. There are certain ways that they get compensated. I think at the end of the day, we need to compare our solution to what other folks have brought into the market.

Right now, what we see is, we have a – we think we have a far superior offering and so certainly, we would want to secure compensation well above what other folks are getting in the space. And part of that, I think, can be justified in terms of, if we can demonstrate some very strong savings for the operators in terms of their CapEx and OpEx, certainly opens the door, we think, to – so, a solid deal for us, so, still early in the process, but certainly, still very encouraging.

Ron Shuttleworth – M Partners

So, what we're saying is would it be – so, in terms of monetization, would it be – it would be slightly different than a typical royalty license? It would be more of a – would it be like a transaction license? Would it be a – some sort of right of use license? How would you think that would work out?

Bill Merritt

I think we're looking at all those different approaches. At the end of the day, typically with us, we don't get too tied up into structure and more focus on value. It's a market that, while we have some pretty good information in, we're still – have some learning to do and so you may need to adapt your offering into what is sort of standard fare for that market.

So, we're all working through all that stuff. And again, while we're early in the game, the opportunity we think is moving pretty well for us and we'll see how it translates ultimately to the bottom line.

Ron Shuttleworth – M Partners

Okay. And can you disclose the percentage of the patents that you recently announced. 150 US patents, and I forget what it was, 1200 international patents in 2010. Can you disclose the ratio – how many of those are 3G, 4G, or LTE, percentage-wise?

Bill Merritt

Yes. A little hard to do, sitting here, what that number was. But generally it's going to track the R&D work in the company, particularly the filing – the US filings for the year will track the work. The issuance for the years will be a lag right. That could be a many, many-year lag.

I would say generally it's still a very healthy component of 3G patents, because there continues to be a lot of work in terms of upgrading those networks. Obviously there's a big component in there of LTE. And so, those two technologies probably dominate the landscape in terms of patent issuances and filings.

But these other areas that we've worked on in terms of compression technologies, security technologies and the higher-level stuff we've been doing in terms of network and networks is probably a good amount in that too.

Ron Shuttleworth – M Partners

Can you – is it 30/30/30, or what's the – what do you think the ratio is?

Bill Merritt

As I said, sitting here today, it'd be a little hard to give me – give you anything more –

Ron Shuttleworth – M Partners

Okay. I'll follow up later.

Bill Merritt

That's perfect. Great.

Ron Shuttleworth – M Partners

Thanks.

Operator

And we'll go next to Jonathan Skeels with Davenport.

Jonathan Skeels – Davenport

All right. Just a quick one on Nokia. Can you just remind me where – what the next steps are, I guess, depending on what the outcome is at the appellate court?

Bill Merritt

Sure. So, the next event from a litigation standpoint would be the CAFC's decision, right. And if that is favorable for us, then absent any petition for rehearing or petition for certiorari, which we – Nokia could make but we don't think would go anywhere, then the case would go back to the ITC for further proceedings there.

And back there it either could be handled by – directly by the Commission, or they could take it back to the judge and have him basically make a new recommendation based upon the direction that came from the Federal Circuit and then that would go back up to the Commission. If there – if it's not in our favor, then we obviously have an opportunity for petition for rehearing or certiorari on that; but other than that, that particular case would be over.

Jonathan Skeels – Davenport

Okay. Thanks.

Operator

And we'll go next to Michael Cohen with MDC Financial Research.

Michael Cohen – MDC Financial Research

Yeah. I also have a question about the Nokia situation. In the original claims construction that you got from the ALJ on code, signal and increased – I guess, increased power level, what you received from the ALJ – was that against what you were hoping to get at the lower investigation? And what you're seeking now from the CAFC? Is that consistent with what you were hoping to get for claims construction all along?

Bill Merritt

I think the answer to both is yes. I think it was against what we had proposed from a claim construction standpoint. With respect to the judge and what we've asked the CAFC to do, is basically adopt our claim construction.

Michael Cohen – MDC Financial Research

The same claims construction you were originally seeking out the – before the ALJ?

Bill Merritt

Yes. I believe that that's correct.

Michael Cohen – MDC Financial Research

Okay. Excellent. Thank you.

Operator

And with no further questions in the queue, I'd like to turn the conference back for any additional closing remarks.

Janet Point

All right. Well, thank you very much for tuning into our call. I'm certainly available for any additional followup questions and we'll talk to you all again soon. Thank you very much.

Operator

Thank you. And that does conclude today's presentation. We thank you for your participation.

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