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InterDigital, Inc. (NASDAQ:IDCC)

Q3 2012 Earnings Call

October 24, 2012 5:00 pm ET

Executives

Janet M. Point – Executive Vice President, Investor Relations

Patrick Van de Wille - Investor Relations

Richard J. Brezski – Chief Financial Officer

William J. Merritt – President and Chief Executive Officer

Analysts

Tim Quillin – Stephens Inc

Anil Doradla – William Blair & Company L.L.C

Charlie Anderson – Dougherty & Company LLC

Ron Shuttleworth – M Partners Inc.

Luke Labella – Barclays Capital, Inc.

Operator

Good day and welcome to the InterDigital Third Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Janet Point. Please go ahead, ma'am.

Janet Point

All right. Thank you, Mercy. Good afternoon, everyone, and welcome to InterDigital’s third quarter 2012 earnings conference call. With me this afternoon are Bill Merritt, our President and CEO; Rich Brezski, our Chief Financial Officer; and Patrick Van de Wille, who helps the Communications Group for the company.

Consistent with last quarter's call, we'll offer some highlights about the quarter, and the company and then we’ll open up the call for questions. Before we begin our remarks, I need to remind you that in this call we will be making forward-looking statements regarding our current beliefs, plans, and expectations which are not guarantees of future performance and are subject to 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 today as well as those detailed in our Annual Report on Form 10-K for the year ended December 31, 2011 and from time-to-time in our other filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof, and except as required by law, we undertake no obligation to update or revise any of them whether as a result of new information, future events or otherwise.

In addition, today's presentation contains references to free cash flow, 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 today, which has also been posted in the Investors Section of our website at interdigital.com.

At this point on our call, I’d typically turn the call over to Bill Rich, but I wanted to make some brief comments on another bit of news. As you read in yesterday’s strategy update, Interdigital has offered a voluntary early retirement program to a number of employees, one of them was me. After consideration and thoughtful reflection, I’ve decided that now is an excellent time for me to pursue other interest.

So I’ve volunteered for the program. Amazingly I’ve been with the Interdigital for nearly 20% of my life. Half of that’s been in the pleasure of working with and for Merritt. And looking at the past decade, I’m proud of what we’ve been able to built both in terms of a company that continues to have a very bright future and in the investor relations effort here. I know that I leave it in good step and that’s why on the call today with me Patrick Van de Wille who joined InterDigital early this year to lead our communications and marketing efforts.

Going forward, Patrick will be assuming responsibility for the Investor Relations function and he will be your main point of contact going forward. So I would like to introduce you to Patrick so that you can hear his voice and that he can make a few remarks in terms of (inaudible).

Patrick Van de Wille

Thanks very much, Janet, and thank you for your effects in building an Investor Relations function that is absolutely model for our industry. To the Investors on the call and listening via webcast or in the replay, I very much look forward to interacting with you all going forward.

And with that, I’ll turn the call over to Rich Brezski, our Chief Financial Officer.

Richard J. Brezski

Thank you, Patrick. Rather than simply go over our results with you, I’d prefer to spend my time today discussing some of the key financial trends within the business and provide some addition clarity to our third quarter results and our recently announced expense reductions.

The impact of the Intel sale resulted in record revenue, net income and free cash flow in third quarter 2012. Our licensing revenue was down, which come as no surprise as period-to-period volatility in our revenue is currently driven by a few per unit licensees located in Japan or selling into the smartphone market. These licensees continue to face increasing competitive pressure from Samsung and Apple. Since Samsung and Apple are currently under fixed price agreements, we recognize revenue from these agreements on a straight line basis.

As a result, a related revenue does not currently co-relate to quarter-to-quarter changes in their sales. Of course our licenses with Samsung and Apple which was signed a number of years ago are approaching aspiration at the end of this year and in June of 2011 respectively. We look forward to the opportunity to negotiate new agreements with royalties that reflect their current sales volumes.

Throughout 2012, our operating expenses have carried significant intellectual property and enforcement costs. This is the case as we move toward a February 2013 hearing in our ITC case with Nokia, Huawei and ZTE and proceed with the next steps in our successful appeal of a prior Nokia ITC decision. We don’t expect these costs to return to more normal levels until we have reached the successful settlement or decision in these matters.

Our intellectual property enforcement and non-pat litigation costs as well as the cost for patent sales drove large year-over-year increases in both our third quarter 2012 and year-to-date operating expenses. Of course the cost of patent sales was driven by a very positive event for the company. Not including these two items, those of which are quantified in our press release, our adjusted operating expenses would have been down slightly in the third quarter and up less than 5% year-to-date both versus the comparable periods in 2011.

As evidenced by yesterday’s press release, we continue to focus on expense management and have implemented significant cost reductions going forward. We expect that for 2013, these actions will lead to a $15 million to $20 million reduction of our current annualized run rate for internally funded development plus an additional $3 million to $5 million savings in administrative expenses.

I’d like to clarify some of the development related expenses. Through the first nine months of 2012, we recognized approximately $51 million of development expense. Since nearly the full amount related to internally funded projects, our annualized run rate for such projects is about $68 million. In 2013, we are targeting investment levels for internally funded development to be roughly $50 million. Of the $15 million to $20 million reduction in internally funded development projects, we expect at least $6 million to result from a voluntary early retirement plan we initiated in September 2012. We expect the remaining reduction will come from transferring development personnel to customer funded projects within our InterDigital solutions unit and if necessary through additional cost reductions.

So to summarize, our internally funded development expense target is roughly $50 million in 2013. Our InterDigital solutions unit will also work to secure new customer funding, but development expenses related to those engagements will be an addition to the $50 million internally funded development budget.

The enhancements and cost reductions associated with our technology sourcing are consistent with companywide initiatives to create a cost structure that has more flexibility and increased alignment with our revenue base. We believe this will improve our competitiveness in delivering technology solutions, enhance our responsiveness in a dynamic market and ultimately increase the value to our shareholders.

And now I’ll turn the call over to Bill.

William J. Merritt

Thank you, Rich, and good afternoon to everyone. Let me start by adding my thanks to Janet for all of her hard work over the years. Jan and I have spent a lot of time together over the years both building and telling InterDigital story. Like any job what can be a lot of fun when you're working with the pro and Janet certainly is that.

During her 12 plus years with the company, she substantially matured our Investor Relations function, she broadened our touch points in the financial industry, built coverage for the company, and also served as a sounding board for me on strategy and operational issues. She will be missed here, but also I expect has more than one encore left in the business world. On the rest of the company, wish her the best in all of her future endeavors.

Janet was also right when she commented about the company's bright future. Looking back at my 17 years with the company and my going on 8 years as a CEO, I’m more enthusiastic about our prospects now than ever before and for good reasons.

We just delivered a record quarter in terms of revenue, cash flow and profit. Equally important, we delivered on the plan we announced six months ago to diversify the revenue side of our business by adding patent sales, partnerships and joint ventures as an additional component of our strategy.

As we all know, the world of patents has changed dramatically over the past years and with new means of monetization emerging and new business models developing, owning a massive portfolio of high quality patents we understood we had an opportunity to expand our business of invention that will include more than just licensing, but we continue to be very confident in the revenue that the licensing programs and sales could generate. We just knew we could do more.

In the six months since the announcement to expand our monetization strategy, we have done just that. Driven by the very high quality nature of our patent portfolio, that effort very perfectly delivered fantastic results. First, the sale of a small patent portfolio for $9 million, then the sale of a larger patent portfolio to Intel for $375 million and we have more deals in the pipeline. Equally important, our success thus far reinforces our confidence that sales can be a continuing and meaningful part of our business going forward.

The combination of our licensing and sales efforts has now generated nearly $2 billion of revenue in the last five years and made us the top pure sales, patent sales and licensing company in the wireless market today reflecting very positively on our ability to manage and monetize patents. On Tuesday of this week, we announced the next step in the evolution of our strategy enhancing how we will obtain intellectual property which we can then monetize through a variety of channels.

Like to move on revenue diversity, this evolution of our strategy is both logical and market responsive. For a number of years, the company thrived based on its motor related research and development and its licensing programs directed at cellular terminal units. It also produced one of the largest cellular patent portfolios in the world. That said, a number of years ago we came to understand that the mobile industry would begin to encompass much more than just cellular technology. That would also involve Wi-Fi, security, compression, gesture, display, authentication and other technology to fuel its growth. And we also recognized that we could bring our business of invention to those technologies as well.

And so begin a process of evolution to the innovation side of our business. We first diversified our internal R&D teams beyond the modem to higher layers of technology. Just this week, you saw two announcements reflecting the efforts of those teams. We are almost the world’s first public demonstration of a Wi-Fi system that can dynamically and intelligently access TV wide space. As the world deals will be ever increasing demands of wireless users on the go, the ability to intelligently access underutilized spectrum has become a key technology in dealing with the bandwidth crunch. InterDigital is a leader in spectrum sensing and management technology and is driving innovation in this space.

Similarly, the company announced this week that is standardized machine to machine platform had fueled a joint M2M among a large number of the world’s leading operators and equipment providers. Like intelligently accessing white space, InterDigital has led the industry in architecting a common service layer for machine-to-machine application. And anyone who follows this industry knows how important it will be to integrate billions of new diverse wireless objects and sensors into the network.

But you also recognize that not everything needed to be invented here. So in addition to broadening our internal R&D efforts, we targeted acquisitions of small patent portfolio through spaces where we did not participate. We added more external university research. We added a diverse technical advisory committee to the company, and we launched the InterDigital innovation challenge. Each of these four areas provided us with data in terms of where innovation may lie, and what the cost and benefits both innovations may bring.

These successful efforts in broadening our internal R&D efforts and testing orders for external sources of intellectual property combined with our success, and broadening our past and market for our patterns and throughout the evolution of the strategy we announced yesterday. Other this next evolution of our strategy, we intend to further enhance the sourcing of intention is that the company can monetize and to consolidate all of our innovations sourcing under Scott McQuilkin.

Many of you know Scott, and you’ve seen how well he has performed over the years, whether he is running the finance group, working on patent licensing deals, or more recently driving the patent sales function. Scott will bring his stronger management skills and a record of success to his next role to both broadening innovation that the company has to monetize, but also in emerging areas in affected in nimble fashion.

Key to the strategy of course that the continuation of our strong internal research both in the core wireless areas while we have substantial strength, but also an emerging areas in particular areas were wireless intersects with another technology. Renamed innovation labs and led by own wireless industry veteran James Nolan, this group will continue to drive in part of both standardized and non-standardized technology.

This group has had an uncanny ability to predict next-generation wireless technologies and to successfully contribute those technologies to the wireless standards – to the industry standards as demonstrated by the two announcements this week. We expect continued success from this group. The internal innovation will be supplemented by innovation partners, a creative and exciting new approach to technology innovation.

As we all know, numerous companies can fund research or pay companies for patents. In most instances, these companies do not further to research or improve the quality of the patents protecting that innovation. That is how we would differentiate and why the name reflects partnership. As a proven innovator and the company as learn to profit from invention, InterDigital has a large and taken together unique set of skills and resources that it can bring to innovators, small companies or universities.

These skills going to system in the terms of market intelligence, access to valuable laboratory resources, access to capital, technology standardization, and intellectual property management. Combining the right assets for the right innovator, we believe we can enhance the quality of their innovation, speed as development and increase its value are affecting the entrepreneurial spirit and drive of the individual innovator or small company.

Also given what we have already seen to our university relationships, small-company M&A and the InterDigital innovation challenge, we believe there is ample innovation available in the market, and that we should be able to access that innovation at very attractive terms.

Complementing labs and innovation patents and innovation partners as a new unit focused on bringing to market the technologies emerging from the InterDigital innovations Group led by Allen Proithis, another wireless industry veteran in the InterDigital solutions will leverage three core skills of the company and securing customer relationships. Our technology, our R&D strength, and our IPO management, again making this different from a typical partner relationship, this group will also exploit to key needs in the market today.

The first is the need for product differentiation in a world where every device looks the same and runs on very similar operating systems. Working with customers, this group can add pretty standards in differentiating product features like our Smart Access Manager.

This group can also worked with companies to enhance their patent portfolios since our established patent portfolio puts us in a position to share further patents created through funded research. In a market where patent protection is a key strategic asset providing access to both InterDigital R&D and IPR management skills can be a significant differentiator for us in terms of securing customer arrangements.

Ultimately, we believe effective execution on enhanced innovation sourcing and customer solution strategy will drive higher revenue from our patent monetization group, Led by Larry Shay, this group will now handle patent sales, licensing and joint ventures basically any relationship or commercial undertaking where we make money from patent dimension. With more to work with, we are confident that this very capable and proving group can deliver even higher value.

Of course innovation labs will be the primarily driver of patents as it has always been providing substantial amounts of new innovations each year to be included in the license and/or sales transactions. Innovation partners will now add to that and also help inform innovation labs as to the direction of its research. Finally through its customer engagements, InterDigital solutions will drive the creation of new patents for monetization, increase the market take up of existing technology and also provide a bridge to close GAAPs in patent licensing discuss.

Thus while the individual groups will each have their own mission and be measured in compensated on how well they do to, the greater success of the company will be driven by the interconnectedness and interdepends of the groups as well.

Based on the feedback we received definitely announced on Tuesday, there are two areas of this strategy that I thought I would address here.

The first was whether the change in R&D spending was related to the Samsung license renewal? It’s not. The Samsung discussions are proceeding as expected both parties understand that we are dealing with significant sums of money, and typical with any such discussions, the dialogue as professional and very serious in nature.

We continue to believe, we are well positioned for our high value renewal. That said regardless of whether we sign Samsung prior to the end of the year or after that, our budget for R&D and our approach will be the same. We believe this innovation approach response to the changing market and simply represents a smarter and more efficient way to source technology.

The second area relates to my last statement, whether our current R&D was inefficient? The answer to that is also no. Our current R&D is highly efficient for the type of innovation we have pursued namely cellular and other standard space innovations were you need to build prototypes, stimulations another validation means to drive the innovations into standards. That said, for some of the new areas of research we have and they want to invest in, we feel other profits as may be better. Indeed over the past two years, we’ve had the opportunity to compare our internal R&D in new areas of technology against external investments in technology like with universities, small companies, and through things like the InterDigital innovation challenge.

We have found that for certain areas the external approaches were more efficient, thus in designing the new innovation sourcing strategy, we have leveraged that experience and are toning down our internal research in certain areas and ramping it up externally, but other lower cost.

In summary, we think this next evolution of our strategy is very exciting, and could be very valuable to our shareholders. As Rich mentioned earlier and I discussed as well, we are also executing this strategy evolution with the same solid financial discipline that we can consistently employ across the organization. As part of that execution, Rich mentioned the voluntary early retirement program we instituted this fall. I already spoke about Janet but there are good number of other individual personnel who have opted into the program. I want to thank them for their service to the company as well.

We have had great success as a company and that was driven by great people. It is always difficult to say goodbye to people that you have worked alongside for many years. They leave the company strong and we wish them all the best of success in the next chapter of their lives.

With that, let me turn the call back over to Patrick.

Patrick Van de Wille

Thank you, Bill. And with that, we’ll turn to the question-and-answer period of this call. I’ll turn it over to Mercy.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll take our first question from Tim Quillin with Stephens Incorporated.

Tim Quillin – Stephens Inc.

Good afternoon. Could you talk a little bit about how you might deploy capital to support your strategy on patent acquisitions and partnerships, and how we should think about patent acquisitions over the next couple of years?

William J. Merritt

Sure. So in-terms of the new strategy I think its part of what we’ve done before and then some new things as well, all right. So over the last number of monthly we’ve been in the market, for what I’d call targeted patent acquisitions in selective spaces where we don’t participate as a company. With some of those acquisitions dealing with things like the deliver of content and other, so much I think so that would continue under the new program.

We would also look in I wouldn't want to call the new sourcing function sort of a venture function, it is actually very different in that but what it can be is providing capital to smaller companies, but also providing as one of our services intellectual property management, and also providing standardization assistance. We would do that because one we would provide them the benefit of our expertise in patent management, and to large extent these companies as you all know many small companies don't make it all the way down the road.

And the one thing they have at the end of the day is our other patent so that they have been well managed that would be an asset we would have access to. So but again, I think those in types of investments would be very targeted by us, and we been expected maybe very large, the idea with this group is really to gain lot of visibility into lots of technology get out of our hands as far our fingers on a bunch of different technologies, and it's both that access to technology, but also the information that we would gain from that that would help the company both in terms of any intellectual property generated by those activities, but also how it would inform our own research as the company make our own research more efficient. So I think that’s a high level of patent acquisitions and investments outside investments in technology.

Tim Quillin – Stephens Inc.

And how should we think about that the dollar magnitude of potential patent investments or acquisitions that you make. Would it be small $5 million chunks here and there or could it be $100 million outlet?

Richard J. Brezski

I think there's probably a wide range, where we see patents on the market. You’ve seen more in – I’d say sub $100 million range then you say above that range. So I think that – so why wouldn’t preclude the right acquisition that delivered the right value for a higher number, I think what we're seeing is more of the supply at lower dollar figure. So and how that would all roll up at the end of the day in terms of an accumulation of acquisitions we would see.

But I think as you watched, if you watched the company, we tend to be pretty discriminating in terms of one intellectual property we’re buying in part, because we have very strong portfolio. Today, we have very good internal capability to supplement that portfolio, and I think the work that we're doing with folks on the outside to generate patents on the outside is also a strong resource for us. So as we’ve always said acquisitions are nice thing for us to do, and not a necessary thing for us to do to execute on the strategy.

Tim Quillin – Stephens Inc.

Okay. And just one last – two part question if I may, but on patent administration and licensing expenses, which I know is largely related to your ITC actions with Nokia and others. How should we think about those in the fourth quarter, the level of expense in the fourth quarter and beyond, and then maybe if you can give us an update on the timing the kind of updated timing or what's happening with Nokia, and how that might inform negotiations with other large potential licensees like Samsung? Thanks

William J. Merritt

Yeah, Jim, I'll take the first part of that question. When you look at our patent administration and licensing costs, the period-to-period variation is driven almost entirely by litigation and intellectual property enforcement. So in the third quarter, it was at a pretty high rate there. I think it was about $18 million. As I remarked earlier, we expect it to remain high as we move towards a February trial date with the ITC action and continue to proceed in the original Nokia ITC case which we still want an appeal.

Mark A. Lemmo

Yeah. In terms of the second question how, what the timing of the various cases are and then how that timing could affect renewals. So on timing, so the ITC case against Huawei, ZTE and Nokia that goes to trial in February of 2013, judges decision in June and then the commission decision in the fall. So that schedule of course the other action is we are very happy with the decision on the Nokia appeal, there is now a rehearing request on that. There is no timeframe on that although they tend to operate or decide on those whether they are going to grant up pretty quickly so we would expect that in short order, but again there is no schedule for that. They just happen to faster than they do other things.

In terms of how licensees are looking at, things I think while the Nokia appeal went out with a small portion of the portfolio and our licensing program was operating very well notwithstanding a loss, the win has been a big help for us because it validated those patterns and I think in a licensees never tell you exactly what’s on their mind. I think to the extent that folks were going to wait for something else to validate the patent, that’s now happened.

And so we don't licensees always have that choice to some extent to wait and see, and see what happens. There is risk associated with that choice, because the longer they wait, and the more the portfolio gets proved up, and certainly the flexibility that we bring to negotiations certainly effects things like how we handle past sales, and so I think right now we see good progress in the licensing pipeline, and whether they don't tell us directly whether any one is waiting for any particular thing I feel, we don’t sense it right now, so again a thick part of that was fueled by the success of the Federal circuit.

Tim Quillin – Stephens Inc.

Thank you.

Richard J. Brezski

I'd just like to add one thing to make sure I'm not misunderstood in the third quarter, the patent administration and licensing also did include $60 million of expense for the patent sale.

Tim Quillin – Stephens Inc.

Yes, thank you.

Operator

We'll take our next question from Anil Doradla with William Blair.

Anil Doradla – William Blair & Company L.L.C

Hi guys, couple of questions. What milestones and yardsticks you will be using to judge the success of innovation partners and innovation labs and I’ll follow up?

William J. Merritt

Sure. So the innovation labs will – that's sort of classic function here at the company, and we have very good internal measurements in terms of success on getting innovation incorporated into standards or other success in terms of driving projects for in terms of achieving certain technical results. So that's been a pretty well refined process over the years, and so that would continue to go forward. I think on the partnership side it's a sort of a multidimensional approach, because it will include both sourcing of patents investments in Company’s partnerships with Company’s on intellectual property, I think we’re currently working through exactly the measures that we would use to see the success of that.

We have some benchmarks that we’ve done in terms of patent acquisitions when we done them, we’ve got benchmarks in the industry in terms of what the average price being paid for patents, and how this is fit in that, we set certain guidelines, we don’t want to set a number that you have to do X number of deals in the year, because that we only want to do smart deals, but you also want to see a strong pipeline of opportunity coming through the company, so we measure your pipeline how deep is it, is your pipeline being coming to you after expense through brokers hands or you seeing it in the first instance, so there is lot of things we can do to measure success there, so little bit of a working progress on the innovation partner side, but I think we’ve got some of that – some of that and another part of it will get refined over the next month or so.

Anil Doradla – William Blair & Company L.L.C

And regarding the voluntary retirement, can you give us a sense of how many people have except the offer and what is the nature of most of these folks?

William J. Merritt

I think, we [site up] the cost savings in the press release, so that’s we’ve talked about that in terms of the program, I would tell you it was the broad based program for company. And there will be I think we’ll probably provide little bit more disclosure in the queue, which we’re filing this month, so there will little bit more index.

Anil Doradla – William Blair & Company L.L.C

And finally on – one of your strengths has been your participation and standards bodies, in this – what I view the slightly changing business model, how are you planning to exploit that strength with – the are several pure play NPVs out there many patents that don’t have means of representing themselves in standards bodies, how you plan to exploit that?

William J. Merritt

I think that actually one of the – when we talked about the unique skills that the company can bring to the community, and I think it's our ability to work with folks on standards, and I get technology that they are developing into the standard and I can tell we've got first hand experience with that. And as I mentioned in my script much of what you see in the strategy in terms of the changing approach innovation are based on things that we've been testing over the last year to see how well they would work.

And on the security side for cellular technology, we've actually been working with the company with a group outside the company, a very small group of people. I would tell you that they are very high price people, but the efficiency of that group is extraordinary and we've done exactly we said, we’ve combined their engineering expertise with our standard skill and driven their results into the standards.

There are more opportunities like that and when we look that the market this combination of access to capital, access to laboratory equipment, access to IPO management, access to standards is a unique combination of skills that we think will be very attractive to folks, and so I think ultimately we’ll find that we are delivering even more success in terms of standardization, because we will find the technical experts out there, they don't exist in this company combine it with our standards expertise and drive a very, very solid solutions into standards, because we'll continue to be a very important part of the business.

Anil Doradla – William Blair & Company L.L.C

All right, thanks a lot.

Operator

We'll take our next question from Charlie Anderson with Dougherty & Company.

Charlie Anderson – Dougherty & Company LLC

Good evening and thanks for taking my questions, and Janet, best of luck in the next endeavor and wellness.

Janet M. Point

Thanks.

Charlie Anderson – Dougherty & Company LLC

So I guess, I’ll just start with a big picture question, you guys add a number of patents every year. You’ve had a sort of a strategy that’s quite for number of years, and you’re sort of mixing that up now going to a number of different outs, but I just wonder if the cadence will change in terms of number of patents that you are adding to the portfolio and how the mix might change to between standard essential and may be some stuff that’s non-standard essential?

William J. Merritt

Sure, in terms of – I’ll talk about two different growth trajectories right, one is the issuance of patents and it's really the issuance of patents that drive licensing discussions, not things we filed this year, because they don't really have any impact for number of years. So with respect to the issuance of the patents, nothing that we're doing today affects that. They're going to continue to issue and we had a pretty rapid phase of issuance this year that work so on the pipeline and patent team is very effective, they’re getting the patent out.

So in terms of near-term and I'll frankly say with the next couple of years the terms of patents that will drive the licensing program that's all in place and being in driving lots of research we’ve done a couple of years ago. In terms of new file applications roughly we are in the 150 or so plus or minus each year, new file patent applications.

I think when you'll see a greater diversity in terms of what we will be filed, I'd say there's going to be a greater diversity both in terms of technology, but also in terms of probably a bigger percentage of non-standards-based technology, because we have a surplus of standards-based technology so we're going to (inaudible) program towards with a higher percentage of non-standard's related technology. Impart that’s the benefit and one of the reasons for the solutions group. Standards technologies are great, because everybody uses them in the standard process of course is that happen. Non-standards-based technology you need get adoption, therefore you need customer traction and that's with the solutions group we’ll facilitate.

In terms of just one numbers of patent filings my guess is that we could be – it's hard to say it will depend upon the innovation partners and what they are able to drive in terms of relationships and inflow of patent assets, but I don't think we’re going to do the amount of patents, the file is going to change dramatically as a result of this. Overtime I think what we end up filing is at least the same higher quality patents at the end of the day and at the innovation partnership group works really we’ll probably a lot more.

Charlie Anderson – Dougherty & Company LLC

And then in concerned with that you guys have always capitalized spending costs. I wonder if that's going to drop next year sort of encounter with some of these OpEx reductions?

Richard J. Brezski

Yeah, so we’ll continue to capitalize our patent cost, the cost that we capitalize are really the external fees paid to outside council and the patent agencies around the world. So we don't expect any changes there, and as Bill said we'll still have this patent issuing and we capitalize up to the issue date, so I wouldn't expect any near-term changes in that area. Other than potentially some applications that we sold as part of the Intel or other patent sales you might get an offsetting reduction from some of those.

Charlie Anderson – Dougherty & Company LLC

Got it, got it. And then, I wonder if you guys can update us on the sale of the (inaudible) been out there for a while with kind of how is that going, and how is it compared to the process that consummated with the Intel transaction, and if you have any sort of timelines that could help us on one something to get done?

William J. Merritt

Yes, so the pipeline remains good for the additional transactions in terms of timing. We’re still trying to move things along, but in terms of when they actually get done, we’ll see if we can get some done this year that would be the great, but moving to next year’s level, we’ll see what happens.

What we’re seeing is, generally in the market, a continued good appetite for the type of innovation that we have. I think what happened over the last couple of years in terms of patent acquisition as quality as become very important in acquisition and luckily we’ve got a strong portfolio and some high-class patents we continue into the market.

This is generalization I don’t want to suggest, but this would suggest were our transaction happened, but generally what we see in the market is smaller transaction. Today, the bigger ones are fewer and it’s further between and people are being little bit more targeted.

And so we’ve got a very substantial list of patents or number of patent assets and essentially what we’re doing in sort of mixing and matching depending upon the various customers’ interest I’m trying to find the right set of assets for the right person. So that continued to be very encouraged by the opportunity there and again as we mentioned in my script, we have got good evidence now, but this could be a continuing contributor to revenues of the company.

Charlie Anderson – Dougherty & Company LLC

It sounds like more or likely smaller batches than 2010 patent at a time type of a sale?

William J. Merritt

Yeah, as I said I think that’s for more of the transactions in the market are happening. That said, they’re continued to be large strategics in the market, it continue to have the appetite for larger assets skill and it’s just a question of finding the right deal for the right price, and I’d say it's a very exciting process, because it's one where we have things that people want. And I think the Intel transaction was a strong transaction for us from a number of perspectives, but one of those was to validate the strength of the R&D team.

Charlie Anderson – Dougherty & Company LLC

Got it. Thanks for taking my questions.

William J. Merritt

Thanks.

Janet M. Point

Thanks.

Operator

We’ll take our next question from Ron Shuttleworth with M Partners.

Ron Shuttleworth – M Partners Inc.

Hi, good evening, thanks for taking my call. Just wanted to – I'm just curious if you will be providing guidance for Q4 in the new sort of structure you’ve got?

William J. Merritt

In terms of revenue guidance?

Ron Shuttleworth – M Partners Inc.

Yeah.

William J. Merritt

Yeah, we will do that. And since we have all the information at this level.

Richard J. Brezski

Yeah, we're providing that general timeframe is usually about two weeks after this call once we get our reports.

Ron Shuttleworth – M Partners Inc.

Okay, that sounds good. With respect to the solutions group my interpretation, is also that you are looking at licensing in different ways like possibly the way more traditional product licensing or solutions licensing as opposed to simply royalties? Is that correct?

William J. Merritt

If you look at what the solutions group can do, I think they have a number of different ways they can bring various to market, and the things they have to sell or as I mentioned one is the technology that is successfully emerged from our innovation labs, so it's again more to access manager, it's for machine-to-machine platform, it's the mode of my pay and it’s the DSM, the Dynamic Spectrum Management of the WiFi technology, that's – I would say its pre-commercial stage other than lot of my P itself, that is obviously commercial technology. And they would bring that to market, I think under a variety of commercial constructs whether it's in terms of (inaudible) they can be lump-sum deal, they can be running loyalty deals it could be a mix of those two, I think the same of the two of the other thing technologies, so from a pure licensing perspective, there is no one model that we would employ.

The other thing that they can do is provide engineering services either related to those technologies or in the end of those technologies perhaps in a different stage, or perhaps related to technologies that are maybe a little further back in the lab, but we find interest to it a customer that wants to work together with us. What we're seeing is that it's not just R&D capability of the company that is attractive to people, but as I mentioned in this script, it's our patent management and because what companies can do when they work with us, and they can share the patent with us, many companies like us, many companies who develop technologies sort of hold on to the patents all to themselves, we have, I’d say – we have got a great well for patent. We don’t need to hold onto every patent.

So we can share them with folks and I think our skill at both inventing in our scale and at managing patent portfolio is making that an attractive offer to folks. So I'd tell you that the structure of the deals for solutions group at this point it’s a blank sheet of paper, and however they structure and make sense whether it's royalties, whether it's engineering services on more typical fashion whether its other types of deals, I think they're going to be pretty nimble and dynamic in response of the customers.

Ron Shuttleworth – M Partners Inc.

Okay, so that leads into I guess the next question in terms of timing, we've become accustomed to I believe sort of leading for legal proceedings to conclude and various delays in those legal proceedings and we’ve been trained to sort of wait and anticipate the large sort of multi year royalty programs to come with this new regime are you saying, are you sort of ensuring that hey look we should be able to see more meaningful revenue streams faster from our invention, so instead of looking at say for example, in your white space technology or more meaningfully maybe your M2M technology, so waiting till 2017 to see any type of monetization, you can start monetizing it right now or within the next couple of quarters, is that kind of what we should look at?

William J. Merritt

Yeah, one I say one of the designs in the strategy right, and this was, as I would say a combination and move we made in January to add sales and ventures as part of the patent monetization strategy, and now we move to add solution, is to address the point you raised, which is – the business had become when we’re – people became focused on these big events, because that was where all the value was, those big events are still very important, but we’ve now added a number of other things, which don’t require litigation, there’s nothing there is no litigation required to make a patent sale.

And, as you’ve seen, we’ve had great success there. Solutions group as well that’s not a litigation arena and activity that the sales oriented activity with high quality things to offer and of course even on the licensing side a good number of license agreements happen whatever, without ever having the reserve to litigation.

So, I think the mix of different monetization schemes both for patents and solutions should provide a greater deal flow into the market, and less of a focus on these other big event, they’re still important. The Huawei, ZTEs and they’ll get still very important, but there will be things in the gap period now more things in the gap period.

In terms of timing, modem IP within the market with that that continues to be an appetite certainly that’s an area where we can continue to see success and that’s not something that two or three years out in terms of readiness, it’s ready today. The Smart Access Manager in terms of product readiness is probably next up in terms of readiness, and you continue to see great appetite out there for smart offloading technologies in the market.

Machine-to-machine probably as slightly behind SAM in terms of market readiness and so that’s probably a little further ramp up. Certainly one of those areas were cooperative R&D, we probably make a tremendous amount of sense and that could come that’s an area were something is happen sooner rather than later.

And then DSM over Wi-Fi, again of the four technologies that we’re moving into solutions that’s the one that probably is a little further out from a commercial standpoint, but again something that represents a great opportunity for R&D joint invention that we sharing from the project.

Ron Shuttleworth – M Partners Inc.

Okay. Just changing the subject slightly, you have now built up from the SlimChip IP, but I think someone already talk about $40 million now of deferred revenue as a result of this litigation starting to become meaningful. And I was wondering what the status is on, is there just going to happen in perpetuity or is there an end point that we can expect for this, when you comes to conclusion?

Richard J. Brezski

Yeah, you’re correct. We deferred just over $40 million to date on that, and I think it was about little over $3 million that was added to the pile this quarter, and that's all pending for results of an arbitration, which we expect to take place or the hearing actually took place, so we expect to hear the results relatively near term.

Ron Shuttleworth – M Partners Inc.

Okay, all right. So we should see here, (inaudible) in this quarter that right?

William J. Merritt

Either in this quarter or early in 2013 is our expectation.

Ron Shuttleworth – M Partners Inc.

Okay, all right. Okay I'll pass the line for now. Thanks.

Janet M. Point

Thanks.

Operator

(Operator Instructions) We'll take our next question from Luke Labella with Barclays.

Janet M. Point

Luke, you there?

Operator

Please check your mute button.

Luke Labella – Barclays Capital, Inc.

Guys can you hear me?

William J. Merritt

Yeah, there we go.

Luke Labella – Barclays Capital, Inc.

Sorry about that, can you just give us an update on your confidence around the Samsung renewal situation at this point, and would you perhaps view a partnership perhaps, if you weren’t able to get something done before year-end, any other color you could give would be great? Thanks.

William J. Merritt

So, I mentioned in the script, we continue to have good dialogue with Samsung, I think today and we both appreciate it's a very high value deal that we are working on, and we understand the importance of that deal in terms of the overall business. So I think things like success with the Nokia appeal was very important in terms of I think at a minimum just the optics of that deal since Samsung did some license before, and I think the Samsung, Nokia appeal reversal validated that prior choice of their. We’re working hard to get it done most important to get it done correctly.

Certainly with a company like Samsung, there is always a number of opportunities that you can put on the table in terms of not only licensing, but some of the other technologies we're working on as well, you put the challenge in that is sometime the technology solutions, so only a certain level of gap between the parties. And so it works really well of sort of mid tier you folks with the large companies the royalties really and the royalty payments really drive the discussions, and more than anything else.

But we open to create a solutions with them, and we have a long relationship there, we know the people at Samsung well, and we'll see we get it done, whether we get it done by the end of the year or it moves over next year as you know whether it happen on time or whether happens with a gap, it's not really as important as getting it done right, we recapture all of the sales that happens during the gap period and so ultimately we get full value regardless of the timing.

Luke Labella – Barclays Capital, Inc.

Okay, great. Thanks. And that's it from me. Just want to say congrats to you Janet. Thanks again.

Janet M. Point

All right. Thanks, Luke.

Operator

We’ll take our next question from Ron Shuttleworth with M Partners.

Ron Shuttleworth – M Partners Inc.

Thanks for taking my follow-up question. Now it was like $781 million of cash on the balance sheet and I know you're going to be of doing some acquisitions of patterns and doing some probably some acquire hires of people and all that stuff, but that's a lot of dough and probably Gartmore coming in what future patterns sales as it relates to you got up the block that you got it for sale. Can investors expect you haven't mentioned share buybacks continuing, but investors expect maybe an uptick on quarterly coupon or more the one-time benefit for investors?

William J. Merritt

Yeah, I think what folks can expect is that the Board will continue to be very much on top of the cash at the company in terms of how gets deployed. As you know, we’ve been pretty aggressive in terms of buying back stock over the years. We have a dividend and appreciate that we’re carrying strong amount of cash right now. I think that’s helpful in terms of the discussions that we’re in. But like I can tell of all the topics of Board deals with this is probably number one and number two in terms of how it deploy the cash in terms of whether it gets deployed into the business, gets deployed in M&A or gets sent back to the shareholders in some point.

Ron Shuttleworth – M Partners Inc.

Okay. So are you basically saying that you’re going to keep the dividend where it is for now, and thinking about it or is there any other actions that we can expect?

William J. Merritt

What we tell is Board actually right now they look at it on a very regular basis. So when the Board does its review, we’ll know what they decided to do.

Ron Shuttleworth – M Partners Inc.

Okay. I have to ask question so, and Janet congratulations and good luck to the future. Thanks.

Janet M. Point

Thanks.

Operator

It appears there are no further questions at this time. I’ll turn the conference back over to Patrick for any additional or closing remarks.

Patrick Van de Wille

Well, thank you Mercy and thanks for everybody who dialed into the call today, and looking forward to be in touch with you in the days and weeks ahead and looking forward to seeing you all again next quarter on this call. Thanks for joining us today.

Operator

That concludes today's conference. Thank you all for your participation.

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