InterDigital, Inc. (NASDAQ:IDCC) Q4 2009 Earnings Call February 25, 2010 10:00 AM ET
Janet Point - EVP, Communications and IR
Scott McQuilkin - CFO
Bill Merritt - President & CEO
Tom Carpenter - Hilliard Lyons
Chris Versace - Think 20/20
Michael Ciarmoli - Boenning & Scattergood
Charlie Anderson - Dougherty & Company
Good day, everyone. Welcome to today's InterDigital’s fourth quarter 2009 and year end earnings conference call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Janet Point. Please go ahead.
Thank you, Danny, and good morning everyone and welcome to InterDigital’s fourth quarter and full year 2009 earnings conference call. With me this morning on the call are Bill Merritt, our President and CEO; 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.
This quarter, we would like to provide an opportunity for members of the investment community to ask a number of questions of the management team. So we are asking you that please ask one question at a time and then hop back into the queue. Before we begin our remarks, I need to remind you that in this call we will make forward-looking statements regarding our current beliefs, plans, and expectations, which are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ materially from the results and events contemplated by such forward-looking statements.
These risks and uncertainties include those set forth in our earnings release published yesterday and those detailed from time-to-time in our other filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof and as except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information, future events, or otherwise.
So with that taken care of, I will turn the call over to Scott.
Thank you, Janet, and good morning to everyone. Our fourth quarter financial results reflect significantly higher year-over-year earnings driven by strong growth and revenue combined with the structural reduction in expenses.
The combination of increased revenue and lower expenses combined with the recognition of a $16.4 million tax benefit related to foreign withholding taxes drove net income to $38.9 million, an increase of $35 million over the year ago quarter. Fully diluted EPS was $0.88 in fourth quarter 2009 up from $0.09 in fourth quarter 2008 and higher than full year 2008. Revenue were $76.4 million, an increase of 30% from fourth quarter 2008, and the fifth consecutive quarterly increase. Expenses were at $35.6 million, a 34% decrease from fourth quarter 2008.
As you may note from our release, both fourth quarter 2009 and 2008 included a number of unusual items. Fourth quarter 2009 included a $16.4 million tax benefit, a $3.9 million charge to write down an investment, a $1.6 million repositioning charge and a $0.5 million reversal of a bad debt reserve.
Fourth quarter 2008 included the recognition of $6.4 million of deferred revenue from a licensee that exited the handset business, a $9.4 million accrual adjustment for a long term incentive compensation plan, a $3 million accrual for a bad debt reserve and a small insurance reimbursement. Excluding these items, pro forma net income was $27.1 million in fourth quarter 2009 compared to $7.5 million in fourth quarter 2008. Pro forma fully diluted EPS was $0.61 in fourth quarter 2009 compared to $0.17 in fourth quarter 2008. The net profit margin or pro forma net income divided by revenue was 35% in fourth quarter 2009 up from 14% in fourth quarter 2008.
Back in third quarter 2008, our quarterly revenue was $55.1 million and it has risen to $76.4 million in the fourth quarter 2009. Our revenue guidance for the first quarter 2010 is a range of $78 million to $79 million excluding the potential impact of any new agreements that may be signed during the first quarter 2010 or the impact of royalties identified and regularly conducted audits.
Our revenue consists of three components, current patent royalties, other patent royalties and technology solutions revenue. Current patent royalties was $72.6 million in fourth quarter 2009, up 55% over fourth quarter 2008. Significant increase in current patent royalties over the fourth quarter 2008 is due primarily to the contribution of $25.7 million from Samsung.
Consistent with the trend in total revenue, current patent royalties also increased in each quarter of 2009 due to generally higher volume from per unit licensees in addition of new licensees. Our other patent royalties were $0.1 million in fourth quarter 2009 compared to $7.3 million in fourth quarter 2008. This included recognition of $6.4 million of deferred revenue for our licensee that exited the handset market. As a side note on the latter, this recognition shows the value of using non-refundable pre-payments as part of the licensing strategy.
Our technology solutions revenue totaled $3.8 million compared to $5.1 million in fourth quarter 2008. The decrease is primarily due to a reduction in service related revenues. Importantly, our technology solutions revenue has increased steadily in each of the last three quarters. In addition, over the last year, technology solutions revenue has shifted from services based revenue to per unit royalty revenue. This is important because per unit royalty revenue is driven by recurring sales of our customers’ products and generally does not require significant current period expenses.
Therefore not only has our per unit royalty revenue grown over time, but the transition to per unit royalty revenue has resulted in a significantly higher profit contribution from this revenues source.
I'd like to make a few points to put the quarterly revenue trends in perspective. First it appears that the handset shipments globally has started to improve, more importantly 3G handsets and in particular smartphones have continued to increase as a percentage of the total market.
Second, our exposure to the relatively mature Japanese handset market is decreasing over time, as we add significant new licensees for the diversified global customer base.
In fourth quarter 2009, royalties from Japanese per unit licensees accounted for only 19% of the current patent royalties compared to 34% in fourth quarter 2008. Licensing revenue from our per unit Japanese licensees did decline quarter-over-quarter by about 15%, reflecting the weakness in that market.
However, our recently updated guidance for the first quarter 2010 does reflect a rebound in these licensees of about 10% over fourth quarter 2009.
Third over time, we have a significant opportunity to grow and diversify our patent royalty revenue by licensing other handset makers increasing our share of the 3G handset market under license.
With the addition of Samsung, Cinterion and Pantech as 3G licensees, our share of the 3G handset market under license has increased to nearly 60%. As you may know the major unlicensed handset makers Nokia, Sony Ericsson and Motorola account for about one third of the 3G market.
Fourth, our revenues today are based almost exclusively on royalties relating to the sale of handsets. While the handset market is very large there are also many other products with wireless capability to utilize our patented technology, including laptops netbooks, mobile Internet devices and a broad range of machine-to-machine and other consumer electronics devices.
Sales of these products are growing over time and represent a significant opportunity to expand and diversify our revenue base and further leverage our investment in research and development.
Last given the nature of our business model growth in revenue can drive even greater growth in earnings. As an example, we are currently recognizing revenue from a licensee that we signed in 2009 at a fixed rate of about $15 million annually. Based on our revenue run rate when we signed this deal, it increased our revenue by about 5%. Since there are no material incremental expenses required to support this revenue, pre-tax income also increased by about $15 million or close to $10 million per year after tax.
This drove growth in net income of about 10%, that's not bad for one deal. Turning to the expense side, fourth quarter 2009 operating expenses were 35.6 million, this represents an 18.3 million or 34% decrease from the fourth quarter 2008.
Excluding patent litigation and arbitration cost, operating expenses were 30.8 million in fourth quarter 2009. This represents a 21.7 million or 41% decrease from fourth quarter 2008.
Most of the decrease was driven by the reduction in development and other expenses associated with the repositioning of our business at the end of first quarter 2009. As I mentioned before both fourth quarter 2009 and 2008 included a number of unusual items. Fourth quarter 2009 operating expenses included a 1.6 million charge related to the repositioning of our modem business and a $0.5 million reversal of a bad debt reserve.
Fourth quarter 2008 operating expenses included a 9.4 million accrual related to revised expectations for the payout associated with the long term performance based incentive program and a $3 million accrual for bad debt.
Excluding these items our operating expenses other than patent litigation and arbitration cost were 29.6 million in fourth quarter 2009, a decrease of 10.5 million or 26% from fourth quarter 2008.
On a sequential basis, fourth quarter expenses of 29.6 million increased from third quarter 2009 expenses of 27.9 million, excluding a 2.3 million reduction in the accrual for a long term incentive comp plan. The increase is due primarily to higher development expenses.
Patent litigation and arbitration cost were 4.8 million in fourth quarter 2009, up from 1.5 million in fourth quarter 2008. The increase in patent litigation and arbitration cost is due primarily to the unusually lower level of patent litigation and arbitration cost in fourth quarter 2008. As I have mentioned before, this element of our expenses can vary from quarter-to-quarter based on the level of activity. As a perspective, our patent litigation and arbitration costs excluding insurance reimbursements and adjustments to contingency accruals have averaged about 6.3 million per quarter over the last two years.
Net investment income was a loss of 3.2 million in fourth quarter 2009, compared to a positive 0.6 million in fourth quarter 2008. The fourth quarter 2009 includes a $3.9 charge to write down in investment.
With respect to our income tax provision, we recognized a net benefit of 1.2 million in fourth quarter 2009. This includes a $16.4 million tax benefit that relates to our plan to amend our US Federal income tax returns for prior years to switch to foreign tax payments we made during those years from deduction to foreign tax credit.
Accounting for this benefit is based on guidance provided by FIN-48 Accounting for Uncertainty in Income Taxes. Under this is guiding, the recognition of a tax benefit depends on the benefit being more likely than not to be sustainable upon audit by the relevant tax authority.
The process to amend these returns involves tax treaty procedures for both US and foreign tax authorities and they take a number of years to complete. Our balance sheet is very strong. We ended fourth quarter 2009 with $410 million in cash and short-term investments and virtually no debt. In January 2010 we received the third of four $100 million payments related to our patent license with Samsung which we reflected in our first quarter balance sheet.
Looking forward, we continue to have confidence in our ability to generate value for our shareholders by licensing our significant portfolio of patents. In support of these opportunities, we intend to maintain a strong balance sheet to provide flexibility and the opportunity to selectively pursue prudent investments that are fully aligned with our technology and business strategy. In summary, we have the capacity and flexibility to execute on our business strategy in order to drive shareholder value.
Now I will turn the call over to Bill.
Thanks, Scott, and good morning to everyone. I would like to begin with a review of our performance in 2009 and our strategic objectives for 2010. Then I will talk about some of the recent changes in our Board of Directors. During this call last year I shared with you that the key objectives for the company were to one; continue to drive the licensing business, including positively resolving the Nokia licensing dispute. Two; either grow or exit the modem chip business. Three; continue to drive the creation of key new technologies. And four; make targeted M&A investments to drive our strategy.
On the first item, we grew the licensing business with the addition of Samsung, Cinterion and Pantech as licensees driving an additional $30 million in quarterly revenue.
The Nokia dispute of course is ongoing. However. even there we have successfully secured patents from the US Patent Office that address a number of the issues that ALJ identified in the ITC action with Nokia. So the patent portfolio today is even stronger than it was at the beginning of 2009 giving us good tools to bring to our licensing discussions. We expect continued success from our licensing program in 2010. Moreover, we will continue to press forward with Nokia including in the next couple of weeks filing what we believe will be a compelling appeal of the ITC decision to the Federal Circuit.
That said we will continue to look for ways to end the dispute and believe that creative structures exist that will be beneficial to both companies. On the second item, we made the decision in March of 2009 to exit the modem chip business. That was the right decision. As a reminder, however, while we exited the chip side of that business, we continue to work on future modem technology as part of our patent licensing program.
We also continue to be very active in seeking licensees for the chip designs we created. On that front, we are seeing excellent market traction from Infineon which uses the 3G protocol stack codeveloped by the company as part of the modem chip program.
ST-Ericsson which uses our HSDPA design in certain of its market offerings is also seeing success with that design. We also have good interest from a number of other companies to license our full 3G ASIC design. With continued success on all of those fronts, we would hope that technology services and IP royalty revenue line could materially increase by end of 2010.
The third objective for 2009 was to continue to drive new and exciting technologies. Here we had an excellent year as demonstrated by the significant interest in the technology we saw at the Mobile World Congress show in Barcelona last week. For a numbers of years, we have been developing and advocating technologies that will enhance the performance, intelligence and flexibility of mobile networks.
For example, for a number of years we have been focused on technologies that enable seamless connectivity and mobility between not only cellular and Wi-Fi networks but across any network creating what we call the network of networks. In 2009, the need for these technologies became apparent to everyone as the uptick of data traffic caused significant congestion issues on mobile networks. At the NASDAQ conference in London in December 2009, we spoke more specifically about our roadmap to create a suite of technologies intended to address the growing gap between what mobile users need in terms of network capacity and what the networks can do.
We coined the phrase bigger pipes, more pipes and better pipes to describe our suite of technologies for spectrum optimization, mobility and connectivity and intelligent data handling. At Mobile World Congress, we rolled out demonstrations of technologies in each space. For bigger pipes, we demonstrated our innovative Fuzzy Cell technology that addresses the loss of data throughput at cell-edge by redefining traditional cell boundaries hence the name Fuzzy Cell.
For more pipes, we demonstrated advancements in our MIH middleware as well as bandwidth aggregation technology that allows users to combine the capacity of both cellular and non-cellular networks. As an illustration of our effort to machine to machine communication, we demonstrated our opportunistic connectivity technology that combines the capabilities of short and wide area wireless networks, for example, blue tooth, Wi-Fi and cellular to deliver data parcels between remote sensors and server networks.
For better pipes, we demonstrated our media mobility technology enabling intelligent data optimization and seamless multi media transfers across devices and networks. These demonstrations drew great interest and the relevance of these technologies were confirmed in our conversations with numerous companies which all saw the need to radically change how we think about mobile network design if you are to truly meet the demands of the mobile multi media user.
So we are off to a great start from a technology development standpoint. Our goal this year is to continue to drive the technology creation, develop key industry partnerships to help drive the market for those technologies and successfully continue to standardize those technology to help drive our patent and IP licensing programs not only in the markets where we have historically participated, but in newer markets as well. Indeed, while the terminal unit market is very large, topping $150 billion last year, the infrastructure, consumer electronics and data services markets are together significantly larger than that, topping over $1 trillion. Our goal is to develop highly relevant technology for those markets, allowing for the delivery of better, more compelling products that greatly enhance the user experience. If we can do so, and I believe we can, those technologies will create substantial new revenue opportunities to substantially increase our profits.
Lastly, with regard to M&A, we successfully concluded a transaction with Attila Technologies last year taking both a license under their bandwidth aggregation technology and an equity position in the company. We also concluded one patent acquisition deal. For 2010, we want to continue to find opportunities for targeted investments in small innovative companies to drive our technology road map faster. We will also continue to actively seek out high quality patent portfolios. We believe these investments in these spaces have the ability to drive significant long term value for our shareholders and represent the best current use of our cash.
To assist management on both internal R&D investments as well as any external investments, we announced today the formation of a technology advisory council. The members include Dr. Gilbert Amelio, Lead Director of AT&T and former Chief Executive Officer of Apple; Dr. Hossein Eslambolchi, Chairman and Chief Executive Officer of 2020 Venture Partners and former President and Chief Executive Officer of AT&T Labs; Thomas Gilley, Chief Technology Officer of Critical Media; David Hytha, General Partner at New Wave and Executive-in-Residence of Sofinnova Ventures and former Executive Vice President of Terminals for T-Mobile; and Dr. Luigi Licciardi, Head of Technology Plan and Standard Coordination, Technology and Operations for Telecom Italia.
The council will greatly expand InterDigital's dialog with the companies and thought leaders that are shaping the future of global communications. We are extremely pleased to have access to the talent and expertise of the individuals.
With that let me now move to the changes on our board. As you all know, Harry Campagna, our Chairman of 13 years passed away in December 2009. During his tenure, the company significantly grew in terms of its financial strength, stability and influence in the wireless market. Harry was passionate about InterDigital and his leadership and ability to find the right people to drive the company contributed significantly to where we are today. We are very much indebted to him for our successes.
The loss of Harry brings new leadership to the board including a very strong and industry savvy new Chairman, Terry Clontz. Terry is a global telecommunications industry veteran with 37 years of extensive experience across a broad range of markets. His leadership and influence has been recognized by several prestigious awards, including being named the Telecom Chief Executive Officer for 2009 by Telecom Asia magazine and Best CEO in 2009 for Singapore Corporate Awards. Under his leadership, StarHub received Euromoney’s Best Managed and Governed Company for Asia in 2009.
I've known Terry for the last eight years and I believe he will be a tremendous asset in his new role. He has the industry knowledge to help refine the company strategy, he has the contacts and network in the industry to help us drive our strategy. And I think he will be very important in terms of attracting new members to the board that will add to our success as we move forward.
In that regard, we are actively seeking a number of new industry savvy executives to further enhance the strategic capacity of our board. Given the financial strength of the company, its technology vision and its future potential, I can tell you we are finding a wealth of very qualified industry talent. Assuming the process continues to move as well as it has, we would hope to have at least two new highly qualified board members in place during the first half of the year. The company is also reviewing other critical matters of corporate governance, including the shareholder rights plan, the term for board members, board compensation and a the like. The purpose of the exercise is to assure that we have in place the policies and practices that will drive the highest shareholder value.
To conclude, our future, much like our past, will be defined by the innovative solutions we bring to the market. Fortunately, the wireless industry is going through some significant changes that require their creativity of technology companies like ours to invent solutions to solve the industries most pressing problems. Indeed much like the evolution from analog to digital and then voice to data, the next generation of wireless, which will move us from somewhat static isolated networks to a connected, intelligent and flexible network of networks. The solution is necessary to make this vision a reality will come from those who know the systems best and who have a proven ability to invent the solutions that solve the industry's challenges. We believe we are one of those companies. As a result, these are exciting times for us, times that we think will benefit from those with fresh thinking about how to invent technologies, those with a vision of the new areas of innovation to pursue, those with the investing capacity to grow those ideas on their own or through a leveraging relationship, and those with a broadening approach to the markets they serve. I believe that we are in a very good position to create significant value as this new era unfolds.
With that let me open it up for questions.
(Operator instructions). And we will go first to Tom Carpenter with Hilliard Lyons.
Tom Carpenter - Hilliard Lyons
One of the great things that's happened in the past five or eight years is we actually have transcripts of conference calls, we can go back and ask questions on something that was said on the last call. So on October 29, 2009 call, Bill you had referenced that we also have other license discussions ongoing where we have reached economic agreement on solid terms.
And since that time I don’t think I have seen any new licenses from IDC and I was hoping you could comment or give us an update on those comments you made in October.
That continues to be true, we have deals where the economic turns are largely worked out. It’s taking a little bit longer to sort of get from that point to a final agreement that gets signed. For me, that’s a little disappointing and I pushed the patent guys to see if they can move it along but on the other hand you know the most important thing is that deals get done on the right terms and I am still confident that we'll get those things done.
We will go now to Chris Versace with Think 20/20.
Chris Versace - Think 20/20
Just one question, try to make it an A or B if I can. In just dealing with the licensing agreement, since you look out to 2010, obviously we are seeing the beginnings of LTE and I am curious as to how that’s going to impact your conversations, your rates and things like that and when we should expect it to really pick up momentum first half second half of the year?
And then also buried in that, as we start to see some of your existing customers come out with new classes of devices, how should we be thinking about either them showing through the agreements, if you will, or perhaps what does it mean? An example would be Apple's iPad versus just the iPhone or something like that.
On the first question on LTE, LTE is becoming of more standard there in licensing discussion. It will depend to some extent on the perspective licensee and whether LTE is something that they intend to pursue over the period of the license that is being discussed, but typically the license periods are at least five years if not longer and any of the plans out there for LTE roll out would show that there is at least some meaningful roll out within that period. So it is part of the discussions, we are very well positioned on LTE from a patent perspective. Because it represents another layer of technology in the device, we are trying to see if we can move the rate up a little bit like we did when we went from 2G to 3G with the LTE, we'll see how we do doing that but it makes sense given the larger contribution of IP [ph] that we have on the device.
In terms of new devices, that a licensee may ship, typically the license, it depends a little bit on whether it’s running royalties or fixed plan; on a running royalty deal, you try to capture all devices that will come out so that you capture all that revenue. On a fixed price deal, it depends on how you are calculating what that fixed price should be, whether future products were in there, and there was some flexibility to capture them or not. So, it’s highly dependent upon the particular deal.
Next is Michael Ciarmoli, Boenning & Scattergood
Michael Ciarmoli - Boenning & Scattergood
If we can, how do we think thinking longer term about LG, that deal is going to conclude at the end of this year, that will be roughly I guess $57 million revenue gap, can you talk us through you may be the renegotiation process? Will there be a gap in early 2011? Do you think you can kind of re-up up their license or just renegotiate terms to continue that license so we will not see kind of revenue gap when we enter 2011?
Certainly the plan is to get the agreement renewed before the current one expires and we are already engaged in discussions with them as we should because these are process that can take some time. I think that the patent position is pretty strong going into the discussion, so I think that’s a very positive things for us. I also think that technology offerings that we are working on some of those could be very relevant to LG, so that’s another tool we will bring to those negotiations. So I think we are going to do everything we can to make sure that we have a smooth transition from the current agreement over to a new agreement.
We will go now to Charlie Anderson, Dougherty & Company.
Charlie Anderson, Dougherty & Company
Bill, I wonder if you could address M2M specifically, wireless M2M. You have a certain percentage of the 3G market that you are covering, but I wonder what percentage of sort of current wireless M2M you have and what your expectations are this year in terms of ramping that up?
You know we have two meaningful M2M suppliers currently under license. We have Cinterion which is one of the market leaders, but we also have Sierra Wireless which acquired one of the M2M providers. And we are also in discussion with a number of other folks in that space because as Scott mentioned we definitely view it as a growth area for us. And I think machine-to-machine has been a little slow to ramp over the years. It has been one of those things where that uptick has been always predicted and doesn’t quite come in as advertised.
But there are some strong initiatives now to push machine-to-machine, there is a standardization process going on within ETSI in Europe to standardize machine-to-machine technology, we think that is very important in terms of driving significant volumes.
And there are some other efforts going on worldwide to push machine-to-machine, I think there is a big effort in China on machine-to-machine. So, we view it as a area of growth for us, both in terms of licensing the current patent portfolio, because it’s very relevant to those devices.
But also with respect to some of the new technologies we are creating, we did demo a machine-to-machine technology in Barcelona that allowed very low cost, low power sensor like a Bluetooth sensor to opportunistically use a passing by cellular terminal unit to move its data back to whoever the recipient be, whether it’s a FedEx or something like that, and I think that those technologies are important for us to develop because we want to drive that market to the extent we could make it work even better, that ultimately works to our advantage.
(Operator instructions). We'll go again to Tom Carpenter, Hilliard Lyons.
Tom Carpenter - Hilliard Lyons
I wanted to follow up with your comments about the bigger pipes, more pipes and better pipes. Historically 99% of the licenses have been with handset manufactures, you have got 2 M2Ms, is the bigger push going forward going to be with handset manufacturers, infrastructure or the carriers or some combination of the above, may be kind of give us some more insight into how you see that business model, specifically the revenue stream changing over the next couple of years?
Sure, the idea is to actually create top technologies that would map across all of those markets or at least more than one of those markets right, so we get reuse of technology. Certainly that occurs with respect to the basic wireless technology, because not only does that appear in terminal units but it appears in infrastructure that is utilized by operators and it’s also now appearing in consumer electronics and other such devices. So that’s a core part of the program that will continue and have applicability across all those markets.
But we are looking at other technologies as well. An example would the compression technology. Compression technology is very important in the wireless space, because there’s a need to create the smallest packet carrying the most amount of data across that network, but compression technologies also pop up in many other devices, as you know, some of the non-wireless. So again the idea is to try to create technologies that has very significant volume flow in the market.
As far as how we would go to market with these additional technologies, that is still -- I think we have a number of opportunities there, certainly with respect to some of the technologies that can be a direct licensing strategy for example with the infrastructure side of the business. I think there is other opportunities though with respect to some software solutions like MIH and other things where the better play may be directly up to the operator, because you are providing substantial either cost reduction or operational efficiency to them, and you know a lot of times, the person who delivered value too is going to pay with the highest value back, and so we have to think about where that technology is creating the best of the highest level benefit, and so that’s being worked at the current time. The idea at the end of the day of course is to move from participation in this $150 billion market into a market that is five or seven times bigger than that. And if we can do that successfully, I think it becomes very, very significant growth story for the company.
(Operator instructions). We have another question from Tom Carpenter with Hilliard Lyons.
Tom Carpenter - Hilliard Lyons
Bill, you had mentioned and you talked about this last fall, in the Nokia case, I guess there were four patents which all of those have been an issue in the Samsung case. You talked about filing continuation patents on those and possibly for the new patent that would buttress your position in the case. Is that going to help you with appeal or do you have to file a new case based on those new patent filings you made?
It can be both. On appeal, and I have seen this before, to the extent that the judge in a case made a certain interpretation of a patent, one of the extrinsic evidence you can bring up on appeal, because it is a matter of public record, is a follow-up action by the patent office which may be contrary to what the judge did and may evidence of the fact that maybe the judge got it wrong.
So you can use success, subsequent successes at the patent office upon appeal if you think that that strategically makes the most sense. Separately of course you can use those patents -- first and foremost, you use them back in licensing discussion, and what I can tell you, I mean I went through this first hand back when we had the Motorola case, and we had an adverse decision there, but we were able to go back to the patent office and get very strong patents and subsequent license, the majority of the market also, because it took away a lot of the questions that one sometimes exists with the brand new patent because it hasn’t been tested.
Here these patents have been fully tested, the odds fully in front of everybody, and now we have the patent that overcomes all that, becames a pretty powerful tool in licensing negotiations. If need be it certainly is also very a powerful tool in future litigations because a subsequent fact finder can look at what happens with the particular patents, well it went through a pretty strenuous process here, where the findings of a prior fact finder is now, those have all been addressed. I think it puts you in a pretty good position in any future litigation.
We will go again to Charlie Anderson, Dougherty & Company.
Charlie Anderson - Dougherty & Company
On litigation arbitration expenses, you guys rubbed about $1.5 million Q3 to Q4, just wonder where you are seeing yourself directionally in Q1 and then if you compare 2010 to 2009 on that front?
Yes, we see that number obviously go up and down from quarter to quarter. It always depends on specific circumstances and level of activity in each quarter. So that has been a difficult one to predict on a quarter-to-quarter basis and a year-to-year basis and for that reason we don’t really give guidance on that component. I tried to put the number in perspective by giving an average over the last couple of years where I would say we have been fairly active in terms of litigation. Over the last year or so, the level of activity has probably been on the low end of the range, but it has crept up a bit.
I think the average over the last couple of years is probably not an unreasonable number but as we have said in the past, in any quarter and year, it could be significantly higher or lower for that matter. It’s a difficult one to forecast and so we don’t really make a habit of doing that.
We will go again to Chris Versace, Think 20/20.
Chris Versace - Think 20/20
Just looking at the balance sheet a little bit, I just kind of noticed that the aggregate deferred revenue number ticked down quarter-over-quarter. And if I remember correctly, this is the first time in a few quarters that we have seen it been sequentially down. I am just wondering if you could speak to that and at the same time talk about how we should think about the burn over the next 12 months or so for the deferred revenue line.
Sure, from Q3 to Q4, the deferred revenue balance did go down by about I think $54 million or so. What drives that up is prepayments that we get from folks or significant increases in accounts receivable that we expect to convert into cash over the next year. What makes it go down is simply the recognition of deferred revenue in each current period.
So what happened in Q4 real simply is we continue to recognize deferred revenue which relates in part to some fixed payment kind of deals as well as prepayments relating to some per unit deals that was probably about $60 million or so in the quarter and we had very few small amount of prepayments that resulted in an increase in that number. So that’s kind of what happened in Q4.
If you look at it, obviously, over the course of the last twelve months, a much different story, same kind of level of revenue recognition but much stronger payment receipts which drove that number up. It’s not unlike patented litigation cost, the number goes up and down quarter to quarter depending on cash receipts, which can be somewhat lumpy. I can tell you in the first quarter that we received cash from Samsung and that $100 million payment, so the cash can go up and down.
In terms of cash burn I think the fourth quarter was a situation where there was cash burn again because we didn’t really receive a huge amount of cash payments from, other than the normal quarterly per unit licensees that changes quarter to quarter and depends on the timing of payments as well as new licensees that we add.
So it is a little bit difficult to predict, but certainly if you look at the past couple of years it has been very strong and we have got $200 million of cash coming in, obviously $100 million received in January, another $100 million from Samsung due at the middle of the year.
And at this time, we have no further questions.
All right, thank you, Danny, and thanks everyone for dialing in on the call. And as always I will be available afterwards if you have any follow up questions. Thank you.
This does conclude today’s call. We thank you for your participation.
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