My comments on today's cash flow discussion.
A cash flow statement consists of three sub categories: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. Investors are usually most concerned with cash flow from operating activities which, as the title implies, covers the normal operations of the business.
The key to operating cash flow and paying dividends is in Fish’s statement that
“As long as you have licenses that renew when due, as well as signing new licenses, you have 'cash flow' coming in. ONCE THE LICENSES EXPIRE OR NEW LICENSING DRIES UP, you have no incoming cash but you still have expenses (salaries, dividends, ongoing expenses, etc. with no cash coming in. You may evenually burn the $12 million and be 'out of cash'. “
IDCC is not a normal business where cash is generated by recurring product sales. IDCC’s cash is generated by patent royalty paying licenses granted to a small number of customers. Cash payments are made either quarterly based on licensees’ sales of royalty bearing products, or a lump sum amount is paid to cover all sales during a specified period. Recent licenses have been more of the lump sum payment type, which are accounted for in the deferred income accounts, rather than recurring quarterly payments which are recorded as income when received.. These lump sum payments have resulted in sharp variations in reported operating cash flow. For example, operating cash flow during 2016, 2015, and 2014 was positive at:
2016………….$431 million
2015………… 114 million
2014…… ……242 million
However, in the 1st qtr, 2017, because no new agreements were signed, reported operating cash flow was a negative (more out than in) $26 million.
Another point for consideration is that without new licenses IDCC’s revenues would probably be around the $400 million range. According to the 10-K:
“Based on current license agreements, we expect the amortization of fixed-fee royalty payments and the scheduled expiration of an agreement to reduce the December 31, 2016 deferred revenue balance of $621.2 million by $360.2 million over the next twelve months. Additional reductions to deferred revenue over the next twelve months will be dependent upon the level of per-unit royalties our licensees report against prepaid balances.”
This means that in the absence of new licenses a substantial portion of IDCC’s future reported revenue would not be generating cash.
