From the IDCC 10K. It sounds like previous agreements didnt give rights to future patents so they can no longer recognize revenue on a straight line basis over the term of the license.

https://www.sec.gov/Archives/edgar/data/1405495/000140549518000015/idcc-2017x10k.htm

Accounting Standards Update: Revenue Recognition

In May 2014, the FASB issued guidance on revenue from contracts with customers that superseded most revenue recognition guidance in effect at December 31, 2017, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017. The guidance permits the use of either a retrospective or cumulative effect transition method.

The new guidance will affect our recognition of revenue from both our fixed-fee and per-unit license agreements beginning in first quarter 2018. For accounting purposes under this new guidance, we will separate our fixed-fee license agreements into two categories: (i) those agreements that provide rights, over the term of the license, to future technologies that are highly interdependent or highly interrelated to the technologies provided at the inception of the agreement (“Dynamic Fixed-Fee Agreements”) and (ii) those agreements that do not provide for rights to such future technologies (“Static Fixed-Fee Agreements”). Under our current accounting practices, after the fair value allocation between the past and future components of the agreement, we recognize the future components of revenue from all fixed-fee license agreements on a straight-line basis over the term of the related license agreement. Upon adoption of the new guidance, we expect to continue to recognize revenue from Dynamic Fixed-Fee Agreements on a straight-line basis over the term of the related license agreement, while we expect to recognize most or all of the revenue from Static Fixed-Fee Agreements in the quarter the license agreement is signed. We will not recognize any revenue post adoption from Static Fixed-Fee Agreements already in existence at the time the guidance is adopted. Based on our preliminary classifications of fixed-fee license agreements as either “Dynamic” or "Static," in 2017, approximately 70% of our fixed-fee revenue was derived from Dynamic Fixed-Fee Agreements, with the remainder coming from Static Fixed-Fee Agreements. Additionally, in the event a significant financing component is determined to exist in any of our agreements, we may recognize more or less revenue and corresponding interest expense or income, as appropriate. See below for a preliminary summary of expected adjustments related to our adoption of ASC 606.

In addition, under our current accounting practices, we recognize revenue from our per-unit license agreements in the period in which we receive the related royalty report, generally one quarter in arrears from the period in which the underlying sales occur (i.e. on a "quarter-lag"). Upon adoption of the new guidance, we will be required to record per-unit royalty revenue in the same period in which the licensee’s underlying sales occur. Because we do not expect to receive the per-unit licensee royalty reports for sales during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in our quarterly results for such quarter, we expect to accrue the related revenue based on estimates of our licensees’ underlying sales, subject to certain constraints on our ability to estimate such amounts. As a result of accruing revenue for the quarter based on such estimates, adjustments will likely be required in the following quarter to true-up revenue to the actual amounts reported by our licensees. In addition, to the extent we receive prepayments related to per-unit license agreements that do not provide rights, over the term of the license, to future technologies that are highly interdependent or highly interrelated to the technologies provided at the inception of the agreement, we will recognize such prepayments as revenue in the period in which all remaining revenue recognition criteria have been met.

FWIW, the call has started for me.


Slacker

Can anybody explain the impact of the new ASC606 accounting standard? Why did it reduce Q1 guidance by $24 million?


Thanks for any help.


Slacker

Pegatron's revenues were up 30% YoY in the September quarter.

http://www.taipeitimes.com/News/biz/archives/2015/10/09/2003629588

Yep, nothing on Interdigital initiating a legal action.

The obvious reason that a licensor might do that would seem to be a licensee not paying or only paying a portion of what was owed...or does that usually end up in arbitration?

Random WAG here, but could Pegatron's civil suit violate some portion of the license terms? I'd certainly like that explanation better.

Slacker

Is this new?

I knew that Pegatron had initiated a suit in Taiwan but didnt know that IDCC had a proceeding against Pegatron here. Did they talk about this at the AM?

Legal action against the company that made up 40% of their first quarter revenue makes me nervous.


Slacker

Has IDCC ever talked about attempting to reduce their tax rate? Universal Display established a UDC Ireland last year and their recent contract with LG was signed with UDC Ireland to lower future tax payments. Of course, you have to make sure that you have enough US cash for future expenses.

Total speculation, but this would be a sensible reason to raise cash while rates are low even when you already have significant cash on hand.

There would normally be a dramatic fall in Pegatron revenues in February as we enter the mobile dead season and attention shifts from the iPhone to the new launches from Samsung/HTC etc. The extent that they can change that trend will probably give a good preview for revenues from the iPhone for through the summer.

Pegatron's first quarter revenues will be interesting to watch. Their January revenues were actually up 3% MoM from December though I am sure that revenue will decrease as they move past the Chinese New Year. Channel fill should help though and their 6 shipments should dwarf their 5C shipments from last year.

Moving through the year, Pegatron's ability to pick up a larger share of 6S shipments will be key.

Q4 looks in line but guidance is huge.

Near-Term Outlook

"We expect that sales volumes of our per-unit licensees in fourth quarter 2014 will drive our first quarter 2015 total revenue to a range of between $107 million and $110 million, comprised entirely of recurring revenue," said Richard J. Brezski, Chief Financial Officer. "This expected sequential quarterly increase is based on the same set of licensees and is driven, in part, by second half 2014 product introductions that saw tremendous market success but also introduce a cyclical element to our first quarter guidance. Consistent with our practice, this revenue guidance is based on royalty reports received to date, and does not include the potential impact of any new patent license, technology solutions or patent sale agreements that may be signed, or any arbitration or dispute resolutions that may occur, during the balance of first quarter 2015."

It is my understanding that Pegatron (and Foxconn) just assemble the final product and supply miscellaneous small parts. All the major components that you see in the published bills of material are purchased by Apple and shipped to Pegatron for final assembly. Therefore, Pegatron's revenue, upon which a per unit royalty should be paid, is very small in relation to the products ASP. The following article explains the Apple/Pegatron relationship, note the highlighted part.

My attempt at calculating the increase in IDCC's royalties from Pegatron was by estimating the increase in revenues for the Communications division and then discounting it by the increase in ASP. I used the following link to get me in the ballpark. The cost to Apple for the new iPhone's is generally around estimated to be around $200.

http://www.forbes.com/sites/chuckjones/2014/09/24/apples-iphone-6-teardown-and-other-costs-analysis/

Of course, as DR stated, there could be a number of other factors that would discount this number further. IDCC's revenue as a percentage of Pegatron's communication division revenue has drifted downward by about 20% over the last year.

Slacker

I am pretty confident it is per unit.


Thanks.

I was thinking that would I would have to apply a big discount to revenue growth if it was per unit, but that doesnt seem to be the case. Pegatron has gone from selling iPhone 5C's last year to the 6 this year, but while there is a big difference in Apple's ASP, I am not sure if the same is true for Pegatron.

For one thing, a big portion of the ASP increase is due to consumers selecting higher storage capacities and that is probably entirely captured by Apple. Also, Apple's margins will be higher on the 6 than the 5C.

I found one source that shows a 15% bill of materials cost increase from the 5C to the 6 (it includes assembly and test). That would mean that IDCC should still see revenue growth from Pegatron well over 80%.

It seems to me that non-Pegatron per unit license fees would have to absolutely collapse for the March estimate to be close.

Slacker

Pegatron revenue up 30% YoY but down about 1% MoM.

http://www.corpasia.net/taiwan/4938/monthlysales/83/EN/Pegatron_Nov%2014_ePM5La7NcJnj.pdf

Pegatron reported October revenues were up 13% MoM and 35.8% YoY. Last October they were actually down 26.1% MoM.

http://www.digitimes.com/news/a20141110PM210.html

Likely a dumb question, but why are analyst estimates for revenue in Q4 lower than for Q3? Revenue from Pegatron should be up substantially (and even more so in Q1 2015). Is there a license expiration I am missing?

Thanks for any help.

Pegatron lands half of 4.7-inch next-generation iPhone orders, say sources


http://www.digitimes.com/news/a20140813PD221.html

Monica Chen, Taipei; Joseph Tsai, DIGITIMES [Thursday 14 August 2014]
Apple's upstream suppliers have begun shipping components for next-generation iPhones recently and Pegatron Technology is estimated to have landed half of the orders for the 4.7-inch model, indicating that Pegatron may supply 25 million of the estimated 50 million 4.7-inch next-generation iPhones shipped before the end of 2014, according to sources from the upstream supply chain.

However, makers believed to be in the new iPhone supply chain have declined to comment.

Apple is said to be unveiling its next-generation iPhones on September 9 and the 4.7-inch model is scheduled to enter mass shipments in October.

Previously, Foxconn Electronics (Hon Hai Precision Industry) was said to have landed all of Apple's new 5.5-inch model orders and 70% of the 4.7-inch model's orders. However, the latest development shows that the orders for the 4.7-inch models are split evenly between Pegatron and Foxconn, the sources said.

The sources also pointed out that Pegatron's relationship with Apple has grown tighter recently.

With the strong orders from Apple, Pegatron is expected to see impressive results in the fourth quarter. Currently, Apple's orders contribute 35-40% of the company's revenues, the sources said.

Thanks, missed the presentation.

Will listen now.

I was thinking it was a running royalty since that is what the original press release calls it a royalty plus the fact that guidance widened from a range of $55-$57 million recurring sales to $72-$80 million. Why would guidance widen like that on a fixed agreement?

Congrats everybody!

You are not comparing the same figures. The $65-$70 million amount in your comparison was the previously reported amount for both recurring and past sales. The $72-$80 million in the current report is only for recurring revenues.


From the previous announcement
"We expect recurring revenues to be in the range of $55 million to $57 million and past sales to add another $10 million to $15 million,

Samsung did about $30 billion in revenue for their mobile division. A royalty of $15 million to $25 million would give a range for the rate of .05% to .083%. Of course, that assumes that the guidance given in late May that covers the previous licensees is still exactly the same.



Slacker

I am sure China helps some, but reportedly the sales ratio of the 5S to 5C has been something like 6 to 1 in China. The 5C is actually selling better in the US than in most other places around the world.

There is a market for a handset like the 5C, but Apple did a terrible job of setting the price point/features.


Slacker

I certainly agree that the market is not taking into account that rumor. Part of it is probably due to the source. I am not sure I can remember any tech rumors coming out of the Liberty Times.

If Pegatron is responsible for half of iPhone 6 production, it should provide for a very nice end of 2014.

Personally, I doubt that Pegatron screaming about IDCC royalties is going to make any difference to either Apple or Foxconn.


Slacker

As DR stated, Pegatron manufactures the 5C and is paying IDCC royalties on a per unit basis.

The question I was attempting to answer is why has the valuation fallen so low. Of course, a substantial problem is the lack of new licensees. However, I think one reason that the ex-cash valuation is even lower than previous falls is that the current per unit licensees are doing terribly.

Last fall, it was hoped that Pegatron might make up for the falls in Sharp, HTC, and Blackberry. The lower than expected sales of the 5C have hurt that possibility and I think that is extending the fall in valuation.



Slacker

My guess is that the decline in Interdigital is at least partially due to the disastrous sales of the 5C. Apple clearly built up to much inventory of the 5C in the first two months after launch and it is unclear if that issue has cleared up.



Slacker

I think the market is pretty clearly expecting negative cash flow going forward. Considering that, I'm not sure that the cash position provides any kind of absolute floor to the stock price.


Slacker

I look at it as a second chance for IDCC to abandon the creative licensing ups, downs and failures for a transparent FRAND licensing effort. I am tired of IDCC trying to select winners and losers in the wireless market.

Yep, move entirely to a royalty system with everybody paying the same rate. The fixed fee system complicates everything, and this is a case where KISS makes sense.

The question is, how much did IDCC compromise on their rate to get into arbitration? Has IDCC hinted at what they may have been asking in terms of rates over the last year or two?

The 3G market is now worth north of $220 billion. IDCC can compromise well below a 1% rate and still hit their targets.

The fact that they actually expect a decision by the end of 2014 is great news. Litigation has simply taken too long with little end in sight.


Slacker

Way OT.

I have to respect him because he seems to be fact oriented. How people can ignore that is beyond me.


While Asensio has been successful at finding fraudulent companies, he has been anything but honest in his research.

Just a simple example, he lists his track record on his website. He shows the price when he launches his short and then the lowest price that the company EVER hits after his attack. So Netflix is considered a success, even though it has doubled since his piece.

That is the simplest example, there are any number of idiotic/false accusations in his actual research.

So while he's good at finding fraudulent companies, he uses any tactics he can get away with to scare investors.

As for OLED, the patent that was overturned in Europe was upheld in Japan, and it is only one of four fundamental patents that cover phosphorescent materials. He way overstates the importance of the case.


Slacker

I wonder if the fact that Yahoo shows consensus revenue at $57m is having an impact. At first glance, it looks like recurring revenue missed since analysts dont usually put one-time revenues into estimates.

However, if you look at the numbers, there are only 3 estimates and the high-end estimate is at $81m. That almost has to include the catch-up revenue and it skews the average upwards pretty dramatically. If you took $27m out, the consensus would have been $48m.



Slacker

The press release says it is for "past sales revenue". While that might be for Q3, it sounds more like periods prior to that.

I didnt get a chance to listen to the call so these questions might have been answered in the call. Did WM comment on the period that $27m covers?

I should have read the press release more carefully. So the $27m is make up payments for past shipments. Did WM give an idea about the period that covers?

Basically, I would love to know a "clean" number for revenue for any single quarter. We can try and scale up the revenue to see what Pegatron might pay going forward.

Is the $26 million a run-rate or does it have catch up payments?

Does anybody have any estimates on Pegatron revenue going forward? I have been trying to come up with some numbers.

According to Pegatron's guidance, they expect ~50% revenue growth in the non-computing divisions sequentially. I had to make some assumptions on the split between divisions but that could translate to something around 33% YoY revenue growth in their communications division.

Does the $12 million that Interdigital referenced in their August preannouncement represent the entirety of their revenue from July 2012 to March 2013?


Slacker

Here is the full article on Forbes.

http://www.forbes.com/sites/chrisversace/2013/09/26/interdigital-caught-between-dropping-blackberry-sales-and-nokia-vs-htc/?partner=yahootix

Seriously?

You dont think that Apple beating expectations by 50% or so is another piece of new information that the market is digesting this morning?

I'm a big believer in Occam's razor and it applies to both Friday afternoon and this morning.

I have no idea why what I am saying is remotely controversial. Somebody wondered why Interdigital declined on Friday afternoon and this is the answer. Almost everything related to mobile fell at around the time of the BBRY warning. The impact on revenue will be felt in the December and March quarters though upside from Pegatron could offset the weakness.

Obviously, the revenue decline is far less important than the legal cases, but there is always going to be some impact when the market gets new information on near-term revenues.


Slacker

Well, I had done enough research to tell you that Blackberry was a 10% customer last quarter (I think 12%).

Somebody wonders why the stock fell and it just happens to be when a 12% customer warned that revenues would be 50% below expectations. I dont think it takes a rocket scientist to connect the two events.


Slacker

It has been a while since I have followed Interdigital closely, can anybody point me to a post or two summing up the Pegatron arbitration? Or any near-term court decisions?

Thanks for any help.

Slacker

While the market may be underestimating the impact of Pegatron, the "new news" on Friday was clearly Blackberry. It had been at least a possibility that Blackberry might survive in some form but that possibility is absolutely over. They missed expectations by 50% for the August quarter and the November quarter is going to be worse.


Slacker

I dont think there is much mystery. The Blackberry numbers were beyond awful and that is going to impact per unit revenue going forward.


Slacker