Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Magilla re Fuji
I doubt that the new chip design company will have any bearing on Fuji's past sales or the current quarter revenue to be recognized by IDCC in Q2 2014 for two reasons. This new company will not be operational until Q4 2014, and it does not appear that chips are even part of the license agreement with IDCC, but only terminal units and infrastructure. However, the infrastructure portion of Fuji's royalty could be causing the allocation between past sales and current quarter royalties to be much more complicated for IDCC than just having to deal with terminal units only.
Jim re accounting for Fuji and Arima differences
The revenue recognition on the new Fuji license will involve an allocation between past sales (nonrecurring) and current quarter royalties (recurring) in Q2 2014. Fuji's unit sales for Q1 2014 should be the basis for IDCC's recognizing current quarter royalties in Q2, ie the one quarter lag on per-unit licenses. The remainder of the the agreement settlement amount would probably be accounted as past sales revenue. Perhaps IDCC had not received Fuji's sales report for Q1 ending on March 31 by May 1, the date of the press release, and could therefore not make the determination between past sales and current quarter royalty at that point in time. IDCC should probably have this report in-hand before they make Q2 revenue guidance.
One side note: this allocation problem between past sales and current quarter royalties usually does not exist with new fixed-fee licenses. Usually IDCC will just recognize the fixed amount over the current quarter and future quarters based upon the number of quarters of the fixed agreement. For example the fixed-fee LG and Samsung licenses, which have now expired, had no past sales amount allocated to them, but the more recent Sony fixed-fee license did have past sales allocated to it. However, this accounting treatment can't be done with a new per-unit license with settlement amounts, since current quarter royalties must match with the unit sales of the previous quarter only.
As far as Arima's revenue recognition: since this was an arbitration award, the settlement amount, excluding interest and legal costs, will probably be allocated to past sales. Arbitration award amounts almost exclusively are based upon past sales of the licensee. IDCC's statement about fixed, determinable, and collectibility being reasonably assured is a general revenue recognition principle. I suppose Arima could balk at paying the arbitration settlement amount, in which case, IDCC might have to get an arbitration confirmation ruling before they are assured of collectibility.
Hope this helps some.
Apple suppliers Pegatron and Wistron
Pegatron generated $96m of revenues to IDCC in 2013, as an ODM supplier to Apple. This amount exceeded the Apple fixed-fee license of $60m for 7 years signed in 2007, which expires at the end of June 2014. It now appears that Apple will be using IDCC licensed ODM supplier Wistron in 2014, in addition to Pegatron and Foxconn (unlicensed). To the extent that Wistron takes some Apple production away from Foxconn, this will provide a net benefit to IDCC in 2014. However, if Wistron takes Apple production away from Pegatron and not Foxconn, it might be no additional benefit to IDCC in 2014.
From the 2012 10K:
"In third quarter 2012, we entered into a worldwide,non-exclusive, royalty-bearing patent license agreement with Wistron Corporation, a Taiwanese corporation. The agreement covers various products,including handsets, wireless modules, computers, tablets and other consumer electronic devices, designed to operate in accordance with 2G, 3G and 4G wireless standards, including LTE and LTE-Advanced. Wistron is a leading original design manufacturer in the laptop market."
From the article posted by David:
"Apple is enlisting additional help to meet demand for its new iPhones. Sources in position to know tell AllThingsD that Apple has tapped Wistron, a contract manufacturer in Taiwan, to bolster iPhone production capacity as it heads into the holidays and the new year beyond. Wistron will begin manufacturing devices for Apple sometime this month or next, joining existing iPhone production partners Foxconn and Pegatron, sources said."
la-fan re Pegatron's timing issue you said:
"However, I am confused by the timing. I believe IDCC's Q4 per-unit revenues are based on royalties received in Q4 for sales in Q3. Therefore, I would not expect the October 2013 decision to affect Q4 revenues. What am I missing?"
My opinion: since the arbitration verdict was rendered very early in Q4 on Oct 10, that gave IDCC time to notify Pegatron that its Q3 royalty report, which I believe is not due until at least one month later following the end of a quarter (ie Oct 31 at the earliest), needed to also include Apples 4G iphones and ipads manufactured by Pegatron in Q3 2013 per the Apple arbitration verdict. Evidently Pegatron's Q3 report also included past sales before Q3 2013 of these same products resulting in $35.6m past sales recorded by IDCC in Q4, in addition to the $21.3m of per-unit royalties recorded in Q4 for Pegatron's Q3 sales.
la-fan re Pegatron's Q4 Revenue contribution you said:
"Pegatron's contribution in Q4 is mind-boggling considering they make well under half of all iPhones sold."
I too was amazed at Pegatron's per-unit contribution of $21.3m in Q4, which was more than all the other IDCC per-unit licensees combined, and a dramatic increase from Pegatron's Q3 per-unit contribution of $3.4m. Evidently the arbitration win against Apple on Oct 10, 2013 was the catalyst that increased Pegatron's recurring per-unit royalties. That ruling made Apple's 4G LTE iphones, its CDMA2000 iphones, and also its ipads royalty-bearing to the licensed ODM (Pegatron), because they were not covered under IDCC's 2007 2G/3G fixed-fee license with Apple. From the Q3 10Q as follows:
"Arbitration with Apple Inc. Regarding Scope of 2007 Patent License Agreement
On October 10, 2013, a three-member tribunal constituted by the American Arbitration Association’s International Centre for Dispute Resolution issued an arbitration award in a proceeding initiated by our wholly owned subsidiaries InterDigital Technology Corporation and IPR Licensing, Inc. to resolve a dispute surrounding our 2007 patent license agreement with Apple Inc. (the "Apple PLA”). The arbitration award declared that Apple iPads, and any Apple products that operate on CDMA2000 or LTE networks, are not licensed under the Apple PLA."
IDCC Revenues by Quarter Q1 2012 - Q4 2013
Q1 2012:
Fixed-fee:
Samsung $25.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Inventec $1.5m per quarter
Unidentified Licensee beginning Q4 2011 $0.5m per quarter
Total Fixed Fee $33.7m
Per Unit:
RIM $11.8m (69.3m x17%)
HTC $7.6m ($69.3m x 11%)
Other per-unit licensees $15.0m
Total per-unit $34.4m
Past Sales $0.45m (U-blox AG)
Technology $0.72m
Total Revenues $69.3m Q1 2012
Q2 2012:
Fixed-fee:
Samsung $25.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Inventec $1.5m per quarter
Unidentified Licensee beginning Q4 2011 $0.5m per quarter
Total Fixed Fee $33.7m
Per Unit:
RIM $8.6m ($71.9m x 12%)
Other per-unit licensees $18.8m
Total per-unit $27.4m
Past Sales $1.2m
Patent sales $9.0m (Nufront Mobile)
Technology $0.5m
Total Revenues $71.9m Q2 2012
Q3 2012
Fixed-fee:
Samsung $25.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Inventec $1.5m per quarter
Unidentified Licensee beginning Q4 2011 $0.5m per quarter
Total Fixed Fee $33.7m
Per-Unit $23.6m
Past Sales $0.98m
Patent sales $375.0m (Intel)
Technology $0.62m
Total Revenues $434.0m Q3 2012
Q4 2012
Fixed-fee:
Samsung $25.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Inventec $1.5m per quarter
Unidentified Licensee beginning Q4 2011 $0.5m per quarter
Total Fixed Fee $33.7m
Per Unit $29.8m
Past Sales $23.65mm ($22.3m Sony, $1.35m other)
Technology $0.64m
Total Revenues $87.9m Q4 2012
Q1 2013
Fixed-fee:
Sony $9.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Other Fixed-fee licensees $1.2m
Total Fixed-fee $16.9m
Per-unit:
HTC $9.5m ($47.4m x 20%)
Blackberry/RIM $6.6m ($47.4m x 14%)
Sharp $4.7m ($47.4m x 10%)
Other per-unit licensees $$8.5m
Total per-unit $29.3m
Past Sales $0.7m
Technology 0.45m
Total Revenues $47.4m Q1 2013
Q2 2013
Fixed-fee:
Sony $9.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Other Fixed-fee licensees $1.2m
Total Fixed-fee $16.9m
Per-unit:
Blackberry $7.4m ($67.7m x 11%)
Other per-unit licensees $18.6m
Total per-unit $26.0m
Past Sales $24.2m (Pegatron $23.5m prior to Q3 2012 [Note:1], Other $0.7m)
Technology 0.48m
Total Revenues $67.7m Q2 2013
Note 1: The Pegatron arbitration award of $29.9m in Q2 was allocated $23.5m to past sales before July 1, 2012 and $6.4m to interest income, which was netted against Interest Expense.
Q3 2013
Fixed-fee:
Sony $9.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Other Fixed-fee licensees $1.2m
Total Fixed-fee $16.9m
Per-unit:
Pegatron $3.4m
Other per-unit licensees $22.9m
Total per-unit $26.3m
Past Sales $12.5m (Pegatron $12.2m for Q3 2012 - Q1 2013, Other $0.3m)
Technology $54.9m (Intel Mobile $51.6m of past deferrals, current quarter $3.4m, which is primarily Intel Mobile)
Total Revenues $110.6m Q3 2013
Q4 2013
Fixed-fee:
Sony $9.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Other Fixed-fee licensees $1.2m
Total Fixed-fee $16.9m
Per-unit:
Pegatron $21.3m (total Q4 Pegatron $56.9m - $35.6m Pegatron past sales recorded in Q4)
Other per-unit licensees $19.7m
Total per-unit $41.0m
Past Sales $36.4m (Pegatron $35.6m, Other $0.8m)
Technology $5.4m (including $1.7m past technology sales, $3.7m recurring primarily Intel Mobile)
Total Revenues $99.7m Q4 2013
Olddog thanks for update on the LTCP. EOM
Mickey re IDCC's long-term comp plan
IDCC's long-term comp plan (LTCP) is composed of two parts: one part is time-based and the other part is incentive performance-based. Time-based means that if an employee is still working for IDCC for 3-year periods (ie they have not been fired or quit), then they receive the time-based portion of the long-term comp in the form of stock/vested RSUs. Performance-based long-term comp is now paid in cash rather than RSUs. It appears to me that the majority of IDCC's performance-based incentives is based upon cash flow and new licenses, rather than earnings per share and IDCC's stock price.
Prior to 2010, IDCC Executives received 50% of their long-term comp based on time and 50% based on incentive performance, and Managers received 75% based on time and 25% based on performance. This was changed to 25% time-based and 75% performance-based for 2010 and after for both Executives and Managers. Also in 2010 IDCC extended the long-term comp plan to include all IDCC employees. Any IDCC employee below the Manager level receives 100% of their long-term comp based upon time alone, none of their long-term comp is based on performance.
Some excerpts from the latest 2012 10K:
"In fourth quarter 2010, the LTCP was amended to, among other things, increase the relative proportion of performance-based compensation for executives and managers, extend participation to all employees, and eliminate alternating RSU and cash cycles. Effective with the cycle that began on January 1, 2010 through
December 31, 2012, executives and managers received 25% of their LTCP participation in the form of time-based RSUs that vest in full at the end of the respective three-year cycle and the remaining 75% in the form of performance-based awards granted under the long-term incentive plan (“LTIP”) component of the LTCP.
All employees below manager level received 100% of their LTCP participation in the form of time-based RSUs that vest in full at the end of the respective three-year cycle."
"We also recognized $8.3 million , $1.8 million and $11.2 million of compensation expense in 2012 , 2011 and 2010 , respectively, related to the performance-based cash incentive under our LTCP. In 2012, performance-based cash incentive cost of $8.3 million includes a charge of $4.4 million to increase the accrual rate for Cycle 5 from the previously estimated payout of 50% to the actual payout of 100%. The increase in the incentive payout from 50% to 100% was driven by the company's success in achieving a number of key goals, including the execution of strategic patent sales and the signing of new or amended 4G patent license agreements, after we had reduced the accrual rate to 50% in 2011."
"In 2010, the performance-based cash incentive cost includes a charge of $3.3 million to increase the accrual rate for Cash Cycle 3 from the previously estimated payout of 50% to the actual payout of 86%. The increase in the incentive payout from 50% to 86% was driven by the company's success in achieving a number
of key goals, including the signing of five new or amended 3G patent license agreements, after we had reduced the accrual rate to 50% in third quarter 2009."
Postyle re Rmarchma Reference information
First, thanks for thinking that some of my posts should be referenced information for this message board. That's quite an honor. Since you did decide to reference them, let me offer the following suggestions:
I did recap IDCC's Revenues by year and licensee through 2011 linked as follows:
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=72871128
You might want to replace the referenced post: IDCC's Revenues thru 6/30/2010 by licensee with the more recent one above, as that updated post incorporated everything that was in the post thru 6/30/2010.
I noticed that you referenced Fixed fee revenues 2009 thru 6/30/2010. I also did a more recent post on Fixed-Fee revenues Q4 2010 thru Q1 2012 linked as follows:
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=76445079
You should probably delete the referenced post, IDCC stock repurchases by year through 2009, as all this information was incorporated in my updated post, Recap of IDCC's stock purchases through Q3 2013, which you have already linked as reference info.
Mickey re infrastructure license or patent sales
Well I can't see where IDCC generated any separate infrastructure license through Signal Trust, nor any type of patent sales during 2013 so far. Usually the Annual 10-K will provide disclosure of all of IDCC's licensing activity during the year, including those that were not separately disclosed during the year.
Mickey re what happened with IDCC's infrastructure patents
Evidently IDCC decided not to sale the infrastructure patents, but rather try to license them through a separate newly-created entity, Signal Trust. From IDCC's press release:
"October 17, 2013
InterDigital Announces Formation of Signal Trust
Trust will monetize InterDigital patents related to cellular infrastructure; Trust may expand licensing programs over time; trust structure may serve as model for additional InterDigital patent license program enhancements
WILMINGTON, Del., Oct. 17, 2013 (GLOBE NEWSWIRE) -- InterDigital, Inc. (Nasdaq:IDCC), a wireless research and development company, today announced the establishment of the Signal Trust for Wireless Innovation, which will monetize a large InterDigital patent portfolio related to cellular infrastructure.
The more than 500 patents and patent applications being transferred to the Trust focus primarily on 3G and LTE technologies, and were developed by InterDigital's engineers and researchers over more than a decade, with a number of the innovations contributed to the worldwide standards process. As a result, the patent portfolio includes patents for pioneering inventions that the Company believes are used pervasively in the cellular wireless industry. InterDigital will retain licensing and other monetization rights to the transferred patents for a limited period of time enabling companies to conclude agreements with InterDigital during a transition period.
InterDigital has committed funding to the Signal Trust to help ensure its successful launch. The Company will also be the primary beneficiary of the Trust. The distributions from the Trust will support continued research related to cellular wireless technologies. A small portion of the proceeds from the Trust will be used to fund scholarly analysis of intellectual property rights and the technological, commercial, and creative innovations they facilitate, through the newly-formed Signal Foundation for Wireless Innovation.
The Company has selected two industry veterans to lead the Trust:
Roger E. Stricker, PhD will serve as Trust Advisor. Dr. Stricker's background includes more than 25 years of patent management and licensing experience at IPLM Associates as well as Lucent Technologies, building on a 15-year career in technology development at AT&T and RCA. He holds a PhD in Electrical Engineering from Purdue University.
Bruce G. Bernstein, Esq. will drive the daily portfolio monetization efforts for the Trust. Mr. Bernstein contributes more than two decades of patent management and monetization experience, and from 2005 to 2008 was InterDigital's Chief IP and Licensing Officer. During his tenure, the company closed licensing deals having a cumulative value in excess of $700M.
"The creation of the Signal Trust is a further step in our successful strategy to expand the means by which we monetize our large and growing intellectual property portfolio developed over many years of market-leading research," commented William J. Merritt, President and Chief Executive Officer of InterDigital. "Using this portfolio of strong inventions, we expect the Signal Trust to derive significant value from licensing the large cellular infrastructure equipment market, a market that alone saw over $30 billion in sales in 2012. We also see the trust structure as a potential model for unlocking the value of various other patent portfolios for the Company," continued Mr. Merritt."
Rox re Blackberry's higher sales prices per unit
Thanks for the info, as higher unit selling prices could certainly cause a higher per-unit royalty. I think IDCC does determine royalty per-unit as a certain fixed % of the licensed products' sales price, less some non-IPR items such as batteries, screens, etc less prepaid discounts if any, and less possible volume discounts if any.
RIM/Blackberry's indicated updated royalty rates
Most IDCC's per-unit licensees use a calendar quarter, and then submit their royalty reports to IDCC within 30 or so days following the end of the quarter. IDCC records per-unit royalty revenues in the quarter in which the royalty report is actually received, which produces a one quarter lag between the quarter the licensee sales occurred and the quarter that IDCC records the revenue.
Blackberry uses a fiscal year that ends on Nov. 30, and thus it reports to the general public based on fiscal quarters rather than calender quarters, ie Blackberry's 2013 Q1 reported results are for the months December 2012, January 2013, and Feb 2013. However, I believe that when they submit an internal royalty report to IDCC it is based on a calender quarter, rather than a fiscal quarter.
That is why I think it is much more difficult to try a compute an indicated royalty rate per quarter for Blackberry. Therefore, if one tries to compute a royalty rate for Blackberry using a one quarter lag, you will get significantly varying royalty rates per quarter. The total royalty received by a per-unit licensee should vary based upon actual units sold, however the rate per unit should generally remain fairly constant. This is the classic economic definition of a variable cost, which varies in total only, but is relatively fixed per unit.
However, if one tries to adjust Blackberry's fiscal quarters to calender quarters, the indicated variation in the indicated quarterly royalty rate per unit is much less and probably represents the truer actual royalty rate. That's what I did when I tried to determine an indicated royalty rate per unit for RIM for each quarter during 2011 in my referenced post that I am replying to in this post, which produced indicated quarterly royalty rates ranging between 78 cents to 85 cents per unit for 2011.
Furthermore, I believe that it was RIM and HTC, who made the very large prepayments in 2009, which totaled $182m. If so, these large prepayments would have entitled RIM and HTC to prepaid discounts and thus a lower net royalty amount and a lower per-unit royalty for the prepaid period. I also think that the prepaid period was probably 3 years, and the prepaid discounts were thus used-up sometime during 2012.
Blackberry has been experiencing problems beginning in 2012, and its fiscal quarter unit sales are as follows:
Q4 2011 = 14.1m (Sept, Oct, Nov)
Q1 2012 = 11.1m (Dec 2011, Jan and Feb 2012)
Q2 2012 = 7.8m (Mar, Apr, May)
Q3 2012 = 7.4m (June, July , Aug)
Q4 2012 = 6.9m (Sept, Oct, Nov)
Q1 2013 = 6.0m (Dec 2012, Jan and Feb 2013)
Q2 2013 = 6.8m (Mar, Apr, May)
Q3 2013 = 4.5m (June, July, Aug)
Blackberry contributed more than 10% of IDCC's total revenues in each quarter during 2011, but only for Q1 and Q2 of 2012 and Q1 and Q2 for 2013 producing indicated royalty amounts to IDCC as follows:
Q1 2012 = $11.8m ($69.3m x 17%)
Q2 2012 = $8.6m ($71.9m x 12%)
Q1 2013 = $6.6m ($47.4m x 14%)
Q2 2013 = $7.4m ($67.7m x 11%)
To try and adjust Blackberry fiscal quarters unit sales to a calender quarter basis, I use the preceding quarter twice and the current quarter once and divide by 3. For example to adjust RIM's fiscal Q4 to an estimated calender Q4, I multiply fiscal Q4 x two for Oct and Nov and fiscal Q1 x one for Dec and divide by 3 as follows:
Q4 2011 14.1m x 2 = 28.4m + Q1 2012 of 11.1m = 39.5m / 3 = 13.2m Adjusted. Then to determine the indicated royalty rate for Q1 2012, I divide the $11.8m royalty amount by the 13.2m adjusted units = 89 cents per unit. Finally my indicated updated royalty rates for Blackberry as follows:
Q1 2012 = 89 cents per unit ($11.8m / 13.2 estimated Q4 2011 calendar units)
Q2 2012 = 86 cents per unit ($8.6m / 10m estimated Q1 2012 calendar units)
Q1 2013 = $1.00 per unit ($6.6m / 6.6m estimated Q4 2012 calendar units)
Q2 2013 = $1.17 per unit ($7.4m / 6.3m estimated Q1 2013 calendar units)
My attempt at a possible explanation: I think Blackberry still had its prepaid discounts thru Q1 and Q2 of 2012 and the indicated quarterly royalty rates per unit were comparable to those in 2011. I think Blackberry lost its prepaid discounts by Q1 2013, and thus the royalty rate increased from 85 cents per unit to $1 per unit in Q1 2013.
Blackberry updated its license to include 4G products at the end of Q4 2012. Therefore, Blackberry's Q1 2013 calender units sold included 4G products, which IDCC was now entitled to royalty thereon, and began recording Blackberry's 4G product sales in Q2 2013. More products bearing royalty would yield a higher royalty amount and more per unit, or the 4G rate per unit may be a little higher than the 3G rate per unit, since 4G encompasses both 3G and 4G IPR. Those are the only possible explanations that I can come up with as to why Blackberry's indicated royalty per unit went from $1 to $1.17 in Q2 2013.
Of course, even if Blackberry's rate per unit might be somewhat higher than in the past, if they sell significantly less units, then IDCC's total royalty amount from Blackberry will decrease.
Olddog re prepayments and prepaid discounts
I certainly agree with your statement that prepaid amounts do not impact IDCC's current quarter's recorded revenue. Prepaid royalties entitle the licensee to prepaid discounts in future quarters, which do reduce the net royalty amount and the royalty rate per unit in future quarters following the prepayment.
When I first read Merritt's comments it seemed he was implying that HTC included some prepaid amounts in Q1 royalty payment and that's how they got to 20%, but we know that is wrong, as any prepaid amounts are deferred and not recorded into IDCC's current revenues. Therefore, I then assumed Merritt was referring to prepaid discounts impacting the royalty amounts. If HTC received significant prepaid discounts prior to 2013, then their royalty would be less. However, if the prepaid discounts ran out in 2012, and HTC did not prepay for 2013, then the net royalty paid by HTC in 2013 would be more without the prepaid discounts.
However, prepaid discounts or lack thereof can't really explain HTC's Q1 royalty going from 75 cents per unit in 2011/2012 to over $1.50 per unit in 2013. Even long-term prepayments such as 3 to 4 years shouldn't amount to over 100% in total, as I stated in my earlier post to Rox. I would imagine that a long-term 3-year prepayment shouldn't garner over a 30% total prepaid discount, which is 10% per year.
Rox re Bill's comment on prepayments re HTC
I did read Merritt's comments in the Q1 CC, which I included in my post, but they still don't really explain the HTC Q1 royalty. Certainly prepaid discounts or lack thereof can impact a licensee's net royalty amount in future quarters, and thus the indicated royalty rate per unit. However, I seriously doubt that prepaid discounts can amount to over 100%, which is what is indicated if the effective net royalty rate per unit for HTC goes from 75 cents per unit in 2011/2012 to over $1.50 per unit in 2013.
What's going on with HTC's royalty in Q1 2013?
According to the Q1 10Q HTC provided 20% of IDCC's Q1 revenues. Q1 total revenue of $47.4m x 20% = $9.5m of indicated HTC royalty for Q1. Since HTC's unit handset sales for Q4 2012 = 6.1m, that would indicate a royalty rate $1.56 per unit ($9.5m royalty / 6.1m units sold). Remember IDCC lags one quarter in recording per-unit licensee's revenues. What's so unusual is that HTC's indicated royalty rate per unit during each quarter throughout 2011 was just 75 cents thru 79 cents per unit.
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=72443813
Even for Q1 of 2012, HTC's indicated royalty was 75 cents per unit as follows:
IDCC's total revenue Q1 2012 $69.3m x 11% = $7.6m HTC indicated royalty / 10.1m HTC unit handset sales Q4 2011 = 75 cents per unit. Q1 2012 was the last quarter that HTC was a more than 10% quarterly revenue contributor until Q1 2013.
BTW an excellent source of quarterly unit handset sales by the top 14 handset venders is at the end of the following linked article:
http://www.fiercewireless.com/europe/special-reports/analyzing-worlds-14-biggest-handset-makers-q2-2013
A couple of analysts, as well as, IDCC's CFO seemed rather stunned by HTC's indicated Q1 royalty contribution. From the Q1 2013 earnings CC transcript as follows:
"Operator
And we’ll take our next question from Charlie Anderson with Dougherty and Company. Please go ahead.
Charlie Anderson - Dougherty and Company
Good morning, thanks for taking my questions. I want to start off with HTC just got the disclosure on the Q it was up pretty substantially year-over-year the royalties from HTC, had a look at their results in their fourth quarter it was substantially down so I'm wondering was there a change in rate or coverage in HTC?
Rich Brezski - Chief Financial Officer
No, no change in rate or coverage I don’t believe they met the 10% qualification this quarter so we didn’t provide this specific amount I would say that is less than 10% of our revenue.
Charlie Anderson - Dougherty and Company
I'm saying (seeing) 20% actually in the Q.
Rich Brezski - Chief Financial Officer
I then perhaps I misspoke.
Bill Merritt - President and Chief Executive Officer
Charlie that is without getting into HTC specifically you know the way royalties can move around inside an agreement should be different by a couple of factors one of which could be whether parties choose to prepay or not because prepaying will be pretty significant so that can move things probably more so than typically than what you see in terms of different rates under that agreement. So.
Rich Brezski - Chief Financial Officer
And Charlie you’re correct and it was 20% for the quarter.
Charlie Anderson - Dougherty and Company
Okay, so I mean I would think of this as you’re taking the unit sold in the quarter before and I mean it’s at the that pretty by the book thing and sounds like there could be timing issues around those with I'm just trying to understand – are you taking that more months of units or something here is it’s kind of confusing to me?
Rich Brezski - Chief Financial Officer
No there a per unit licensee so as you alluded to our first quarter revenue is based on their first -- fourth quarter sales.
Ron Shuttleworth - M Partners
Okay. The last clarification HTC, is that current license include 4G LTE?
Bill Merritt - President and Chief Executive Officer
I think that the minimum products that are LTE based that include a 3G backwards compatible technology which they all do, there would be royalties loaded on that product side, I don’t remember those I believe - I don’t believe the scope of the patents extended to LTE."
http://seekingalpha.com/article/1372861-interdigitals-ceo-discusses-q1-2013-results-earnings-call-transcript?page=6&p=qanda&l=last
IDCC Revenues by Quarter Q1 2012 - Q3 2013
Q1 2012:
Fixed-fee:
Samsung $25.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Inventec $1.5m per quarter
Unidentified Licensee beginning Q4 2011 $0.5m per quarter
Total Fixed Fee $33.7m
Per Unit:
RIM $11.8m (69.3m x17%)
HTC $7.6m ($69.3m x 11%)
Other per-unit licensees $15.0m
Total per-unit $34.4m
Past Sales $0.45m (U-blox AG)
Technology $0.72m
Total Revenues $69.3m Q1 2012
Q2 2012:
Fixed-fee:
Samsung $25.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Inventec $1.5m per quarter
Unidentified Licensee beginning Q4 2011 $0.5m per quarter
Total Fixed Fee $33.7m
Per Unit:
RIM $8.6m ($71.9m x 12%)
Other per-unit licensees $18.8m
Total per-unit $27.4m
Past Sales $1.2m
Patent sales $9.0m (Nufront Mobile)
Technology $0.5m
Total Revenues $71.9m Q2 2012
Q3 2012
Fixed-fee:
Samsung $25.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Inventec $1.5m per quarter
Unidentified Licensee beginning Q4 2011 $0.5m per quarter
Total Fixed Fee $33.7m
Per-Unit $23.6m
Past Sales $0.98m
Patent sales $375.0m (Intel)
Technology $0.62m
Total Revenues $434.0m Q3 2012
Q4 2012
Fixed-fee:
Samsung $25.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Inventec $1.5m per quarter
Unidentified Licensee beginning Q4 2011 $0.5m per quarter
Total Fixed Fee $33.7m
Per Unit $29.8m
Past Sales $23.65mm ($22.3m Sony, $1.35m other)
Technology $0.64m
Total Revenues $87.9m Q4 2012
Q1 2013
Fixed-fee:
Sony $9.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Other Fixed-fee licensees $1.2m
Total Fixed-fee $16.9m
Per-unit:
HTC $9.5m ($47.4m x 20%)
Blackberry/RIM $6.6m ($47.4m x 14%)
Sharp $4.7m ($47.4m x 10%)
Other per-unit licensees $$8.5m
Total per-unit $29.3m
Past Sales $0.7m
Technology 0.45m
Total Revenues $47.4m Q1 2013
Q2 2013
Fixed-fee:
Sony $9.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Other Fixed-fee licensees $1.2m
Total Fixed-fee $16.9m
Per-unit:
Blackberry $7.4m ($67.7m x 11%)
Other per-unit licensees $18.6m
Total per-unit $26.0m
Past Sales $24.2m (Pegatron $23.5m prior to Q3 2012 [Note:1], Other $0.7m)
Technology 0.48m
Total Revenues $67.7m Q2 2013
Note 1: The Pegatron arbitration award of $29.9m in Q2 was allocated $23.5m to past sales before July 1, 2012 and $6.4m to interest income, which was netted against Interest Expense.
Q3 2013
Fixed-fee:
Sony $9.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Other Fixed-fee licensees $1.2m
Total Fixed-fee $16.9m
Per-unit:
Pegatron $3.4m
Other per-unit licensees $22.9m
Total per-unit $26.3m
Past Sales $12.5m (Pegatron $12.2m for Q3 2012 - Q1 2013, Other $0.3m)
Technology $54.9m (Intel Mobile $51.6m of past deferrals, current quarter $3.4m, which is primarily Intel Mobile)
Total Revenues $110.6m Q3 2013
Trying to reconcile the fixed-fee revenues for 2013
During all 4 quarters of 2012, IDCC's fixed-fee revenues were as follows:
Samsung $25.7m per quarter (expired at end of Q4 2012)
Pantech $3.9m per quarter (set to expire at the end of 2015)
Apple $2.1m per quarter (set to expire in Q2 2014)
Inventec $1.5m per quarter
Unidentified Licensee beginning Q4 2011 $0.5m
Total Fixed Fee $33.7m per quarter in 2012
At the end of 2012, Samsung's license expired, but IDCC signed a new 3-year fixed-fee license with Sony at $9.7m per quarter ($116.6m total fixed fee / 12 quarters). My problem is that I can't reconcile to the 2013 actual quarterly fixed-fees of $16.9m per quarter as follows:
Samsung -0-
Sony $9.7m per quarter
Pantech $3.9m per quarter
Apple $2.1m per quarter
Inventec$1.5m per quarter
Unidentified Licensee $0.5m per quarter
Subtotal $17.7m
Unexplained overage $0.8m???
Total Actual Fixed-fees $16.9m per quarter for 2013 thru Q3
Pantech did amend its license in Q2 of 2012 to include 4G products according to the 2012 10K. However, there was no increase to the total fixed-fees at all during 2012.
Rox re Pegatron
Thanks. Any specific post(s) that you can refer me to as to why this supplier must be Pegatron, when IDCC had already gone through an earlier arbitration and resulting ruling re Pegatron. At first glance, I thought it might be someone else other than Pegatron.
Jimlur hope you and everyone else on this board are doing well. I plan to do some more research and get myself current on IDCC. But yes I do plan to make some more posts in the near-term.
Supplier to Apple and IDCC per-unit licensee?
From the latest 10Q:
"On October 10, 2013, a three-member tribunal constituted by the American Arbitration Association’s International Centre for Dispute Resolution issued an arbitration award in a proceeding initiated by our wholly owned subsidiaries InterDigital Technology Corporation and IPR Licensing, Inc. to resolve a dispute surrounding our 2007 patent license agreement with Apple Inc. (the "Apple PLA”). The arbitration award declared that Apple iPads, and any Apple products that operate on CDMA2000 or LTE networks, are not licensed under the Apple PLA. On October 30, 2013, InterDigital Technology Corporation and IPR Licensing, Inc. filed a petition to confirm the arbitration award in the United States District Court for the Northern District of California."
"SUBSEQUENT EVENTS:
In early fourth quarter 2013, we received an award in an arbitration that we initiated with a licensee to resolve a dispute surrounding an existing patent license agreement (the “PLA”). Because the PLA is a fixed-fee agreement, we continued to recognize revenue from this licensee during the course of the dispute. The arbitration award declared that certain products are not licensed under the PLA. As a result of this declaration, it is now clear that certain products not licensed under the PLA but manufactured by a supplier of the licensee are licensed under the per-unit patent license agreement we have with that supplier. Accordingly, we expect to recognize approximately $27.0 million of past sales revenue from this supplier in fourth quarter 2013 related to such products sold through June 30, 2013."
I know this message board has probably discussed this already, but I have not followed IDCC or this message board since the summer of 2012. To satisfy my curiosity, who is this supplier to Apple who is also an existing IDCC per-unit licensee?
Recap of IDCC's Stock repurchases through Q3 2013
Most of IDCC's stock repurchases occurred between 2003 - 2008, and then significant repurchases in 2012. Prior to 2003, IDCC had only repurchased 1.5m treasury shares. The following is a recap of IDCC's treasury stock repurchases through Q3 2013:
Prior to 2003: purchased 1.5m shares at cost of $8.1m = $5.40 per share
2003: purchased 2m shares at cost of $34.7m = $17.35 per share
2004: purchased 1m shares at cost of $17.1m = $17.10 per share
2005: purchased 2m shares at cost of $34.1m = $17.05 per share
2006: purchased 6.54m shares at cost of $192.5m = $29.43 per share
2007: purchased 5.75m shares at cost of $176.3m = $30.66 per share
2008: purchased 3.76m shares at cost of $81.5m = $21.68 per share
2009: purchased 1.01m shares at cost of $25.02m = $24.77 per share
Total purchased thru 2009: 23.57m at cost of $569.25m = $24.15 per share
2010: no purchases
2011: no purchases
2012: purchased 4.9m shares at cost of $152.7m = $31.16 per share
2013: no purchases through Q3 2013
Total Treasury stock purchases thru Q3 2013 = 28.4m shares at cost of $721.9m = $25.42 per share
IDCC's stock repurchases really began in earnest in 2006 when they were flooded with cash after receiving the first $95m LG installment and the $253m Nokia 2G settlement. These two key events triggered significantly higher stock prices of IDCC also during this ensuing time of stock repurchases.
IDCC got flooded again with cash in 2009 receiving $200m from new licensee Samsung, and $182m in prepaid royalties from two existing licensees. These treasury stock repurchases helped reduced IDCC's outstanding shares at 12/31/09 to 43.26m.
After no stock purchases in 2010 and 2011, IDCC began repurchasing stock in 2012 triggered by the sale of patents to Intel for $375m cash. In 2012, IDCC finally completed the 2009 authorization by purchasing 2.3m shares for $75m. IDCC then authorized another $100m share buyback in May 2012 and then authorized another $100m share buyback in June 2012 for a total $200m for the 2012 authorized share buyback. IDCC purchased an additional 2.6m shares for $77.7m in 2012, leaving $122.3m remaining on the 2012 authorization for future stock buybacks.
Although IDCC purchased no additional shares in 2013 thru Q3, they did begin to buyback shares in October 2013, but less than 100,000 shares thru Oct. 30 for $1.7m according to the latest 10Q. Since IDCC is currently flush with cash (over $750m thru Q3 2013) and the stock price is relatively low, I would imagine that IDCC is currently purchasing significantly more shares at the present time. IDCC had 41.2m outstanding shares at 9/30/13.
Update: IDCC's Stock Repurchases through June 30, 2012
Most of IDCC's stock repurchases occurred between 2003 - 2008. Prior to 2003, IDCC had only repurchased 1.5m treasury shares. IDCC purchased no shares in 2010 or 2011, then started back up repurchasing shares in 2012. The following is a recap of IDCC's treasury stock repurchases through June 30, 2012:
Prior to 2003: purchased 1.5m shares at cost of $8.1m = $5.40 per share
2003: purchased 2m shares at cost of $34.7m = $17.35 per share
2004: purchased 1m shares at cost of $17.1m = $17.10 per share
2005: purchased 2m shares at cost of $34.1m = $17.05 per share
2006: purchased 6.54m shares at cost of $192.5m = $29.43 per share
2007: purchased 5.75m shares at cost of $176.3m = $30.66 per share
2008: purchased 3.76m shares at cost of $81.5m = $21.68 per share
2009: purchased 1.01m shares at cost of $25.02m = $24.77 per share
2010: no shares were purchased
2011: no shares were purchased
Q1 2012: purchased .66m shares at cost of $25.33m = $38.38 per share
Q2 2012: purchased 1.73m shares at cost of $52.42m = $30.30 per share
Total purchased 25.96m shares at cost of $646.99m = $24.92 per share
IDCC's stock repurchases really began in earnest in 2006 when they were flooded with cash after receiving the first $95m LG installment and the $253m Nokia 2G settlement. These two key events triggered significantly higher stock prices of IDCC also during this ensuing time of stock repurchases. IDCC got flooded again with cash in 2009 receiving $200m from new licensee Samsung, and $182m in prepaid royalties from two existing licensees.
IDCC made no stock repurchases in 2010 or 2011, although they still had some unused 2009 share repurchase authorization during those years. IDCC began repurchasing shares in Q1 2012, and finally used-up the remainder of the 2009 authorization in May 2012. Then they announced another $100m share repurchase authorization on May 4, 2012. On June 18 2012, in conjunction with the announced $375m patent sale to Intel, IDCC authorized an additional $100m for share repurchases. This action brought the 2012 share repurchase authorizations to $200m thus far this year.
Olddog re IDCC bonus plans
Good grieve, I didn't realize that the short-term STIP covered all IDCC employees, in addition to, the long-term LTCP plan covering all IDCC employees. Thanks for that correction. I also appreciate your added info on these plans, especially the percentage amounts that go to executives, other management, and the remaining employees. I also might be wrong about the patent sales being included in the bonus calculations, as this will be a cash receipt from Investing Activities, not Operating activities, in the statement of cash flows. Therefore, it might not be considered cash received from operating activities in IDCC's definition of free cash flow.
Olddog re arbitration settlement revenue accounting
No I hadn't read your post of June 27 as to the new FASB re Revenue recognition on multiple deliverables. Under this new provision, a contract or settlement involving multiple years quarters might not be recorded into revenue on a going-forward basis as in the past, if it involved previous years/quarters reasonably determinable amounts. However, I still think prior period amounts will all go through the current quarters revenues in this particular case with the Intel arbitration.
I think this new Accounting provision would have changed how IDCC reported earned revenue under the Samsung and LG contracts, and similar ones like these in the future. For example, Samsung's total contract was for $400m and IDCC recorded all of this into earned revenues on a forward basis, at essentially $25m per quarter for 4 years beginning in the quarter that the contract was signed, since it was a 4 year contract.
However, we all knew that at least $150m of the $400m Samsung contract amount related to previous quarters and years due to the 2G arbitration win. I think this new FASB provision would had required IDCC to record the prior quarters/years amount of $150m immediately into earned revenue in the quarter of the signed contract and disclosed as a nonrecurring revenue item in that quarter. The remaining $250m contract amount would then be carry-forward to future quarters over the next 4 years, rather than the full $400m being carried-forward.
I think under the new FASB settlements and new contracts that involve prior period consideration amounts will result in all the prior period amounts flowing through earned revenue in the current quarter of the contract or settlement. Only amounts associated with future quarters will be allowed to go-forward and be recognized in future quarters. That's why I'm under the opinion that in any Intel arbitration win or settlement the deferred balance from prior quarters will all be recorded into earned revenue in the quarter of an arbitration win or settlement. But I might be wrong about this.
Rox re Intel arbitration you asked:
..."just so I understand the converse......what happens if it doesn't settle in IDCC's favor? Would they have to give back the monies....maybe bury it in sale price of patent sale? .....How fast did they report the $9M patent sale to the Chinese? Seems that was certainly a 10% contributor...."
First, if IDCC completely loses the arbitration, then the $33.1m of disputed deferred balance will have to be refunded back to Intel in a cash payment. The offsetting part of the accounting entry would be to Debit the Deferred Liability account to -0- it out, and to Credit Cash. This technically would have no impact on IDCC's quarterly net income, because no revenue or expense account would be affected.
However, if the arbitration settlement goes completely in IDCC's favor, then the accounting entry would involve a Debit to the Deferred Liability account to -0- it out, but an offsetting Credit to Earned Revenues. This transaction would impact quarterly net income, because it would affect a revenue account.
As to the $9m patent sale to a Chinese company, I do not know how fast IDCC disclosed this particular transaction. There was no press release or 8K on this item. I think IDCC disclosed it in the Q1 2012 Conference Call on April 25 as an upcoming item, and included it in the Q2 2012 Revenue forecast of $71m on May 4. All $9m of this patent sale will be recorded as earned revenues in Q2, but disclosed as a nonrecurring revenue item. Since it will in all liklihood exceed 10% of IDCC's Q2 revenues, then the specific identity of the Chinese company will have to be disclosed in the Q2 earning press release.
Rox re possible Intel arbitration settlement you asked:
...."question regarding material nature of disclosure for Intel arbitration......since we "have" the monies already.....does it require FD within 3 days of settlement?.....expecting that earlier non-recognised revenue may be applied to previous quarters?"
The arbitration balance with Intel stood at $33.1m as of March 31, 2012, of which $3.4m was from Q1 2012. As you note this balance of $33.1m has already been received in cash from Intel, but has not been recorded into IDCC's earned revenues due to the dispute, but rather into a deferred account.
If this were to settle in IDCC's favor, then all of the deferred balance would be included in earned revenues in the quarter of the settlement, but disclosed as a nonrecurring revenue item for that quarter. None of this would be applied to previous quarters accounting-wise, even though the deferred balance was created over the previous quarters. This would be similar to how IDCC treats past sales or revenues from audits, which represent prior quarters, but all is recorded into the current quarter's revenues. Therefore, this amount would be financially material to the quarter in which a settlement occurs, thus requiring disclosure within 3 days of a settlement.
David re IDCC's "bonus" based on recurring revenues you said:
....."I believe the bonus is based on recurring revenue not one time patent sales or by "by liquidating assets".
I believe that a small portion of IDCC's overall bonuses are based on recurring revenues. The majority of IDCC bonuses/additional compensation is actually based on a "time-based" criteria, rather than "performance-based" criteria, such as recurring revenues. Time-based criteria basically means that if you are still employed at IDCC after a certain length of time, ie you aren't fired or you don't quit after 3 years employment with IDCC, then you get a vested RSU compensation bonus.
ALL of IDCC employees below management level, which is the vast majority of IDCC employees, receive 100% of their long-term compensation plan (LTCP) bonuses based upon a "time-based" criteria. Management and Executives LTCP bonus compensation is based on 25% time-based and 75% performance-based (before 2010, managers and executives LTCP were 50% time-based and 50% performance-based).
Currently IDCC bonuses and additional compensation are awarded under the Short-Term Incentive Plan (STIP) for Executives only, and the Long-Term Compensation Plan (LTCP) for all IDCC employees including executives also. The LTCP is a monstrosity created by Harry Campagna after the IDCC shareholders voted NO to no more stock options authorizations on June 4, 2003. Harry then decided to give generous compensation bonuses primarily in the form of cash and RSUs (Restricted Stock Units), which had been previously authorized by the shareholders, in lieu of additional stock options. To the best of my interpretation, the latest LTCP performance-based awards are based on achieving the one-year STIP goals over a three-year span, achieving a certain predefined amount of cash flow, and licensing a certain percentage of the 3G market. [Side Note: The $375m patent sales to Intel should involve revenue cash receipts, so it should certainly factor into the LTCP compensation as positive cash flow].
The one-year STIP performance goals are based on 9 criteria, only one of which is recurring/normalized revenues. 50% of the STIP compensation is based on objective measures: (recurring/normalized revenue =20%, top-tier handset licensing = 15%, new technology development =5%, IPR creation =5%, and Cash Spending held below a certain amount =5%). The remaining 50% is based on subjective evaluations: (business model protection =5%, Branding, whatever that is =10%, Corporate development, whatever that is =10%, and compensation committee discretion =25%).
The reason that IDCC executives tend to earn maximum amounts each year, is probably because 25% of the Executive performance-based compensation is based upon Compensation Committee Discretion and 25% is based upon other subjective determinations. For example, 2011 executive compensation was near max levels, because the compensation committee subjectively determined that the attempted sale of the company adversely impacted short-term performance goal attainment. I think one has to be a genius to figure out IDCC's STIP and LTCP programs, and I'm certainly no genius. Therefore, the preceeding comments were just my interpretations of some of the following IDCC compensation disclosures:
From IDCC's latest Annual 10K:
"In fourth quarter 2010, the LTCP was amended to, among other things, increase the relative proportion of performance-based compensation for both executives and managers, extend participation to all employees, and eliminate alternating annual RSU and cash cycles.
Under the terms of the current LTCP, effective beginning with the cycle that began on January 1, 2010, all employees below manager level receive 100% of their LTCP participation in the form of time-based RSUs that vest in full at the end of the respective three-year cycle. Executives and managers receive 25% of their LTCP award in the form of time-based RSUs that vest in full at the end of the respective three-year cycle and the remaining 75% in the form of performance-based awards granted under the LTIP component of the LTCP. The LTIP performance-based awards that are applicable to both executives and managers may be paid out in the form of cash or equity, or any combination thereof at the end of the respective three-year cycle. The form of the LTIP award will be determined by the Compensation Committee of our Board of Directors, in its sole discretion, at the beginning or the end of each three-year cycle. The following cycles have been initiated under the current LTCP through December 31, 2011:
Cycle 5: Time-based RSUs granted on November 1, 2010, which vest on January 1, 2013, and a long-term performance-based incentive covering the period from January 1, 2010 through December 31, 2012; and
Cycle 6: Time-based RSUs granted on January 1, 2011, which vest on January 1, 2014, and a long-term performance-based incentive covering the period from January 1, 2011 through December 31, 2013.
Payouts of performance-based awards will continue to be determined by the Compensation Committee in its sole discretion, based on the Company’s achievement of one of more performance goals, previously established and approved by the Compensation Committee, during the respective cycle period. Payouts may exceed or be less than target, depending on the level of the Company’s achievement of the performance goal(s). No payout may be made under the LTIP if the Company fails to achieve the minimum level of performance for the applicable cycle, and the payout for any particular cycle is capped at 200% of target."
From the lastest Proxy:
"Elements of Compensation
The elements of our executive compensation reflect a mix of current and long-term, cash and equity and time- and performance-based compensation. For 2011, the material elements of each executive’s compensation included:
Base salary;
Short-term incentive plan (“STIP”) award, paid in cash;
Long-term compensation program (“LTCP”) awards, which include time- and performance-based equity vehicles; and
401(k) matching contributions.
Fiscal 2011 Company Performance and Impact on Compensation
The company delivered a solid performance in 2011. Although the company’s total revenue decreased to $301.7 million, a decrease of $92.8 million, or 24%, from the prior year, the company ended 2011 with a strong cash balance of $678 million, due in part to the company’s successful senior convertible note offering in April
Page 25
2011, and maintained a regular quarterly cash dividend in 2011. The decrease in revenue was primarily driven by a decrease in patent licensing royalties, due to the absence of fixed fee royalties from a large licensee whose agreement expired at the end of 2010 and a decrease in the amount of past sales revenue recognized in 2011 compared to 2010. These decreases were partially offset by an increase in per-unit royalties as a result of strong sales by licensees with concentrations in the smartphone market. We began 2011 with the intention to aggressively pursue new and renewed patent license agreements, which, if realized, could have generated additional patent licensing royalties. However, the strategic alternatives review process initiated by the board in July 2011 adversely affected the company’s ability to enter into such agreements. Despite this challenge, we continued to deliver on other components of our strategy by contributing our patented or patentable inventions into the various wireless standards and entering into joint research and development relationships with strategic partners to advance our new technologies.
Our executive compensation decisions for 2011 reflect our pay-for-performance philosophy and take into account both the solid business results and the challenges posed by the strategic alternatives review process outlined above. The compensation committee approved a payout level of 84% of target for the achievement of corporate performance goals under the 2011 STIP, which recognized the executives’ successes with respect to intellectual property rights (“IPR”) and technology development as well as their steady management of the company through the strategic alternatives review process during the second half of 2011, but also acknowledged the failure to add or renew a patent license agreement with a top-tier handset manufacturer.
Similarly, the compensation committee approved a payout level of 31% of target for the 2009-2012 cycle under the LTCP. This payout level corresponded to a combined achievement level of 83% of the two corporate performance goals under the LTCP cycle: (i) generate a specified amount of free cash flow over the cycle period and (ii) have under license, at cycle-end, handset manufacturers representing a specified target percentage of the worldwide 3G handset market. Actual results with respect to the cash flow goal were above target, but actual results with respect to the market share goal were below target. The compensation committee believes that these compensation decisions appropriately rewarded the executives for the company’s overall performance in 2011 while recognizing the setback in the company’s goal to derive revenue from new and renewed patent license agreements with the world’s largest handset manufacturers.
Short-Term Incentive Plan
The STIP is designed to reward the achievement of corporate goals and the individual accomplishments of the executives during each fiscal year. 75% of an STIP award paid to an executive is based on the achievement of corporate goals, and the remaining 25% is based on the individual performance of the executive. The targeted STIP award for each of the company’s executives is set as a percentage of annual base salary. For 2011, the targets were 80% of salary for Mr. Merritt, 55% of salary for Messrs. McQuilkin and Shay and 45% of salary for Messrs. Lemmo and Nolan. These target percentages were set at or near the median of the peer group data and are also intended to reflect the importance of each executive’s role to the company. In addition, the target percentages also reflected an increase of five percentage points over 2010, consistent with increases for all employees, as part of the compensation committee’s determination to increase the company’s use of performance-based compensation, such as the STIP, relative to time-based compensation.
Page 29
For 2011, the goals established by the compensation committee under the STIP involved securing additional patent licensees and revenue, furthering corporate development, limiting cash spending, enhancing the company’s intellectual property portfolio, engaging new customers or strategic partners to further the development of new wireless technologies, protecting the company’s business model and improving the company’s brand. The specific goals, and the relative weights assigned to each, were as follows:"
(Note the nine specific goals and percentage weighting table will not post). I recapped the specific goals and percentage weightings earlier in my post. However if you want to read them directly, see page 30 of the latest proxy to view the nine performance goals linked as follows:
http://ir.interdigital.com/secfiling.cfm?filingID=1193125-12-174700
Yes, I definitely meant Intel not IBM in my last post. Early stages of senility, I suppose, because this is not the first time that I have said IBM but meant Intel.
Did IDCC sell essential or nonessential patents to IBM?
Very interesting Seeking Alpha article as follows:
"Did InterDigital Sell A Rembrandt At Thomas Kinkade Prices, Or Was It The Other Way Around?
June 20, 2012 | by: Patrick Anderson | about: IDCC
After abandoning attempts to sell its entire portfolio last year, InterDigital (IDCC) announced this week the sale of 1,700 patents to Intel for $375 M. At $220,000 per patent, the transaction seems downright anemic, but the news gave IDCC's stock a nice 30% boost just for, as IAM Magazine pointed out, "doing what it said it was going to do six months ago." Recent, well-repeated benchmarks include the opportunistic Nortel creditor's $750,000 (minimum) per patent windfall, and the AOL-Microsoft transaction, which netted about $1 M per patent. Of course, Acacia's purchase of Adaptix for nearly $5 M per patent stands well above the crowd.
By comparison, IDCC's sale appears paltry, prompting Seeking Alpha contributor Kraken to proclaim that "in reality the company has just sold off its best patents to Intel." Of course, judgment calls on the quality of IP made prior to any IP being publicly identified are inevitably premature, but IDCC may have left an interesting clue by leaving one significant question unanswered. A joint press release on the patent purchase explained that "[t]he agreement involves patents primarily related to 3G, LTE and 802.11 technologies." The rest of the release describes what technologies IDCC develops and the typical inconsequential drivel that fills most corporate PRs. Noticeably absent from the description of the patents sold to Intel is the word "essential."
Historically, companies have not been shy to boast about the sale or purchase of LTE essential patents - normally defined as patents "related directly to technology that is strictly required to meet the technical specifications of the LTE standards." For example, analysts widely reported Nortel's control of seven patent families covering LTE essential technologies. Acacia similarly reported its acquisition of Adaptix resulted in acquisition of "130+ patents that are standards-essential to 4G LTE/LTE+."
By contrast, neither party released a statement using similar language to describe the patents IDCC is selling to Intel. In addition, only one article claims "at least some of [the patents are] standards-essential" but makes no reference to a source from either side to back up the claim. Standards-essential patents carry far more licensing value than non-essential patents for the simple reason that licensing candidates have more options when considering adopting non-essential technology. Availability of options can drive licensing rates down to a level slightly cheaper than the next more expensive non-patented option.
If IDCC managed to sell 1,700 non-essential 3G, LTE and 802.11 related patents for $225,000 each, then it might well have commanded a premium for patents that carry little licensing value - IDCC's other revenue angle. For its part, Intel might still value the sheer volume of patents above their true income potential simply to beef up their weak IP holdings relevant to mobile technologies.
Of course, the possibility still exists that neither party intended to a particular interpretation by leaving out a single word from their joint statement. However, statements from publicly traded companies about highly confidential transactions tend to be heavily scrutinized, edited and worded to convey value to investors while obscuring details about the transaction. On balance, logic slightly favors a conclusion that, if LTE essential patents changed hands, the joint statement would have said so.
If that conclusion holds, IDCC added value in three important ways. First, it thins the herd, so to speak, by shedding 10% of the least valuable patents in the portfolio. Second, IDCC likely saves several hundred thousand dollars in overhead and maintenance by offloading the portfolio. (Note: when Micron (MU) sold 4000 patents to Round Rock Research, John Desmarais commented that the patents were managed by 27 different law firms and would have cost "millions" to maintain.) Finally, IDCC set a benchmark for future transactions and licensing discussions over the value of the remaining patents, many of which are reportedly LTE essential.
http://seekingalpha.com/article/673231-did-interdigital-sell-a-rembrandt-at-thomas-kinkade-prices-or-was-it-the-other-way-around?source=yahoo
Jim re the $230m note decision
I'm glad you sent that info to brokers and analysts. Perhaps something good can come out of a poor decision. If brokers and analysts hold IDCC's management more accountable for their decisions, especially the bad ones, then maybe they will do a better job at basic decision-making in the future. When they were called out on it at the Annual Shareholder Meeting by a shareholder, they could offer up no rational explanation or justification for the convertable note decision. I think that increased accountability for one's actions and decisions tends to help bring out the best in people.
Real Interest cost on the $230m 2.5% Notes
IDCC is now recording $3.7m of interest-related expense per quarter associated with these notes according to the latest 10Q. Although the coupon rate said 2.5%, the real interest rate is over 6.4% per year ($3.7m per quarter x 4 quarters = $14.8m per year / $230m note principal = 6.43%). It's also costing IDCC 21 cents per year in lost Earnings Per Share ($14.8m expense per year x 65% after tax cost / 46m diluted shares outstanding). All the poceeds from the notes appear to be just sitting in cash earning virtually nothing.
The following table presents the amount of interest cost recognized for the three months ended March 31, 2012 from the 10Q relating to the contractual interest coupon, accretion of the debt discount, and the amortization of financing costs (in thousands):
Contractual coupon interest.... $1,438
Accretion of debt discount..... 1,899
Amortization of financing costs... 326
Total............................$3,663
The contractual coupon interest and the amortized financing costs remain the same each quarter, but it appears that the accretion of debt discount increases each quarter. If this accretion continues to increase each quarter, then the true effective interest rate of the Notes will also increase each quarter above the current quarter's 6.4% real interest rate.
It appears that the convertible debt financing in April 2011 was a complete waste of time and money. If the purpose of the notes was to raise money for a possible slice of the Nortel patents, then as was mentioned at the ASM, a bank line of credit would have been a much better and far less costly option. The line of credit would not have been used at all, since IDCC dropped out of the Nortel bidding. If IDCC would have needed the money though, then the bank line could have been drawn upon, and later replaced with long-term notes. Also as my referenced post indicated, IDCC is stuck with these unneeded and unnecessary notes, as they can not be redeemed prior to the maturity date in March 2016.
Rox re retiring the $230m Notes before maturity
IDCC can not retire these notes before maturity, due to the stock conversion provision within the notes. From the Annual 10K:
"On April 4, 2011, InterDigital issued $230.0 million in aggregate principal amount of its 2.50% Senior Convertible Notes due 2016 (the “Notes”) pursuant to an indenture (the “Indenture”), dated as of April 4, 2011, by and between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). The Notes bear interest at a rate of 2.50% per year, payable in cash on March 15 and September 15 of each year, commencing September 15, 2011. The Notes will mature on March 15, 2016, unless earlier converted or repurchased.
The Notes will be convertible into cash and, if applicable, shares of the Company's common stock at an initial conversion rate of 17.3458 shares of common stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $57.65 per share).....
Prior to 5:00 p.m., New York City time, on the business day immediately preceding December 15, 2015, the Notes will be convertible only under certain circumstances as set forth in the Indenture. Commencing on December 15, 2015, the Notes will be convertible in multiples of $1,000 principal amount, at any time prior to 5:00 p.m., New York City time, on the business day immediately preceding the maturity date of the Notes. Upon any conversion, the conversion obligation will be settled in cash up to, and including, the principal amount and, to the extent of any excess over the principal amount, in shares of common stock.
The Company may not redeem the Notes prior to their maturity date. "
Mickey re officer compensation greater than shareholder dividends you asked:
..."Doesn't the total compensation for the officers exceed the total amount of dividends paid out annually?"
That's an interesting question that I don't have an answer to off the top of my head. I'll have to research it further to be able to try and answer your particular question.
Mickey re compensation at IDCC
It's a very lucrative gig if you are an employee or director at IDCC. As you probably know, the compensation issue has been one of my major gripes against IDCC for many, many years. The feeding trough has been there for a long while at IDCC, and they (management, directors, employees) feed liberally at it year after year.
Olddog thanks for details re Article 5 of the LG contract
Once again, I am not a lawyer and have no desire to be one, so mine is just a layman's interpretation. It appears to be that the contract language in this particular section keeps emphasizing:
"In the event of a dispute arising under this Agreement".
If its "under this agreement" it seeems logical that the dispute had to arise during the contract term, not after the contract expired. Therefore, if LG did not request arbitration during the term of the contract, which ended 12/31/2010, I don't see how they can request it at a subsequent date, after IDCC filed an ITC claim against them.
Outside director compensation for 2011
The last table from the proxy would not post right in the referenced post, so I will manually recap that table. The first amount for each director is the cash compensation, the second amount is the value of the stock units, and the final amount is the total director compensation for 2011:
Belk...... $52,500.....$159,240....$211,740
Clontz....$102,500....$159,240.....$261,740
Kamins.....$80,000....$159,240.....$239,240
Kritzmacher..$65,000..$159,240.....$224,240
Rankin.....$55,000....$159,240.....$214,240
Roath......$50,000....$159,240.....$209,240
Amelio.....$47,500....$393,085.....$440,585
(Amelio received 9,030 stock units in 2011, rather than the 4,000 that each of the other directors received).
Centerline re Form 4s galore
These all involve the non-management outside directors of IDCC as follows:
"An annual award of restricted stock units granted pursuant to the company's 2009 Stock Incentive Plan in accordance with the company's compensation program for non-management directors."
The outside directors of IDCC receive 4,000 restricted stock units each year on the date of the Annual Shareholder Meeting, as well as cash payments during the year for director committee meetings attended and director committees chaired and retainers.
From the latest proxy:
DIRECTOR COMPENSATION
How are directors compensated?
For board participation during 2011, our non-management directors each received an annual cash retainer of $40,000. In addition, the chairman of the audit committee received an annual cash retainer of $30,000, the other members of the audit committee each received an annual cash retainer of $10,000, the chairmen of the compensation, finance and investment and nominating and corporate governance committees each received an annual cash retainer of $10,000 and the other members of the compensation, finance and investment and nominating and corporate governance committees each received an annual cash retainer of $5,000. The chairman of the board received an additional annual cash retainer of $50,000. All cash retainers were generally paid quarterly in arrears and based upon service for a full year, and prorated payments were made for service less than a full year. The quarterly payments of the annual board and all committee retainers are subject to the director’s attendance at the regularly scheduled quarterly meetings, as follows: 100% payment for participating in person, 50% payment for participating telephonically and no payment for not participating.
Each non-management director received 4,000 restricted stock units (“RSUs”), which vest in full one year from the grant date, for his or her service during the 2011-2012 board term. Upon his initial election to the board in 2011, Dr. Amelio also received 4,000 RSUs, which vest in full one year from the grant date, and a pro-rated RSU award for his partial service during the 2010-2011 board term. RSU awards may be deferred. An election to defer must be made in the calendar year preceding the year during which services are rendered and the compensation is earned. Unvested time-based RSUs and deferred RSUs accrue dividend equivalents, which are paid in the form of additional shares of stock at the time, and only to the extent, that the awards vest or at the end of the deferral period, as applicable.
To align the interests of non-management directors and executives with those of our shareholders, the company has adopted stock ownership guidelines. The stock ownership guidelines applicable to the non-management directors are set at a target of five times their annual cash retainer of $40,000. Qualifying stock includes: shares of common stock, restricted stock and, on a pre-tax basis, unvested time-based RSUs. Any director who has not reached or fails to maintain the target ownership level must retain at least 50% of any after-tax shares derived from vested RSUs or exercised options until the target ownership level is met. A director may not make any disposition of shares that results in his or her holdings falling below the target ownership level without the express approval of the compensation committee. As of March 31, 2012, all of the non-management directors had reached their target ownership levels.
2011 Non-management Director Compensation Table
The following table sets forth the compensation paid to each person who served as a non-management director of the company in 2011 for their service in 2011. Directors who also serve as employees of the company do not receive any additional compensation for their services as a director.
Olddog re surviving provisions expressly stated
No I hadn't got to your post #357966, when I responded to an earlier post of yours. That expressed provision for a surviving clause in the LG contract could certainly make a difference. However, I would still like to know the exact wording of Article V, and whether that provision re survival only applies if a formal dispute possibly involving arbitration had arisen within the contract term, ie before the contract expired. Then it might fit into the following provision of the law summary I provided:
..."Post-expiration claims may “arise under a contract” if they involve facts and occurrences that took place prior to the contract’s expiration. There, the agreement to arbitrate survives the contract’s expiration, but only for that particular claim".
Olddog re dispute/arbitration clauses surviving an expired contract
To my nonlegal mind, I don't see how any type of clause can survive an expired contract. It seems like the expiration of the contract would nullify any and all contract clauses. You might be interested in the following article, which addresses whether arbitration clauses can survive an expired contract:
Home › Litigation News › Top Stories
Courts Continue Defining Scope of Arbitration Clause Survivability
By Henry R. Chalmers, Litigation News Associate Editor – Februrary 10, 2009
Even non-lawyers can tell you that contractual obligations should cease to exist after a contract expires. Like so much in the law, however, exceptions exist. Parties to expired labor contracts, for instance, may find themselves bound by arbitration provisions in the contracts, even for conduct occurring after the expiration. But when asked recently to expand this precedent to general commercial contracts, a district court declined.
Background
Unlike most parts of an agreement, the U.S. Supreme Court has found that structural provisions relating to remedies and dispute resolution can survive a contract’s termination in order to enforce duties “arising under the contract.” Litton Bus. Sys., Inc. v. Nat’l Labor Rels. Bd.
Post-expiration claims may “arise under a contract” if they involve facts and occurrences that took place prior to the contract’s expiration. There, the agreement to arbitrate survives the contract’s expiration, but only for that particular claim.
“An example of where this might occur is when a franchise agreement with an arbitration clause is terminated, but the franchisee continues using the franchisor’s trademarks,” says Edward M. Mullins, Miami, FL, cochair of the Section of Litigation’s Alternative Dispute Resolution Committee.“Even though the contract itself is no longer enforceable, the agreement in the contract to arbitrate may be,” Mullins explains.
Survival of Arbitration Clauses
“If you want to make sure the arbitration provision governs” in this situation, drafters should include language “explicitly stating that the arbitration clause survives the contract’s termination,” advises Lori A. Sochin, Miami, cochair of the Section’s Alternative Disputes Resolution Committee. For those obligations that both arise and are breached after the contract’s termination, however, the contract’s arbitration provision generally is not available. Unless, that is, the contract is a collective bargaining agreement.
Collective Bargaining Agreements
In that narrow field, employers and unions who continue their relationships with one another after expiration of their collective bargaining agreements may be able to force arbitration, even where the obligations that were violated arose after the written contract had expired.
As the Third Circuit describes it, “The employer’s uninterrupted fidelity to the arbitration provision stood as the implied consideration for the employees’ continued diligent and loyal service.” Luden’s Inc. v. Local Union No. 6 of Bakery, Confectionary and Tobacco Workers’ Int’l.
By accepting the benefits of the employees’ continued labor after the collective bargaining agreement had expired, the employer implicitly assented to an implied-in-fact agreement to arbitrate. This then begs the question: Should not this reasoning apply equally in nonlabor contexts where parties continue conducting business with one another after their contract expires? The answer, thus far, appears to be no.
Recent Dispute
A court in the Eastern District of Pennsylvania was recently asked this exact question. The parties in Vantage Technologies Knowledge Assessment, LLC v. College Entrance Exam. Bd. [PDF] entered into a contract, with an arbitration clause, for the defendant to administer the plaintiff’s online college board prep courses. The contract expired, but the defendant continued to provide its administrative services.
When a dispute erupted over payment for the defendant’s post-contractual services, the defendant initiated arbitration, and the plaintiff filed suit. The defendant relied heavily on Luden to argue that the arbitration provision survived the contract’s expiration. The court disagreed, distinguishing labor contracts, where arbitration clauses are “typically included for the express benefit of labor in exchange for a promise not to strike.”
“No similar exchange exists,” the court found, “where two sophisticated commercial entities mutually decide to continue their relationship on a day-to-day basis in the absence of an agreement signed by both.”
For now, at least, courts seem to be holding the line on implied-in-fact arbitration provisions.
http://apps.americanbar.org/litigation/litigationnews/top_stories/arbitration-clause-survivability.html
By the way, more info on the above cited court case as follows:
Survival of Arbitration Clauses After Termination of Contract
By Kenneth J. Ashman & Neal D. Kitterlin
Your client, a large widget manufacturer, comes to you with a commercial dispute with one of its main suppliers of raw materials. Upon review of the governing contract, you notice that it contains a procedure compelling arbitration for any dispute that arises under its terms. You also notice, however, that the contract expired four years ago. When you ask the client about this fact, he confirms that the contract technically expired then, but says that the two companies “just kept doing business together like we always had under the contract.” Because the parties continued to behave as if the contract were still in effect, must your client initiate arbitration in order to resolve its dispute? According to a recent federal court decision, the answer is no.
In Vantage Technologies Knowledge Assessment, LLC v. College Entrance Examination Board, 2008 WL 5264908 (E.D.Pa. Dec. 18, 2008), the court ruled that parties are not bound to submit to arbitration absent a written agreement compelling arbitration. In Vantage, the parties entered into a written contract in May 1998, under which Vantage agreed to oversee the online administration of the College Board’s proprietary writing assessment tool, “WritePlacer.” The terms of the contract included an agreement that all disputes arising out of or relating to the contract would be subject to arbitration. The contract expired in 1999, but was retroactively renewed by a further written agreement in 2001, which also contained an arbitration clause. In 2002, this agreement expired, and a draft agreement which included the same arbitration clause as that found in the parties’ previous agreements was circulated, but never agreed to. Despite the parties’ inability to agree on the terms of a new agreement, Vantage and the College Board continued to do business with one another without a written contract. In July 2008, the parties entered into a new contract that did not contain an arbitration provision.
In August 2008, the College Board initiated arbitration seeking a declaratory judgment with respect to unpaid amounts claimed by Vantage. In September 2008, Vantage filed an action in Pennsylvania state court (later removed by College Board to the Eastern District of Pennsylvania) alleging unjust enrichment, breach of contract, fraud in the inducement, negligent misrepresentation, and false prosecution of an arbitration claim. In deciding the College Board’s motion to stay the proceedings before the federal court, as allowed by the Federal Arbitration Act, the court analyzed whether the parties had agreed to submit the dispute to arbitration, characterizing the issue as “whether the parties continued to be bound by the arbitration clause of an expired commercial contract when the parties have continued to do business after that contract’s expiration.”
In answering the issue in the negative—the arbitration provision did not survive the contract’s termination— the court distinguished the case of Luden’s Inc. v. Local Union No. 6 of Bakery, Confectionery and Tobacco Workers’ International Union of America, 28 F.3d 347 (3rd Cir. 1994), relied upon by the College Board, holding that the determination there that the arbitration clause survived applied only in the labor context. The Vantage court noted that labor contracts include arbitration clauses for the express benefit of labor, in exchange for a promise not to strike. The Vantage court found no such exchange to be present where “two sophisticated commercial entities mutually decide to continue their relationship on a day-to-day basis in the absence of an agreement signed by both.” It also relied on a New Jersey district court case, Bogen Communications, Inc. v. Tri-Signal Integration, Inc., 2006 WL 469963 (Feb. 27, 2006), which reached the same conclusion under a set of similar facts.
Finally, the Vantage court noted that, while federal law favors arbitration and requires any doubt about the scope of coverage to be resolved in favor of arbitration, a court may not invoke federal policy to “create an arbitration provision in a contractual relationship where no such provision exists.” Thus, under the Vantage ruling, a court will not imply the continued existence of an arbitration clause based on the conduct of the parties, but will require that such a clause be part of an express agreement in order to be enforced.
As a notable caveat, not all courts may follow this approach, and it may instead turn on the intent of the parties. For example, the authors litigated a similar case last year, and, in an unreported Illinois lower court decision, the court ruled that an expired contractual provision providing for the shifting of attorneys’ fees to a prevailing party in a dispute was nonetheless enforceable after the contract’s expiration because the parties continued to behave as though the contract was still in force, under a contract implied-in-fact theory. It would be no tremendous leap of logic to apply the same analysis if the contractual provision at issue were an arbitration provision rather than a fee-shift provision, so although the Vantage decision provides support for one side of the dispute, it does not resolve the question definitively.
Kenneth J. Ashman is a principal of Ashman Law Offices, LLC, a business law and litigation boutique, with offices in Chicago and Lincolnshire, Illinois; and New York. Mr. Ashman holds leadership positions in the American Bar Association and Illinois State Bar Association, and is active in the Chicago Bar Association, Lake County Bar Association, and the Decalogue Society of Lawyers. Neal D. Kitterlin is a litigation associate at the firm.
Note
“Survival of Arbitration Clauses After Termination of Contract”, by Kenneth J. Ashman and Neal D. Kitterlin, 2009, General Practice Solo, and Small Firm Division Business Opportunities and Commercial Law Committee
http://apps.americanbar.org/litigation/litigationnews/top_stories/arbitration-clause-survivability.html