My interpretation of the 8K on the license
This is MY OPINION based on the 8K. It includes facts from the 8K, along with my assumptions and educated guesses. It is given for free and is worth somewhere between half and double that amount.
As clarified by Lastchoice (thanks for calling and posting), I believe that the contract calls for a total of $400 million to be paid covering all 2G and 3G sales through 12/31/2012. That will be the total amount received and the total revenue recorded for the 4 year period. The payments will be made in 4 installments of $100 million over 18 months. My guess is $100 million now (definitely in Q1 2009 per the 8K) and $100 million every 6 months through July 2010. The license is a fixed fee royalty bearing license, similar to LG, not a per unit royalty bearing license similar to the Japanese licensees. Samsung will have to negotiate a new license for post 2012 3G sales. The 2G license will be paid up (meaning no future 2G royalties) with this contract. The income will be recognized ratably over the life of the agreement on the financial statements, which means $25 million a quarter for 4 years.
IDCC got Samsung to agree to make the 2G portion of the settlement related to 2009 forward and forgave the past 2G usage. In this way they were able to make the entire award applicable to 2009 forward, eliminating the "one off" earnings bump that would distort 2009 earnings. Those "one off" payment are backed out from recurring revenues by analysts, resulting in them never being included in the earnings stream that is used to compute the PE ratio. This way the entire contract amount will be recorded in current and future periods as recurring revenues. This is a very good thing and a smart way to go, as multiples are applied to current and estimated future recurring earnings, but not to prior period revenues recorded in the current year. This structure will help the share price more than booking the lump sum for prior years’ 2G and smaller amounts as recurring revenues would. Samsung just cares about the total they are paying, as they have been required to accrue liabilities for IDCC license fees over the years, so they gave IDCC this structure and probably got a lower total. By forgiving the past 2G usage, IDCC can allocate a small portion of the award to 2G for 2009-10 and allocate the rest to Samsung’s 3G sales, making the 3G per unit rate higher. That will give IDCC a better rate to use in future negotiations if they are required to provide the Samsung contract to establish what the existing rate is with tier one companies.
Again, the above is my opinion based on the 8K below and I welcome any comments or critiques of my assumptions and analysis.
Item 8.01 Other Events.
On January 14, 2009, InterDigital, Inc.'s wholly-owned subsidiary InterDigital Communications, LLC and patent licensing subsidiaries (collectively, "InterDigital") entered into a patent license agreement (the "agreement") with Samsung Electronics Co., Ltd. ("Samsung") covering Samsung's affiliates, including Samsung Electronics America, Inc. The agreement supersedes the terms of the binding term sheet signed in November 2008 by such parties and provides for the termination of the 1996 patent license agreement between Samsung and one of InterDigital, Inc.'s patent licensing subsidiaries. Under the terms of the agreement, Samsung has agreed to pay InterDigital $400 million in four equal installments over an 18-month period to resolve the outstanding arbitration disputes involving Samsung's sale of 2G products, as well as the patent disputes over Samsung's sales of 3G products. Subject to the receipt of Samsung's first payment due first quarter 2009, the parties will move to end all litigation and arbitration proceedings ongoing between them.
Under the terms of the agreement, InterDigital has agreed to grant Samsung a royalty-bearing license covering Samsung's sale of 3G products (including products built under both the WCDMA and cdma2000 standards and certain of their related extensions) through 2012 and a license covering Samsung's sale of 2G single-mode TDMA-based products that will become paid-up in 2010.
InterDigital, Inc. anticipates recognizing revenue associated with the agreement ratably from January 14, 2009 through the expiration of the agreement on December 31, 2012.
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding current beliefs, plans and expectations as to the compliance by InterDigital and Samsung with respect to the agreement and the accounting treatment of the revenue associated with the agreement. Words such as "will," "anticipates" or similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual outcomes could differ materially from those expressed in or anticipated by such forward-looking statements due to a variety of factors, including, but not limited to: (i) the failure of any party to observe the covenants under the agreement for any reason, (ii) the failure of Samsung to make any agreed upon payment in the time and manner specified in the agreement, and (iii) changes to generally accepted accounting principles and/or InterDigital, Inc.'s existing accounting policies. InterDigital, Inc. undertakes no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.
