Must read if you want to know from an accounting point of view what today's announcement means. Sorry for the lengthy post but I want to try to give some background information on why it is being done.
There are 2 significant issues in today's press release (excluding the share buyback) from an accounting standpoint. One is the new revenue recognition and the other much more significant issue (because what it is telling about IDCC's future) is the deferred income tax adjustment issue which I will detail in a later post. I will detail what they mean in 2 posts as to try not to confuse those who don't understand what today's announcements means.
The first part of it deals with the "revenue shortfall" that wall street will see and the shorts will pounce on. This is the most meaningless part from a longer term view. No matter what happens tomorrow and the next day and in the days and weeks that follow, the fact that management decided to change its accounting treatment for revenue changes ABSOLUTELY NOTHING ABOUT IDCC'S FUNDAMENTALS.
The accounting for royalties is a very complicated issue from an accounting standpoint and for years I have cautioned people to not to look too closely at IDCC's revenue because it is subject to various interpretations and treatments. The important thing to look at with IDCC is and always has been its growing cash balance. That is how IDCC should be measured. Now on to the accounting explanation:
IDCC was reporting revenue for a particular quarter after its licensees told them how much they owed. Until recently, IDCC had 45 days to report quarterly reports (10q's) and 90 days to report year end reports (10k's). Due to SEC regulations, IDCC now has to report in a shorter time frame, and next year the time frame will be even shorter. Just as Qualcomm realized, the shorter time frames will not allow them to wait for the licensees to report to them how many phones were sold and how much was owed and include those after the fact reports in the prior quarters' revenue, IDCC now must change its revenue recognition.
IDCC would receive reports from licensees AFTER the quarter was over, and include the revenue in the quarter that just ended. For example, for the quarter ending 6/30/04, IDCC had no real idea of how much revenue it would record until ALL licensees reported it to them which probably took at least 30 days and in many cases, probably longer. In addition, I would be willing to bet that in some instances, some licensees were late with reports. This would have to cause IDCC some accounting problems with trying to get all the required filings done timely and most importantly, accurately.
So looking at the 6/30/04 quarter, it is my guess that it wasn't until about 8/5/04 (and maybe later) that IDCC was given all the figures from its licensees regarding handset sales and royalties owed for the quarter ending 6/30/04. In order to finish the all the accounting adjustments, complete the financial statements, update the footnotes and all the disclosures, allowing the outside accounting firms time for review, the review by the audit committee, the legal department, and many others interested from within the company, it was almost impossible to complete the necessary reports timely when some of it was not even available until just prior to the old deadlines. Now that deadline is even shorter and IDCC knows next year it will be shorter still, so you can see they have NO CHOICE but to change their revenue recognition.
Now what they are going to do? Instead of waiting for the revenue reports to come in 30 days or more after the quarter is over, IDCC is saying it wont matter. From now on, excluding new contracts signed during the quarter, revenue will equal the royalties that were reported to them during the quarter in which they are reporting on. The reason this quarter's revenue will be so low is because under the new treatment, the revenue for the 3rd quarter of this year was already reported for IDCC's 2nd quarter (6/30/04). Remember the revenue that was included in the 6/30/04 IDCC financial statements was based on the reports they received from their licenses 30 days after the quarter ended. In other words it was reported to them probably late July or early August which is during the 3rd quarter, (the time period beginning 7/1/04 thru 9/30/04). The reports received in late July or early August was based on sales by IDCC's licensees for the period ending 6/30/04 and that is why IDCC reported it during their 2nd quarter. Now they don't have enough time to wait on their licensees for this information and must change how they report revenue.
Going forward, IDCC is saying that no matter what the contract states as far as reporting by licensees goes, IDCC will include in the quarterly fincial statements all revenue reported to them DURING THE QUARTER. They will not record any revenue in a prior quarter from the reports they receive during the subsequent quarter.
How does this hurt us? It doesn't on a long term basis. Going forward, IDCC will be able to give mid quarter updates on how the revenue looks for the quarter they are in since many if not most licensees report quarterly. The reason I am certain that most licensees report quarterly is because of today's press release. If you look at the tables at the bottom of the release, you will see that on a pro forma basis, had they adopted this revenue recognition policy in the past, each quarter's revenue would have been reported one quarter later. If significant licensees reported monthly, then this would not be the case so exactly.
What does this mean for IDCC's 4th quarter and beyond? IDCC will now report as revenue for the 4th quarter, those figures that their licensees tell them during the 4th quarter which in most cases is the 3rd quarter's sales by the licensees. Since most licensees will report the sales for the quarter ending 9/30/04 by 11/15/04, which IDCC will now record as revenue during the 4th quarter, IDCC will be able to give mid quarter updates on how the quarter is progressing. Will they do this, I have no idea but I would be willing to bet they will.
The revenue for the 1st quarter of '05 will actually be sales reported to them during the time period 1/1/05 - 3/31/05 which will be sales by their licensees for the period 10/01/04 - 12/31/04 but will be shown by IDCC as revenue during the subsequent quarter. IDCC will now be able to issue its financial statements in a much more timely manner since the biggest unknown to them after the quarter is over is how much revenue will they have. They will know know this information even before the quarter is half way over.
This is a one time event folks. It wont mean didly in the future. Sorry for the lengthy post on the topic but if you made it this far, you really want to know what today's announcement really means and when Fagan starts talking tomorrow, hopefully you will now have a clue as to what he is saying.
Is your head spinning by now? Wait till you read my post on deferred taxes and why today's news is so good.
