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| IDCC > SEC Filings for IDCC > Form 10-K on 2-Mar-2009 | All Recent SEC Filings |
2-Mar-2009
Annual Report
equipment producers that manufacture, use and sell digital cellular products. We
have built our suite of technology and patent offerings through independent
development, joint development with other companies and selected acquisitions.
Our goal is to derive revenue on every 3G mobile device sold, either in the
form of patent licensing revenues, product related revenues, or a combination of
these elements. In recent years, our patent license agreements have contributed
the majority of our cash flow and revenues. Including agreements signed in first
quarter 2009, we now derive revenue from approximately one-half of all 3G mobile
devices sold worldwide, up from approximately one-third at the beginning of
2008.
In 2008, 2007 and 2006 our total revenues were $228.5 million, $234.2 million
and $480.5 million, respectively, and our recurring revenues were
$219.1 million, $219.5 million and $213.1 million, respectively. Recurring
patent licensing revenue made up at least 95% of our total recurring revenues in
each period.
In 2008, the amortization of fixed fee royalty payments accounted for
approximately 40% of our recurring patent licensing revenues. Due to the nature
of the revenue recognition, these fixed fee revenues are not affected by the
related licensees' success in the market or the general economic climate. The
remaining portion of our recurring patent licensing revenue is variable in
nature due to the per unit nature of the related license agreements.
Approximately three-fourths of this per unit variable portion for 2008 related
to sales of product by Japanese licensees for whom the majority of the sales are
within Japan. As a result, our per unit variable patent license royalties have
been, and will continue to be, largely influenced by sales within the Japanese
cellular market.
We expect that the proportion of our recurring patent licensing revenues
resulting from fixed fee payments will increase in early 2009 upon our
recognition of revenue associated with our new agreement with Samsung. Under
that agreement, effective January 2009, Samsung will make payments totaling
$400.0 million over the next 18 months.
Industry Overview
Our future revenues and cash flows are dependent, in large part, on
industry-wide sales of wireless products. Over the course of the last ten years,
the cellular communications industry has experienced rapid growth worldwide.
Total worldwide cellular wireless communications subscriptions rose from
slightly more than 320 million at the end of 1998 to approximately 4.0 billion
at the end of 2008. In several countries, mobile telephones now outnumber
fixed-line telephones. Market analysts expect that the aggregate number of
global wireless subscriptions could exceed 5.6 billion in 2013. In June 2008,
Strategy Analytics, Inc. forecasted 1.4 billion total handset sales for 2009.
Recently, Strategy Analytics, Inc. lowered their forecast for 2009 handset sales
by 20%. The following table includes the recent forecast for 2009 and the June
2008 forecast for 2010 through 2013, the latest forecast available for that
period.
(1) Source: Strategy Analytics, Inc. December 2008. Global Handset Shipment Forecast by Quarter for 2009 (2007 through 2009). Strategy Analytics, Inc. June 2008. Global Handset Sales Historical and Forecast 2003-2013 (2010 through 2013).
(2) Includes: WCDMA/HSPA, LTE, and TD-SCDMA.
(3) Includes: cdma2000 and its evolutions, such as EV-DO.
(4) Includes: GSM/GPRS/EDGE and Analog, iDEN, TDMA, PHS and PDC.
The growth in new cellular subscribers, combined with existing customers choosing to replace their mobile phones, helped fuel the growth of mobile phone sales from approximately 168 million units in 1998 to almost 1.2 billion units in 2008. We believe the combination
of a broad subscriber base, continued technological change and the growing
dependence on the Internet, e-mail and other digital media sets the stage for
continued growth in the sales of advanced wireless products and services over
the next five years. While recent market forces and a global economic downturn
may contribute to a decline in total handset sales for 2009, analysts continue
to predict that the shift to advanced 3G devices will continue to increase sales
in that category. For these same reasons, shipments of 3G-enabled phones, which
represented approximately 25% of the market in 2007, are predicted to increase
to approximately 80% of the market by 2013. Moreover, recent advances in 3G
technologies that support devices offering higher data rates have met with rapid
consumer uptake.
In addition to the advances in digital cellular technologies, the industry
has also made significant advances in non-cellular wireless technologies. In
particular, IEEE 802.11 WLAN has gained momentum in recent years as a wireless
broadband solution in the home and office and in public areas. IEEE 802.11
technology offers high-speed data connectivity through unlicensed spectra within
a relatively modest operating range. Since its introduction in 1998,
semiconductor shipments of products built to the IEEE 802.11 Standard have
shipped nearly 1 billion units cumulatively through 2008. Analysts forecast that
these cumulative shipments may reach 4 billion by 2012. In addition, the IEEE
wireless Standards bodies are creating sets of Standards to enable higher data
rates, provide coverage over longer distances and enable roaming. These
Standards are establishing technical specifications for high data rates, such as
IEEE 802.16 (WiMAX), as well as technology specifications to enable seamless
handoff between different air interfaces (IEEE 802.21).
Repurchase of Common Stock
In 2006, our Board of Directors authorized the repurchase of up to
$350.0 million of our outstanding common stock (the "2006 Repurchase Program").
In October 2007, our Board of Directors authorized a $100.0 million share
repurchase program (the "2007 Repurchase Program"). The Company could repurchase
shares under the programs through open market purchases, pre-arranged trading
plans or privately negotiated purchases. During 2006, we repurchased
approximately 6.5 million shares of common stock for $192.4 million. At
December 31, 2006, we accrued accounts payable of approximately $7.6 million
associated with our obligation to settle late December repurchases. We completed
the 2006 Repurchase Program in first half 2007 through the repurchase of an
additional 4.8 million shares of common stock for $157.6 million in 2007. Under
the October 2007 authorization in 2007, we repurchased approximately 1.0 million
shares of common stock for $18.5 million. At December 31, 2007, we accrued
accounts payable of approximately $0.8 million associated with our obligation to
settle late December repurchases. During 2008, we completed the 2007 Repurchase
Program through the repurchase of 3.8 million shares of common stock for
$81.5 million.
Intellectual Property Rights Enforcement
From time to time, if we believe any party is required to license our patents
in order to manufacture and sell certain digital cellular products and such
party has not done so, we may institute legal action against them. This legal
action typically takes the form of a patent infringement lawsuit or an
administrative proceeding such as a Section 337 proceeding before the U.S.
International Trade Commission ("USITC"). In addition, we and our licensees, in
the normal course of business, might seek to resolve disagreements between the
parties with respect to the rights and obligations of the parties under the
applicable license agreement through arbitration or litigation.
In 2008, our patent litigation and arbitration costs decreased to
$34.0 million from $38.6 million in 2007. This represented 58% of our 2008 total
patent administration and licensing costs of $58.9 million. Patent litigation
and administration costs will vary depending upon activity levels and it is
likely they will continue to be a significant expense for us in the future.
Development
Our investments in the development of advanced digital wireless technologies
and related products include maintaining a highly specialized engineering team
and providing that team with the equipment and advanced software platforms
necessary to support the development of technologies. Over each of the last
three years, our cost of development has ranged between 45% and 52% of our total
operating expense, exclusive of non-recurring contingency accruals and
repositioning charges. The largest portion of our cost of development has been
personnel costs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are based on the selection and
application of accounting principles, generally accepted in the United States of
America, which require us to make estimates and assumptions that affect the
amounts reported in both our consolidated financial statements and the
accompanying notes thereto. Future events and their effects cannot be determined
with absolute certainty. Therefore, the determination of estimates requires the
exercise of judgment. Actual results could differ from these estimates and any
such differences may be material to the financial statements. Our significant
accounting policies are described in Note 2 to our consolidated financial
statements and are included in Item 8 of this Form 10-K. We believe the
accounting policies that are of particular importance to the portrayal of our
financial condition and results and that may involve a higher degree of
complexity and judgment in their application compared to others are those
relating to patents, contingencies, revenue recognition, compensation and income
taxes. If different assumptions were made or different conditions had existed,
our financial results could have been materially different.
Patents
We capitalize external costs, such as filing fees and associated attorney
fees, incurred to obtain issued patents and patent license rights. We expense
costs associated with maintaining and defending patents subsequent to their
issuance. We amortize capitalized patent costs on a straight-line basis over ten
years, which represents the estimated useful lives of the patents. The ten year
estimated useful life of internally generated patents is based on our assessment
of such factors as the integrated nature of the portfolios being licensed, the
overall makeup of the portfolio over time and the length of license agreements
for such patents. The estimated useful lives of acquired patents and patent
rights, however, have and will continue to be based on separate analyses related
to each acquisition and may differ from the estimated useful lives of internally
generated patents. The average estimated useful life of acquired patents used
thus far has been 15 years. We assess the potential impairment to all
capitalized net patent costs when events or changes in circumstances indicate
that the carrying amount of our patent portfolio may not be recoverable.
Amortization expense related to capitalized patent costs was $11.9 million,
$9.3 million and $7.8 million in 2008, 2007 and 2006, respectively. As of
December 31, 2008 and 2007, we had capitalized gross patent costs of
$159.7 million and $132.1 million, respectively, which were offset by
accumulated amortization of $56.9 million and $45.0 million, respectively. The
weighted average estimated useful life of our capitalized patent costs at
December 31, 2008 and 2007 was 10.9 years and 11.0 years, respectively.
Contingencies
We recognize contingent assets and liabilities in accordance with Statement
of Financial Accounting Standards (SFAS) No. 5 Accounting for Contingencies. We
do not include expected legal fees to defend ourselves in our accruals for
contingent liabilities; we expense such legal fees in the periods in which the
related services are provided.
In second quarter 2007, we recorded a $16.6 million charge to increase a
$3.4 million contingent liability to $20.0 million. Subsequently we have accrued
post judgment interest expense of $1.8 million ($1.1 million during 2008) and
reported such interest expense within the interest and investment income, net,
line within our Consolidated Statements of Income. This contingency relates to
an arbitration with Federal over an insurance reimbursement agreement. In second
quarter 2008, InterDigital deposited $23.0 million with the Clerk of the Court,
an amount sufficient to secure Federal's judgment and anticipated interest until
decision by the Court of Appeals.
In fourth quarter 2007, we accrued $7.8 million for the potential
reimbursement of legal fees associated with our UKII matter with Nokia. During
2008, we recognized a credit of $3.9 million associated with the reduction of
this accrual in connection with the resolution of the Nokia UK matters.
Revenue Recognition
We derive the majority of our revenue from patent licensing. The timing and
amount of revenue recognized from each licensee depends upon a variety of
factors, including the specific terms of each agreement and the nature of the
deliverables and obligations. Such agreements are often complex and include
multiple elements. These agreements can include, without limitation, elements
related to the settlement of past patent infringement liabilities, up-front and
non-refundable license fees for the use of patents and/or know-how, patent
and/or know-how licensing royalties on covered products sold by licensees, cross
licensing terms between us and other parties, the compensation structure and
ownership of intellectual property rights associated with contractual technology
development arrangements, advanced payments and fees for service arrangements,
and settlement of outstanding patent litigation. Due to the inherent difficulty
in establishing reliable, verifiable and objectively determinable evidence of
the fair value of the separate elements of these agreements, the total revenue
resulting from such agreements may sometimes be recognized over the performance
period. In other circumstances, such as those agreements involving consideration
for past and expected future patent royalty obligations, after consideration of
the particular facts and circumstances, the appropriate recording of revenue
between periods may require the use of judgment. In all cases, revenue is only
recognized after all of the following criteria are met: (1) written agreements
have been executed; (2) delivery of technology or intellectual property rights
has occurred or services have been rendered; (3) fees are fixed or determinable;
and (4) collectability of fees is reasonably assured.
We establish a receivable for payments expected to be received within twelve
months from the balance sheet date based on the terms in the license. Our
reporting of such payments often results in an increase to both accounts
receivable and deferred revenue. Deferred revenue associated with fixed fee
royalty payments is classified on the balance sheet as short-term when it is
scheduled to be amortized within twelve months from the balance sheet date. All
other deferred revenue is classified as long-term, as amounts to be recognized
over the next twelve months are not known.
Patent License Agreements
Upon signing a patent license agreement, we provide the licensee permission
to use our patented inventions in specific applications. We account for patent
license agreements in accordance with Emerging Issue Task Force (EITF) No. 00-21
Revenue Arrangements with Multiple Deliverables and Staff Accounting Bulletin
(SAB) No. 104 Revenue Recognition. We have elected to utilize the leased-based
model for revenue recognition, with revenue being recognized over the expected
period of benefit to the licensee. Under our patent license agreements, we
typically receive one or a combination of the following forms of payment as
consideration for permitting our licensees to use our patented inventions in
their applications and products:
Consideration for Prior Sales: Consideration related to a licensee's product
sales from prior periods may result from a negotiated agreement with a licensee
that utilized our patented inventions prior to signing a patent license
agreement with us or from the resolution of a disagreement or arbitration with a
licensee over the specific terms of an existing license agreement. We may also
receive consideration for prior sales in connection with the settlement of
patent litigation where there was no prior patent license agreement. In each of
these cases, we record the consideration as revenue when we have obtained a
signed agreement, identified a fixed or determinable price and determined that
collectability is reasonably assured.
Fixed Fee Royalty Payments: Up-front, non-refundable royalty payments that
fulfill the licensee's obligations to us under a patent license agreement, for a
specified time period or for the term of the agreement. We recognize revenues
related to Fixed Fee Royalty
Payments on a straight-line basis over the effective term of the license. We
utilize the straight-line method because we cannot reliably predict in which
periods, within the term of a license, the licensee will benefit from the use of
our patented inventions.
Prepayments: Up-front, non-refundable royalty payments towards a licensee's
future obligations to us related to its expected sales of covered products in
future periods. Our licensees' obligations to pay royalties extend beyond the
exhaustion of their Prepayment balance. Once a licensee exhausts its Prepayment
balance, we may provide them with the opportunity to make another Prepayment
toward future sales or it will be required to make Current Royalty Payments.
Current Royalty Payments: Royalty payments covering a licensee's obligations to
us related to its sales of covered products in the current contractual reporting
period.
Licensees that either owe us Current Royalty Payments or have Prepayment
balances provide us with quarterly or semi-annual royalty reports that summarize
their sales of covered products and their related royalty obligations to us. We
typically receive these royalty reports subsequent to the period in which our
licensees' underlying sales occurred. We recognize revenue in the period in
which the royalty report is received and other revenue recognition criteria are
met due to the fact that without royalty reports from our licensees, our
visibility into our licensees sales is very limited.
The exhaustion of Prepayments and Current Royalty Payments are often
calculated based on related per-unit sales of covered products. From time to
time, licensees will not report revenues in the proper period, most often due to
legal disputes; when this occurs, the timing and comparability of royalty
revenue could be affected.
In cases where we receive objective, verifiable evidence that a licensee has
discontinued sales of products covered under a patent license agreement with us,
we recognize any related deferred revenue balance in the period that we receive
such evidence.
During 2007, we recognized revenue of $5.2 million related to unpaid patent
licensee royalties. We based our recognition of this revenue on royalty reports
received, despite the fact that the licensee had expressed its belief that it
did not have a current payment obligation. We believed that we were entitled to
these royalty payments and the eventual collection of these amounts was
reasonably assured; we subsequently collected these amounts in 2008.
Technology Solutions Revenue
Technology solutions revenue consists primarily of revenue from software
licenses and engineering services. Software license revenues are recognized in
accordance with the American Institute of Certified Public Accountants Statement
of Position (SOP) 97-2 Software Revenue Recognition and SOP 98-9 Modification of
SOP 97-2, Software Revenue Recognition. When the arrangement with a customer
includes significant production, modification or customization of the software,
we recognize the related revenue using the percentage-of-completion method in
accordance with SOP 81-1 Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Under this method, revenue and profit are
recognized throughout the term of the contract, based on actual labor costs
incurred to date as a percentage of the total estimated labor costs related to
the contract. Changes in estimates for revenues, costs and profits are
recognized in the period in which they are determinable. When such estimates
indicate that costs will exceed future revenues and a loss on the contract
exists, a provision for the entire loss is recognized at that time.
We recognize revenues associated with engineering service arrangements that
are outside the scope of SOP 81-1 on a straight-line basis under SAB No. 104,
unless evidence suggests that the revenue is earned in a different pattern, over
the contractual term of the arrangement or the expected period during which
those specified services will be performed, whichever is longer. In such cases
we often recognize revenue using proportional performance and measure the
progress of our performance based on the relationship between incurred labor
hours and total estimated labor hours or other measures of progress, if
available. Our most significant cost has been labor and we believe both labor
hours and labor cost provide a measure of the progress of our services. The
effect of changes to total estimated contract costs is recognized in the period
such changes are determined.
When technology solutions agreements include royalty payments, we recognize
revenue from the royalty payments using the same methods described above under
our policy for recognizing revenue from patent license agreements.
Deferred Charges
From time-to-time, we use sales agents to assist us in our licensing
activities. In such cases, we may pay a commission. The commission rate varies
from agreement to agreement. Commissions are normally paid shortly after our
receipt of cash payments associated with the patent license agreements.
We defer recognition of commission expense related to both Prepayments and Fixed Fee Royalty Payments and amortize these expenses in proportion to our recognition of the related revenue. In 2008, 2007 and 2006, we paid cash commissions of approximately $0.1 million, $1.7 million and $18.8 million and recognized commission expense of $4.7 million, $4.7 million, and $8.4 million, respectively, as part of patent administration and licensing expense. At December 31, 2008, 2007 and 2006 we had deferred commission expense of approximately $3.4 million, $4.1 million and $4.1 million, respectively, . . .
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