InterDigital Inc. (IDCC), the licensing company run by CEO William Merritt, said its third quarter net income almost doubled driven by higher than expected patent licensing revenue and lower patent administrative and lower litigation expenses.
The Wilmington, Delaware-based company said its third quarter net income rose to $24.5million, or 68 cents a share, from $13.5 million, or 34 cents a share.
Total revenue rose 29.4% to $100.4 million from a $77.6 million. Patent licensing revenue rose 34.7% to $98.9, while technology solutions fell 31% to $1.5 million from $2.2 million.
The company said recurring revenue increased 7% to $78.6 million driven by an increase in shipments by Pegatron Corp. and other Taiwan-based licensees.
The average analysts estimates were earnings of 24 cents and revenue of $79.04 million in the quarter. The estimate for the fourth quarter is earnings of 32 cents and revenue of $84.34 million.
“The ongoing market strength of our licensees continues to drive recurring revenue growth, even as we work to expand our licensee base,” Merritt said in a statement. "That growth, coupled with our careful expense management, highlights the tremendous operating leverage of our business, which positions us very strongly as revenues expand.”
On a conference call with analysts, Merritt noted that it was the company's third consecutive quarter of revenue exceeding $100 million. He added that the company still is aiming to achieve annual licensing revenue of $500 million to $600 million year in 2016. He said this doesn't include revenue from Huawei, which is expected to be recognized next year after InterDigital won in arbitration.
"InterDigital is one of the few companies in the licensing sector that has been able to withstand the IP market downturn," said Mark Gober, a director at 3LP Advsisors.
While many licensing companies are focusing on “patent-only” licensing, InterDigital has managed to incorporate active technology development into its licenses, Gober said.
As Merritt said on today’s earnings call, "this model leads to 'sticky relationships' with licensees, which allows InterDigital to continue bringing in predictable, recurring revenue streams. The company's recent renewal with Sony is an example of that."
Most other companies in the licensing sector, particularly smaller ones, such as Marathon Patent Group Inc. (MARA) and Spherix Inc. (SPEX) have struggled to generate much revenue let alone predictable revenue, and their valuations have plummeted as a result, he said.
"Additionally, InterDigital is sitting on over $850M in cash. Having a warchest of that size lets potential licensees know that InterDigital can fight for years if necessary."
Gober noted that in contrast InterDigital’s generally encouraging earnings today, another historically successful licensing company, Rovi Corp. (ROVI) dropped around 20% yesterday after its CEO mentioned that “a major CE manufacturer” went “out of contract.”
Santa Clara, Calif.-based Rovi posted a net loss of $18.5 million, or 22cents a share, in the third quarter, compared with a net loss of $7 million, or 8 cents a share, a year earlier. Rovi also reported an 11% drop in revenue to $114.9 million.
"For the licensing powerhouses like InterDigital, Rovi, and Tessera Technologies, renewing major licensees is critical," Gober said. "That is becoming an increasingly difficult task in today’s challenging IP environment. InterDigital seems be have a strategy that’s working in spite of the broader climate, and investors will be watching closely to see if the company can continue its success."
Licensing deals with Sony Corp. of America accounted for 32% of revenue, while Pegatron and Samsung accounted for 23% and 17% of revenue.
Operating expenses fell 11.7% to $55 million from $62.3 million.
Patent administrative and licensing expense fell 16% to $28.4 million from $33.9 million.
Development expenses fell 13% to $16.6 million from $19.1 million.
Selling, general and administrative expenses rose 8% to $10.04 million from $9.29 million.
The company also said it bought back 400,000 shares of its stock during the quarter for $18.5 million under a $400 million buyback program. In addition, from October 1 through October 29, the company repurchased an additional 147,000 shares at a cost of $7.4 million.
The company ended the quarter with cash and short term investments of $867.44 million.
Shares of InterDigital gained 1% or 56 cents to $50.10 in mid-morning trading. They've traded between $49.39 and $60.69 over the past year.
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