Exhibit 99.1
InterDigital Announces Per-Unit Royalty Reporting Transition
and Positive Tax Adjustment; Company's Improved Performance,
Accelerated SEC Reporting Requirements Drive Transition
KING OF PRUSSIA, Pa.--(BUSINESS WIRE)--Oct. 25, 2004--
Company to Host Conference Call at 11:00 a.m. EDT on
October 26, 2004
InterDigital Communications Corporation (Nasdaq:IDCC), today
announced that commencing in third quarter 2004, it will recognize
revenue associated with per-unit royalties in the quarter it receives
royalty reports from its licensees rather than in the quarter in which
its licensees' underlying sales occur. As a result, the Company
expects to report royalty revenue for third quarter 2004 in the range
of $7.0 to $7.5 million, consisting mainly of amortization related to
paid-up royalties.
In addition, because of its solid operating performance over the
past few years and expectations for generating future taxable income,
the Company will recognize a non-cash benefit of approximately $27
million in third quarter 2004 associated with the partial reversal of
its valuation allowance against deferred tax assets, approximately $17
million of which will be recognized as income. The remaining $10
million will be credited to additional paid-in-capital.
As a result of the transition in per-unit royalty reporting, the
income portion of the adjustment to the valuation allowance and the
Company's expectations of a non-cash current tax expense, the Company
currently estimates that it will report a third quarter net loss in
the range of $6 to $7 million.
"It's important to note that these nonrecurring items have no
effect on operating cash flow and do not reflect any change in the
underlying economics of the Company's business," commented Howard
Goldberg, President and Chief Executive Officer. "In fact, we continue
to expect to be free cash flow (1) positive for the full year 2004. In
third quarter 2004, we increased our cash and short-term investments
by approximately $39 million, excluding the use of approximately $17
million of cash for stock repurchases, and ended the quarter with
total cash and short-term investments of approximately $145 million.
We are pleased with our Company's accomplishments and remain very
positive about our outlook for the future."
(1) InterDigital defines "free cash flow" as operating cash flow
less purchases of property and equipment and investments in patents.
The following table summarizes the Company's pro forma and
anticipated operating results for third quarter 2004.
Third Quarter 2004
(Pro Forma versus Anticipated Results)
(in millions)
Pro Forma Anticipated
Forecast (a) Results
------------------------------
Revenue $ 29.2 - 29.7 $ 7.0 - 7.5
Pre-tax income (loss) 2.2 - 2.7 (18.5) - (19.0)
Income Tax (Provision) Benefit
Reduction of deferred tax asset
valuation allowance - 17.0
Other tax expense (4.0) - (4.5) (4.5) - (5.0)
-------------- ---------------
Net Loss $(1.3) - (2.3) $ (6.0) - (7.0)
============== ===============
(a) The pro forma forecast has been prepared as if the Company had
transitioned its per-unit revenue reporting in an earlier period and
excludes any impact of the adjustment to the deferred tax asset
valuation allowance. Certain operating and tax expense items related
to revenue have been adjusted to conform to the pro forma revenue
presented. Refer to the pro forma revenue table at the end of this
release for further disclosures surrounding the Company's presentation
of pro forma revenue.
Royalty Reporting Transition
Commencing in fourth quarter 2004, revenue will include both
paid-up amounts being amortized and per-unit royalties reported to the
Company during that quarter. Previously, InterDigital recognized
revenue related to per-unit royalties in the quarter in which the
licensee's underlying sales occurred. Circumstances related to
accelerated SEC filing deadlines now require the Company to recognize
revenue associated with per-unit royalties in the quarter when royalty
reports are received from licensees. There will be no changes to the
timing of revenue recognition related to royalties that are amortized
over a defined period, such as paid-up licenses and license fees. In
addition, revenue relating to past infringement from licensees,
technology product sales and engineering services will continue to be
recognized in the quarter in which all elements required for revenue
recognition are met.
"The transition to recognizing per-unit royalty revenue in the
quarter when we receive royalty reports will both simplify our
reporting processes and improve our visibility into our future
revenues over the near term," commented Rich Fagan, Chief Financial
Officer. "The change was driven by current and future accelerated SEC
filing deadlines. These accelerated deadlines, combined with the
timing in which we receive the majority of our royalty reports, made
it increasingly difficult for us to compile our results and provide
ample time for both the Audit Committee of our Board of Directors and
our independent auditors to complete their respective reviews of the
information prior to disclosure of our financial results."
The following table provides a breakdown of reported and
anticipated revenue for the first three quarters of 2004 (in
millions):
Third
First Second Quarter
Quarter Quarter Anticipated
---------------------------
Amortization, Past Infringement & Other $ 7.3 $ 7.2 $7.0 - 7.5
Per-unit Royalties 25.7 22.2 - (a)
------- ------- -----------
Total Revenues (b) $ 33.0 $ 29.4 $7.0 - 7.5
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(a) Reflects transition to recognition of per-unit royalties in
the period royalty reports are received rather than the quarter in
which a licensee's underlying sales occur.
(b) Amounts shown for first and second quarter 2004 were reported
as revenue in the Company's first and second quarter 2004 financial
statements, respectively.
*T
Had the transition in per-unit royalty reporting been implemented
in an earlier period, pro forma estimated royalty revenue for third
quarter 2004 would have been between $29.2 and $29.7 million,
consisting of between $7.0 and $7.5 million of current period
amortization and $22.2 million of per-unit royalties that were
recognized as revenue in second quarter 2004 but related to reports
received in third quarter 2004.
The Company's previous guidance, which was based on the continued
recognition of per-unit royalties in the quarter in which a licensee's
underlying sales occurred, indicated that recurring patent licensing
revenues from then existing licensees could be in the range of $27 to
$30 million per quarter over the remainder of 2004. The Company will
provide updated guidance for fourth quarter 2004 subsequent to
receipts of royalty reports that reflect third quarter 2004 activity.
Valuation Allowance Against Deferred Tax Assets Adjustment
In third quarter 2004, the Company will recognize an increase in
the value of its deferred tax assets of approximately $27 million,
through a partial reversal of a corresponding valuation allowance that
totaled nearly $90 million prior to the reversal. The valuation
allowance against deferred tax assets was accumulated during periods
in which the Company did not consistently generate taxable income. Of
the $27 million benefit, approximately $17 million will be recognized
as income in the statement of operations and $10 million will be
credited directly to additional paid-in-capital.
In recent years, the Company has begun to generate taxable income
on a consistent basis prior to the utilization of federal net
operating loss carryforwards. Under U.S. Generally Accepted Accounting
Principles, when a company that has a full valuation allowance begins
to consistently generate taxable income and projects that it will
continue to do so, it is required to evaluate that allowance and
reduce the allowance when it is more likely than not that some or all
of the associated benefits of the deferred tax assets will be
utilized.
The valuation allowance adjustment does not affect the Company's
cash flow. This adjustment, as applied, is based upon conservative
estimates that exclude future potential income sources such as impacts
from litigation or arbitration proceedings. The Company expects that
its cash tax obligations will remain unaffected until all federal net
operating loss carryforwards, which approximated $123 million at
December 31, 2003, are fully utilized or have expired.
"We are pleased that our recent and prospective performance
warrants an adjustment to our valuation allowance against deferred tax
assets for the first time in InterDigital's history," stated Rich
Fagan, Chief Financial Officer.
The Company will continue to evaluate the potential use of its
deferred tax assets and, depending on various factors, could reverse
all or a portion of the remaining valuation allowance in the future.
Although the Company's cash tax obligations will remain unaffected
until all federal net operating loss carryforwards are fully utilized
or have expired, at this time the Company expects to recognize book
tax expense (excluding the valuation allowance adjustment) of between
$4.5 and $5.0 million in third quarter 2004. This book tax expense
relates to the character of the Company's remaining federal net
operating loss carryforwards (the majority of which result from
deductions related to stock option exercises). The Company expects to
recognize book tax expense in the range of $1.0 to $1.5 million in
fourth quarter 2004, primarily related to deferred foreign source
withholding tax expense. The Company is currently updating its fourth
quarter forecast and a change in forecasted taxable income for 2004
could impact the amount of book tax expense that is ultimately
recorded in the third and fourth quarters. Beginning in first quarter
2005, the Company expects to provide book tax expense for income taxes
at a rate equal to its combined federal and state effective rates,
which would approximate 34% to 37%, plus an amount for deferred
foreign source withholding tax expense which is in part dependent on
licensee royalty reports.
Conference Call Information
The Company will host a conference call on Tuesday, October 26,
2004 at 11:00 a.m. Eastern Daylight Time (EDT) to discuss the impact
of this transition and adjustment. For access to the conference call
within the U.S. please dial (877) 505-0448 by 10:50 a.m. and ask the
operator for the InterDigital conference call. Participants calling
from outside the U.S. should dial (706) 679-3165. InterDigital also
will provide live access to the call on its web site at:
www.interdigital.com. The Company encourages participants to take
advantage of the Internet option if possible. For the live Internet
broadcast, click on the link to the Live Web Cast on the homepage. In
addition, a replay of the call will be available from 2:00 p.m. EDT
October 26 through 11:00 p.m. EDT October 28. To access the recorded
replay, dial (800) 642-1687 and use the confirmation code 914845. A
replay of the conference call will be available for 30 days on
InterDigital's web site in the Investing section.
About InterDigital
InterDigital architects, designs and provides advanced wireless
technologies and products that drive voice and data communications.
The Company offers technology and product solutions for mainstream
wireless applications that deliver cost and time-to-market advantages
for its customers. InterDigital has a strong portfolio of patented
technologies covering 2G, 2.5G, 3G and 802 standards, which it
licenses worldwide. For more information, please visit InterDigital's
web site: www.interdigital.com. InterDigital is a registered trademark
of InterDigital Communications Corporation.
This press release contains forward-looking statements regarding,
among other things, our current beliefs, plans, and expectations as
to: (i) our third quarter 2004 reported, pro forma and anticipated
royalty revenues; (ii) the impact of our partial reversal of our
valuation allowance in third quarter 2004 and our ability to generate
future taxable income; (iii) our estimated third quarter 2004 net
loss; (iv) our ability to be cash flow positive for the full year 2004
(v) the future reversal of all or a portion of our remaining valuation
allowance; (vi) the amount of our third and fourth quarter 2004 book
tax expense; and (vii) our anticipated 2005 income tax rates. Words
such as "expect," "future," "prospective," "projects," "estimated,"
"will have," "will continue," "approximately," "forecast" 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 the
forward-looking statements due to a variety of factors in addition to
those specifically identified above. Our third quarter 2004 actual and
pro forma results of operations may be affected by adjustments
associated with the final compilation and review of accounting results
for the period. The impact of our partial reversal of our valuation
allowance in third quarter 2004 and our ability to generate future
taxable income may be affected by: (i) changes in the market share and
the performance of our primary licensees in selling their products;
(ii) our ability to effectively manage costs; (iii) the costs of
ongoing arbitration/litigation; (iv) our ability to identify and
implement effective tax planning strategies; and (v) changes to
existing federal tax regulations.
Our estimated third quarter 2004 net loss may be affected by the
method of recognition utilized to record running royalty rates and our
ability to account for: (i) results of outstanding litigation; and
(ii) the final analysis and review of our third quarter 2004 financial
results. Our ability to be free cash flow positive for 2004 may be
impacted by a delay in the anticipated receipt of payments from our
licensees or a failure by any licensee to realize our internal
projections for their sales of covered products. A future reversal of
our remaining valuation allowance could be affected by: (i) the market
acceptance of our technology products; (ii) the outcome of significant
outstanding patent license arbitrations; and (iii) our ability to
enter into additional patent license agreements.
The amount of book tax expense we recognize in third and fourth
quarter 2004 and the amount of our federal net operating loss carry
forwards as of December 31, 2004, may be affected by: (i) changes to
international tax treaties and federal tax regulations; (ii) the
amount of royalties paid by new and existing licensees; (iii) the cost
of litigation; and, (iv) our level of continued self-funding in
technology development activities. Our anticipated 2005 income tax
rates could be affected by: (i) changes in federal and/or state tax
regulations; and, (ii) our ability to identify and implement effective
tax planning strategies, as well as other factors listed above.
Pro Forma Revenue
The following pro forma tables are representative of the revenue that
the Company would have reported had the Company recognized its per-
unit royalties in the quarter in which the royalty reports were
received rather than in the quarter in which a licensee's underlying
sales occurred.
The Company has provided these pro forma results here and elsewhere in
this press release, as well as information concerning expected free
cash flow, because management believes that investors may find these
results/information useful in understanding the Company's operating
results. This information is intended to provide meaningful
comparisons of the Company's results in third quarter 2004 and future
periods.
The following table provides a breakdown of reported and anticipated
revenue for each quarter in the past 2 years (in millions):
As Reported
2003 2004
-----------------------------------------------------
1Q 2Q 3Q 4Q 1Q 2Q 3Q
-----------------------------------------------------
Amortization,
Past
Infringement
and Other $26.0 $ 6.1 $ 8.1 $ 7.2 $ 7.3 $ 7.2 $7.0 - 7.5
Per-unit
Royalties 11.3 19.7 18.7 17.5 25.7 22.2 -
------ ------ ------ ------ ------ ------ -----------
Total Revenue $37.3 $25.8 $26.8 $24.7 $33.0 $29.4 $7.0 - 7.5
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The following pro forma table is intended to reflect revenue
information as if the per-unit royalties were recorded in the quarter
in which the Company received its royalty reports, generally one
quarter in arrears. However, the information displayed has not been
adjusted for royalty reports that are received semi-annually. These
amounts represent less than five percent of revenue in all periods
reflected (in millions):
Pro Forma
2003 2004
-------------------------------------------------------
1Q 2Q 3Q 4Q 1Q 2Q 3Q estimate
-------------------------------------------------------
Amortization,
Past
Infringement
and Other $26.0 $ 6.1 $ 8.1 $ 7.2 $ 7.3 $ 7.2 $ 7.0 - 7.5
Per-unit
Royalties 12.8 11.3 19.7 18.7 17.5 25.7 22.2
------ ------ ------ ------ ------ ------ -------------
Total Revenue $38.8 $17.4 $27.8 $25.9 $24.8 $32.9 $29.2 - 29.7
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CONTACT: InterDigital Communications Corporation
Media Contact:
Dawn Goldstein, 610-878-7800
dawn.goldstein@interdigital.com
or
Investor Contact:
Janet Point, 610-878-7800
janet.point@interdigital.com