InterDigital, Inc. (IDCC) Q2 2012 Earnings Call July 26, 2012 6:00 p.m. EDT Executives Janet Point – EVP, Communications and IR Bill Merritt – President and CEO Rich Brezski – CFO Scott McQuilkin – Senior EVP – Strategy and Finance Analysts Charlie Anderson – Dougherty & Co. Daniel Bretthauer – MDC Financial Research Ron Shuttleworth – M Partners Jonathon Skeels – Davenport & Co. Sheru Chowdhry – Paulson & Co. Tim Quillin – Stephens Inc. Presentation Operator
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These forward-looking statements are made of as of the date hereof, and except as required by law, we undertake no obligation to update or revise any of them whether as a result of new information, future events or otherwise.In addition, today's presentation may contain references to free cash flow, a non-GAAP financial measure. A schedule setting out a reconciliation of free cash flow to net cash used in operating activities, the most directly comparable GAAP financial measure is included at the back of our earnings release issued earlier today, which also has been posted in the Investor Relations section of our website at www.interdigital.com. So with that taken care of, I will turn the call over to Bill. Bill Merritt Thanks and good evening, everyone. Typical with these calls, I thought I would spend my time this evening updating everyone on our market, our strategic direction, our patent sales initiatives, a very important new component of our strategy, and our licensing discussions and ongoing litigations, which will then provide some additional insight on the quarter. As you all know, we announced earlier this year the expansion of our strategy to include the monetization of those portions of our patent portfolio not necessary to drive our core terminal unit licensing business. The patent assets that could be included in this program are infrastructure-related patents, terminal unit related patents, and patents covering other technologies like security in Wi-Fi. In the second quarter, the company signed two different patent sales agreements for a total of $384 million. One deal is closed, and the deal with Intel is expected to close in the third quarter of this year. I cannot emphasize enough the importance of these transactions. First, they are very high-value deals. When viewed on a price per US-issued patent basis, which is what we believe is the best way to measure the value of patent transactions using public data, each of these transactions was very strong for InterDigital in comparison to other recent patent transactions. Looking at these two transactions, the average price per US patent paid is approximately $2.3 million. This compares to a median price of $1.4 million per US patent paid in four comparable patent deals over the past 12 months.
We believe our transactions are also very solid for the buyers as they're acquiring some very strong patent from an extremely capable R&D team. The price that these parties pay for the patents after extensive diligence confirms how strong the R&D teams are and how well the patents have been managed.Second, it marks the beginning of what is we expect to be a significant new part of our business going forward. We have identified an additional 3,000 patents and patent applications which includes approximately 200 US-only patents, for potential sale or partnership, which represents just over 15% of the approximately 18,000 patents and patent applications that will remain with the company following the closing of the Intel deal. We are in discussions with a wide range of parties around possible transactions with these assets and are working diligently to close new deals. We also continue to generate substantial amounts of patents and patent applications annually based upon our strong R&D teams. In 2011 we filed approximately 150 new non-provisional US patent applications. Based on our historical issuance rate, these patent applications could ultimately yield 1,500 to 3,000 patents around the world over time. Based on this volume of production and the high quality of the innovations that we create, we have a great opportunity to create substantial value from this new addition to our strategy. Read the rest of this transcript for free on seekingalpha.com