Second Quarter PIPCO Roundup

Trends and takeaways from a brief review of 2nd Quarter Financial Results include:

  • New accounting regs wreaking havoc on recognized revenue
  • Apple a major source of licensing fees during the quarter
  • Acacia losses cannot be attributed to accounting reg changes

With the June 30, 2018 quarterly reports rolling in, we decided to check in on a few publicly traded IP licensing specialists. After a brief study, an interesting trend emerges. New revenue recognition guidance, referred to as ASC 606, has been adopted by several companies as of January 1, 2018 resulting in a drastic reduction in recognized revenue. Unfortunately, this exacerbates a problem that PIPCOs have faced for years: “lumpy” revenues. Granted, Asian companies are generally slow to engage in the Winter due to their holiday schedule. Similarly, European companies can be slow  in the Summer. Overall, some companies look to close out liabilities around their fiscal year-end. However, outside of these generalities licensing work is not really “seasonal.” Thus, there is very little reason to compare an arbitrary three-month window from one year to the next. Nevertheless, investors look at these types of comparisons, but this transition year makes these comparisons even less useable.

A brief breakdown of Interdigital, Rambus, Xperi, Acacia, and Quaterhill follows:

Interdigital, Inc.

Overall, Interdigital reported $68.8 M in patent licensing royalties during the quarter that ended June 30, 2018. Their second quarter recognized revenue shows nearly a 50% decrease compared to the same quarter in 2017. However, Interdigital attributes the drop to adoption of ASC 606 revenue guidance standard–a switch from ASC 605–which began in January 2018. From the report:

Second quarter 2018 recurring revenue was $67.5 million. Under ASC 605, recurring revenue for second quarter 2018 would have been $88.6 million, compared to $87.9 million in second quarter 2017, with the increase primarily driven by an increase in fixed-fee royalty revenues as a result of new license agreements signed in 2017 and 2018, partially offset by a decrease in variable patent royalty revenue primarily related to decreased shipments and expired contracts.

However, Interdigital also states that the “operational decrease” of $45.1 M in licensing revenue was “primarily driven by non-current patent royalties related to the Microsoft settlement agreement signed in second quarter 2017.”  Indeed, for the period ending June 30, 2017, Microsoft accounted for 35% of Interdigital’s total revenue, compared to less than 10% for the same period in 2018. Based on their description of the royalties paid by Microsoft, Interdigital most likely received nothing.

However, around 80% of Interdigital’s total revenue still came from companies accounting for more than 10%, including Apple, Samsung, and LG. Based on Interdigital’s disclosures, revenue from Apple accounted for $27.8M, while Samsung and LG accounted for $19.5M and $7.7M, respectively.

Interdigital also acquired 18,000 patent assets from Technicolor during the quarter for a cash payment of $150M. In addition, Interdigital will share 42.5% of net licensing proceeds with Technicolor for licensing consumer electronics, but will keep all licensing proceeds for licensing in the “mobile industry.” These terms are not specifically defined in any disclosure, so it’s unclear whether mobile devices fall under the “mobile industry” or “consumer electronics.”

Rambus Inc.

Similar to Interdigital, Rambus also reported a significant drop in patent licensing revenue over the same quarter last year. Rambus reported $30.1M in royalty revenue for the three month period ending June 30, 2018, compared with $70M for the same period last year. Again, Rambus attributes the revenue drop to the switch to ASC606. According to their report, they would have reported $73M in royalty revenue using ASC 605.

Xperi

Like many of it’s peers, Xperi noticed a 30% drop in royalty revenue on the quarter, decreasing from $91.3M to nearly $64M. Again, Xperi attributes the drop to adoption of the new revenue guidance, and states that legacy GAAP revenue would have been $96.7M.

Acacia

Running with the theme, Acacia’s quarterly revenue is also down significantly from the same period last year. They reported approximately $6.5M in the three months ending on June 30, 2018, compared with $16.5M in the same period last year. Operating costs skyrocketed from $24.4M to $46.3M for a reported loss of nearly $40M. However, Acacia noticed remarkably different results from it’s peers with respect to ASC606 adoption. Their report shows a $2M increase in Acacia’s revenue over the first six months of the year. As reported previously, Acacia is regrouping after an investor group seized control of multiple board positions.

Quarterhill

The parent company of WiLAN shows more stability in their revenue overall. For the period ending June 30, 2018, their total revenue actually increased to $20.3M from $18.6M, despite a 54% drop in licensing revenue. By joining licensing efforts together with recurring revenue from other lines of business, Quarterhill might be better positioned than its peers to withstand the volatility and show consistent revenue. Meanwhile, WiLAN recently reported a $145M jury verdict in a lawsuit against Apple.

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