InterDigital Announces Third Quarter 2006 Financial Results

KING OF PRUSSIA, Pa.—(BUSINESS WIRE)—November 1, 2006— InterDigital Communications Corporation (NASDAQ: IDCC), today announced results for the third quarter and nine months ended September 30, 2006. Highlights for the third quarter include:

-- Revenue of $67.2 million

-- Net income of $21.7 million, or $0.40 per diluted share

-- $134 million (plus interest and additional royalties) arbitration award related to a patent license dispute with Samsung

-- Cash and short-term investments totaling $304.2 million

-- Repurchase of 1.8 million shares of the company's common stock

"These successes have allowed us to continue to build shareholder value," commented William J. Merritt, President and Chief Executive Officer. "Our track record of producing solid earnings and positive cash flow demonstrates the continuing maturation of our 3G technology business. Furthermore, the strength of our patent licensing program was confirmed by the receipt of a substantial arbitration award related to our patent dispute with Samsung."

Mr. Merritt added, "We also made positive strides in our dual-mode 2G/3G ASIC programs as we completed the agreement to license Infineon's 2G Layer 1 technology. We are on target to receive ASIC samples from the foundry in summer 2007. Based on successful interoperability testing with major infrastructure vendors, we believe our dual-mode 2G/3G HSDPA/HSUPA modem offering will be highly competitive. Accordingly, in parallel with the development effort, we have been reaching out to terminal unit vendors to begin a sales dialogue around the InterDigital solution."

The company has recently been recognized by two industry organizations for its achievements in licensing and intellectual property management. InterDigital was named a 2006 recipient of the Licensing Achievement Award from the Licensing Executives Society, joining the ranks of prior winners such as Pfizer and Stanford University. Additionally, InterDigital was included as an inaugural member of the Ocean Tomo 300(TM) Patent Index, announced by Ocean Tomo and the American Stock Exchange on October 24, 2006. The index is based on the value of intellectual property and represents a diversified portfolio of companies that own the most valuable patents relative to their book value, including companies such as 3M and IBM.

Third Quarter Summary

The company's net income increased to $21.7 million, or $0.40 per diluted share, in third quarter of 2006 from $6.5 million, or $0.11 per diluted share in third quarter of 2005. Included in this quarter's net income is approximately $8.1 million after tax, or $0.15 per diluted share, related to the resolution of patent licensing matters with Nokia.

During third quarter 2006, the company generated $5.8 million of free cash flow(1) due largely to the receipt of $14.8 million of royalty prepayments primarily from two existing patent licensees, offset, in part, by investments in product and patent related initiatives.

Revenue in third quarter 2006 increased to $67.2 million from $48.5 million in third quarter of 2005. Third quarter 2006 revenue included $54.7 million of recurring patent license royalties and technology solution sales, and $12.5 million related to Nokia. Recurring patent license royalties in third quarter 2006 increased 58 percent to $53.5 million from $33.8 million in third quarter 2005, due largely to a new agreement signed subsequent to third quarter 2005 with LG Electronics Inc. (LG) and new or higher contributions from other existing licensees. Technology solution revenue decreased to $1.2 million in third quarter 2006 from $4.5 million in third quarter 2005 due to the completion in first quarter 2006 of deliverables under an agreement with General Dynamics supporting a program for the U.S. military. Licensees that accounted for 10 percent or more of the $54.7 million of recurring patent license royalties and technology solution sales were LG (27 percent), NEC Corporation of Japan (17 percent) and Sharp Corporation of Japan (17 percent).

Third quarter 2006 operating expenses of $36.8 million decreased 4 percent compared to third quarter 2005. This decrease primarily resulted from lower costs in three areas. Patent litigation and arbitration costs declined to $5.2 million in third quarter 2006 from $7.9 million in third quarter 2005 due to a decrease in activity levels in third quarter 2006. The company's long-term compensation costs decreased $1.2 million, reflecting the absence of overlapping cycles. In addition, the company recognized $0.8 million of repositioning charges in third quarter 2005. These decreases were offset, in part, by increases in third quarter 2006 costs related to product development initiatives, patent amortization and depreciation, and consultant compensation.

Net interest and investment income of $4.1 million in third quarter 2006 increased $3.3 million over third quarter 2005 due to both higher investment balances and higher rates of return in third quarter 2006.

The company's third quarter 2006 tax expense consisted of a 36 percent provision for federal income taxes plus $0.4 million related to the amortization of foreign deferred tax assets related to non-U.S. withholding taxes made in prior years. Third quarter 2005 tax expense of $4.4 million included a federal tax provision of $4.0 million and $0.4 million related to non-U.S. withholding taxes.

Nine Months Summary

Net income for first nine months 2006 increased to $205.0 million, or $3.65 per diluted share, from $9.7 million, or $0.17 per diluted share, in first nine months 2005. Approximately $162.2 million or $2.83 per diluted share of the 2006 net income is related to the resolution of patent licensing matters with Nokia and Panasonic.

For first nine months 2006, revenue increased to $415.4 million from $122.6 million in first nine months 2005. This increase was driven by $240.5 million and $12.0 million related to the resolution of matters with Nokia and Panasonic, respectively, a new agreement signed following third quarter 2005 with LG and higher contributions from other existing patent licensees.

During first nine months 2006, the company generated $294.6 million of free cash flow. This free cash flow was driven, in large part, by patent license payments from Nokia and LG totaling $319.7 million, net of source withholding taxes, offset, in part, by estimated federal tax payments and investments in product and patent related initiatives.

Operating expenses for first nine months 2006 of $105.6 million decreased 1 percent compared to the first nine months 2005. This decrease is related to lower costs associated with patent litigation and arbitration, long-term compensation, executive severance and repositioning activities offset, in part, by higher costs associated with commissions, product development initiatives and patent amortization.

Net interest and investment income of $9.5 million in first nine months 2006 increased $7.3 million over first nine months 2005 due to both higher investment balances and higher rates of return in first nine months 2006.

The company's first nine months 2006 tax expense consisted of a 35 percent provision for federal income taxes plus $2.2 million of non-U.S. withholding taxes. First nine months 2005 tax expense of $8.1 million included non-cash charges for both federal income taxes and non-U.S. withholding taxes of $5.9 million and $2.2 million, respectively.

Fourth Quarter 2006

Consistent with the company's practice, revenue guidance for fourth quarter 2006 will be provided following the receipt and review of applicable royalty reports. The company will also update its forecasts on anticipated revenue from work associated with technology solution agreements.

Rich Fagan, Chief Financial Officer commented, "We currently anticipate that fourth quarter 2006 operating expenses, excluding patent arbitration or litigation costs, will grow by 7 percent to 12 percent sequentially compared to third quarter 2006, principally reflecting investments in outside services associated with meeting our schedule to have engineering samples of our 2G/3G ASIC by summer 2007. We also currently expect that our patent arbitration and litigation costs in fourth quarter 2006 will be between $5 million and $7 million as we continue to invest whatever is necessary for this critical activity. Lastly, we expect that our book tax rate for the fourth quarter of 2006 will approximate 35 percent to 37 percent."

About InterDigital

InterDigital Communications Corporation designs, develops and provides advanced wireless technologies and products that drive voice and data communications. InterDigital is a leading contributor to the global wireless standards and holds a strong portfolio of patented technologies which it licenses to manufacturers of 2G, 2.5G, 3G and 802 products worldwide. Additionally, the Company offers baseband product solutions and protocol software for 3G multimode terminals and converged devices. InterDigital's differentiated technology and product solutions deliver time-to-market, performance and cost benefits. For more information, please visit InterDigital's web site: www.interdigital.com. InterDigital is a registered trademark of InterDigital.

This press release contains forward-looking statements regarding our current beliefs, plans, and expectations as to our operating expenses (excluding patent arbitration and litigation costs), patent arbitration and litigation costs, book tax rate and general prospects for fourth quarter 2006, the competitiveness of our modem offering and the timeline for receipt of ASIC samples. Words such as "optimistic," "will," "expect," "anticipate" or similar expressions are intended to identify such forward-looking statements.

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