InterDigital, Inc. (IDCC) Q1 2023 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the InterDigital First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's prepared remarks, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Raiford Garrabrant, Head of Investor Relations. Please go ahead.

Good morning to everyone, and welcome to InterDigital's First Quarter 2023 Earnings Conference Call. I am Raiford Garrabrant, and I recently joined the company as Head of Investor Relations. With me on today's call are Liren Chen, our President and CEO; and Rich Brezski, our CFO. With this being my first earnings call with the company, I'd like to say, how excited I am to be part of the team and for the opportunity to work with all of you in the investment community going forward. Consistent with last quarter's call, we will offer some highlights about this quarter and the company and then open the call up for questions. Before we begin our remarks, I need to remind you that in this call we will make forward-looking statements regarding our current beliefs, plans, and expectations, which are not guarantees of future performance, and are made only as of the date hereof. Forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from results and events contemplated by such forward-looking statements. These risks and uncertainties, include those described in the Risk Factors sections of our 2022 annual report on Form 10-K and in our other SEC filings. In addition, today's presentation may contain references to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our financial metrics tracker, which is available on the Investor Relations section of our website. With that, taken care of, I will now turn the call over to Liren.

Thank you, Raiford. Good morning everyone, and thanks for joining us today. Despite of challenging market conditions, this was another excellent quarter as we continue to make good progress on the licensing front with key customers had our best quarter ever in terms of new invention disclosures, and extended our track record of consistently returning capital to shareholders. On our last call, I highlighted our belief that the company was in a strong position as it has ever been and our first quarter results further demonstrate the strength of our business. We doubled our revenue to $202 million and nearly tripled our adjusted EBITDA to $155 million. I'll let Rich talk you through the details, but I want to emphasize that this result only happened because of our outstanding performance across the business. On the licensing front, our binding appreciation with Samsung which we announced in January is proceeding in a timely fashion and according to plan. I should reiterate that Samsung has agreed to take a license to our portfolio effective January 1, 2023, where the arbitration process will decide the monetary terms. We remain confident that our new license with Samsung will reflect the value of portfolio and continue our long-term relationship with Samsung that starts more than 25 years ago. Next, I want to provide an update on our KCS with Lenovo. As some of you may know, this litigation involves multiple trials in the UK and to date have proven interdeal and Lenovo infringement of our patents and the foundational nature of our innovation to the mobile industry. In three separate trials, including two that was heard by UK's Court of Appeal our patents have been found to be valid, essential to various cellular wireless standards and influenced by Lenovo. We recently received the judgment from the UK High Court in the trial to determine how much Lenovo must pay for a license to our portfolio of cellular assets. The court ruled that Lenovo should pay us almost $140 million for a license to our 3G, 4G and 5G patents through the end of 2023. Lenovo has been ordered to pay us in full for all it's pass sales for cellular enabled devices. As court noted, this is intended to be a powerful way of discouraging licenses from delaying our holding out on taking upfront license. This week there was a hearing regarding topics such as interest, cost and permission to appeal the rate of determination, and we are waiting for the judge's final decision before deciding our next steps. It's also worth noting that the positive decision we have received in our Lenovo dispute has had a beneficial impact in our UK litigation with OPPO. US Judge has fast tracked our dispute to focus on how much OPPO should pay us for a license given that our patents have already been found to be valid essential to biocellular wire standards and infringed by OPPO. We are pleased that across both our Lenovo and OPPO cases we are proving the strength of our portfolio. As I said before, we will not levering our determination to defend our IP and to ensure that we see a fair return on our investment in global adopted innovation. Our recent license momentum has placed the business in an incredibly strong position and enabled us to further accelerate our commitment to return capital to shareholders through share buybacks and dividends. Rich will provide more details in our recent share repurchases, but I want to highlight that since 2019 we have returned more than $700 million to shareholders. As always our licensing success has been built on top of quality and breadth of innovation and we believe our innovation pipeline is as robust as it has ever been. In Q1, we filed our highest ever number of invention disclosures in our quarter providing a good indication of how our engineers are turning our foundational research into new breakthroughs. We also had a record quarter in new 5G-related filings, which emphasizes how our working advanced 5G research and standardization continues [indiscernible] is rolled out around the world. Our success in translating our innovation to patents was also highlighted by a recent report from the European patent office in which we were named among the top 50 recipients of European patents in 2022. That underlines the global nature of our portfolio which is now about 30,000 granted patents and applications. Our innovation was also at the forefront of our presence at Mobile World Congress in Barcelona where we engaged with various stakeholders and presented them on several key areas of our research including how AI and machine learning can enhance 5G networks and how video innovation will underpin more immersive connected experience. As our presence at MWC demonstrated, our innovation continue to redefine what it means to be connected and in turn is opening up of what we believe are new and exciting licensing opportunities. Last month, we appointed Skip Maloney as our new Chief People Officer. Skip has 25 years of industry experience and joined us from Aspen Technology where he led its global HR functions. He will help with the further growth and development of our workforce to transform the company to achieve our strategic goals. I also highlight -- I'm also delighted by the recent nomination of former TiVo and Xperi Executive, Samir Armaly to our Board of Directors. Like former Qualcomm President Derek Aberle who joined our Board last year, if elected, Samir will bring considerable licensing experience and excellent insight into the video space as we look to expand our licensing program into new products and services. Before I hand it over to Rich to talk you through the numbers I want to reflect our very significant recent milestones for the wireless industry. Last month was the 50th anniversary of the first call made from our mobile phone which was made shortly after InterDigital was founded. From this landmark moment, our inventors have played a pivotal role in developing foundational innovations that underpins every generation of mobile technologies for connected devices and services. We are proud of the role that we have played over the last 50 years and look forward to deliver even more value to the industry and consumers in the future. And with that I'll hand it over to Rich.

Thanks Liren. Our exceptional first quarter financial results were driven by Samsung and Lenovo. As we discussed during our last call for Samsung, we are recording revenue at a level consistent with the revenue we have recognized from our patent license agreement that expired on December 31 2022, which we believe is a conservative estimate. This is consistent with Generally Accepted Accounting Principles and reflects the fact that the binding arbitration with Samsung will define a patent license agreement that is effective beginning January 1, 2023. We believe it is likely that the arbitration award will exceed the conservative revenue we are recognizing and require a catch-up at that time. As a reminder, we expect to receive the arbitration award around mid-2024. Catch-up revenue from Lenovo brought total revenue for the quarter to $200 million doubling our top line from Q1 2022. Together with our operating leverage this more than tripled our non-GAAP EPS. Our adjusted EBITDA for the quarter of $155 million equates to a tremendous 76% adjusted EBITDA margin. This is a 21 point improvement from the 55% adjusted EBITDA margin we delivered in first quarter 2022. As discussed in the last few calls, we believe adjusted EBITDA is a great metric to measure the ability of our business to generate cash over time because it adjusts for timing differences in cash collections under our fixed fee agreements. These results demonstrate the power of our business model. Our investments in fundamental technologies drive top line growth, while the reuse of those technologies across multiple verticals expands our margins and drives our cash flow. Our recent success has driven our cash balance to $950 million as of March 31. In addition thanks to the significant agreements reached over the last few quarters, we expect an additional $1.4 billion of cash receipts under current agreements. In the first quarter of this year, we continued our long-standing practice of returning cash to shareholders. We started out the year by announcing an increase to our share repurchase authorization to a total of $400 million. We then executed a $200 million Dutch tender and repurchased a total of 2.7 million shares. After a brief cooling off period, we got back in the market and through the end of April, we have repurchased roughly another 350,000 shares for $25 million. In all, since I spoke to you in February, we have reduced our outstanding share count by more than 10%. And with $175 million left on the current buyback authorization, we're not done yet. We look forward to additional share repurchases and another strong quarter in Q2. We expect Q2 recurring revenues will once again be around $100 million. We expect a sequential decrease in operating expenses. And finally, we expect an adjusted EBITDA margin of about 50%. Longer term, our goal remains to achieve and sustain a 60% adjusted EBITDA margin on $650 million of recurring revenue from device licenses with additional upside from licensing new products and services. With that, I'll turn it back to Liren.

Thanks Rich. At this point Liz we are ready to take questions.

[Operator Instructions] Our first question comes from the line of Tal Liani with Bank of America.

Hi guys. Good morning. How do I think about the nonrecurring part there was a positive surprise of nonrecurring income? What is the earnings, did you calculate, or can you tell us, what is the earnings without the nonrecurring part? And how should we think about the nonrecurring part going forward?

Yes. So, Tal, the nonrecurring part is driven by the catch-up on Lenovo, coming from the judgment this quarter. So we've clearly, disclosed the recurring portion of the revenue at 101 and the nonrecurring portion being the difference, as far as I don't have offhand bottom line impacts off of that But the way to think of it, as is the case with other nonrecurring items, is that it's not scheduled to recur next quarter, as is the case both here and oftentimes when we have nonrecurring revenue it relates to prior infringement of our technology. So, if you look forward to Q2, we guided to $100 million to $104 million of revenue of, which I said about $100 million is expected to be recurring.

Got it. And when you look at this quarter, also the recurring revenues were better than expected about $5 million better than expected. I know there is no correlation, but I still want to ask the question. Qualcomm reported just last night and they're talking about major issues, with handsets still decline, still China not recovering, on the other hand you have good numbers. I know your contracts by large are not hinted tight, and they're more fixed. But can you talk to us about the environment? And how could it impact your recurring revenues?

Yes. So, let me first address where our recurring revenues came in the quarter versus our guidance and then I'll let Liren, talk about the environment. As you noted, most of our revenue 90% or so comes from fixed-fee agreements. Most of that is on the mobile side. So, we're not especially sensitive to market changes, because of the structure of our agreements. That said, we do have an element of variable or per unit -- and there were some true-ups in the quarter. We have to estimate every quarter, what that variable component is. And then we true up when we get the report, typically up to 45 days after the quarter end. So that contributed to some of the upside over guidance. The other portion of that was, the recurring element of Lenovo.

Yes. This is Liren. Good morning. So regarding the macro environment there's clearly some macroeconomic headwinds. I think every vendor in the industry is facing, back to Rich's point, due to our fixed license agreement for the existing licensees, there's really no impact. For the renewal discussions, and there's some impact regarding the timing, regarding some near-term headwinds. But keep in mind, when we negotiate for our renewal agreement, generally those are longer term, roughly five years. So we are factoring in the projected recovery, as well as future group for various vendors. So I will say, there is some impact, but it's not very significant.

Got it. Thank you.

Our next question comes from Scott Searle with Roth.

Hi, good morning. Thanks for taking my questions. Nice job on the quarter guys. Also I appreciate the restatements, in terms of taking a pro forma look at the company. I apologize, I did get on the call late, but I wanted to go to back to Lenovo. I know there's rev recognition related to the UK litigation, but there's an appeal ongoing on that front. So, two questions. Has the cash been received on that front? I would assume not, and that's something that's pending, given the appeal process. And then in terms of the guidance for the $100 million to $104 million, is that including a recurring element from Lenovo going forward? And then, I have a couple of follow-ups.

Yes. So, Scott on the rev back around Lenovo, that was -- the judgment was just this quarter. It is subject to appeal, but I talked a little bit about the analysis for rev rec, on Samsung. There's actually a similar analysis here, under the rules that went into place back in 2018. It's very principle-based, and you're looking at what level of revenue do you expect to recognize? And do you think that, there would be -- it's unlikely that you have any kind of significant reversal. So that lends to a conservative view, I would say. And it was recognized on that basis. So, the anticipated agreement with Lenovo, is to get them licensed through the end of the year. So, we did include a recurring element in our guide for Q2.

Got you. But Rich the cash has not been received. Is that correct?

Yes. It was a fairly recent judgment. So, I'll just let it stand there. And then there's some disclosure about future cash receipts in our 10-Q. And we noted that that includes anticipated amounts from both Samsung and Lenovo.

Got you. Okay. So, the same question in Samsung. Samsung then you guys had put out the guidance of expecting basically at a minimum where you had been in the past but you're not necessarily receiving the cash at the current time line until the arbitration is complete. Is that correct?

Yes, what I'll kind of go back to what I said without commenting on what we have or haven't received we did include in our expectations for cash receipts any amounts that we expect from Lenovo and Samsung.

Okay. Fair enough. And then lastly if I could go into the video and IoT side of the equation. It continues to ramp up. You had a run rate of almost $60 million a year now. Historically, you had talked about getting the old Technicolor back to $150 million plus. Is there any time line that you would associate with that that we should be thinking about? I know it's really started to accelerate over the course of 2022. And also as part of that the video services model I know you guys have been incubating a model and a plan on that front. How is that progressing? What should we be thinking about in terms of timeline that we would get more details and actually seeing that impact the P&L? Thanks.

Hey Scott. This is Liren. So, regarding the -- our current run rate for video and IoT as you comment here, we feel we are doing very, very well. And referring to the $100 million to $150 million recurring target here our public stated timeline is three to five years to recycle. On the service side, here we have made a substantial amount of progress. The program is underway. And we don't have any deals announced yet but we are proceeding really well. In my prepared remarks, I did make a comment regarding the recent appointment of Samir Amarley with one of the most experienced executives at TiVo and expiry has been nominated to our Board. If he's being confirmed in our upcoming shareholder meetings, we believe we'll add a lot of value to our Board and which frankly, will help us to further expand the business in this field.

Great. Thank you.

Thanks Scott.

Our next question comes from Anja Soderstrom with Sidoti.

Hi, thank you for taking my question. So, yes, the recurring revenue growth. how should we think about that? What's going to be driving that the most? Is it going to be in the near-term? Is that going to be the addition of the Chinese OEMs? Sorry that longer out in the future and we're going to think about the driving that recurring revenue.

Hey, good morning. This is Liren. Let me take the question and maybe Rich has something to add. So, on the recurring revenue portion in the near-term, it will be primarily driven by our market and I suppose you are aware we have essentially two major customers. In addition to Lenovo, we've got OPPO and VIVO, we are making progress on those accounts. And we also have obviously the growth of IoT and CE business. And over a longer period of time, we do expect the OTC as well as the service revenue to kick in by longer term I mean in three years plus.

Okay. Thank you. And in terms of the operating expenses, you've done some cuts and if I back out those one-time expenses, it seems like you did very well on that line. How should we think about the operating expenses going forward?

Yes, you're right. Anja if you back out the onetime expenses, we came in kind of at the low end of our guide for Q1 and I did using that as a basis, okay? We expect a little bit of an increase when you back out the Q1 expenses, right? And that's driven by litigation. We have our arbitration kicking up with Samsung and then additional proceedings with Lenovo, and, of course, we have the cases with OPPO as well.

Okay. Thank you. That was all from me.

Thanks Anja.

[Operator Instructions] That concludes today's question-and-answer session. I'd like to turn the call back to Raiford Garrabrant for closing remarks.

Thank you, Liz. I'll now turn it back to Liren for his closing remarks.

Thank you, Raiford. Before we close, I like to thank all our employees for their dedication and contribution to InterDigital as well as our many partners and licenses. Thank you to everyone who joined us today and we look forward to updating you on our progress next quarter.

This does concludes today’s conference. Thank you for your participating. You may now disconnect.