InterDigital, Inc. (IDCC) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm Doug Hutcheson, Chairman of the Board of the Directors of InterDigital, Inc. Welcome to the company's 2020 Annual Meeting of the Shareholders. We're excited to be hosting a fully virtual annual meeting again this year, which allows us to be more inclusive and reach a greater number of stakeholders. We ask you forbearance. We have had -- we are having weather and may have some momentary connectivity problem. Let me -- I'd like to present to you the other members of the Board of Directors: Joan Gillman; John Kritzmacher; Jay Markley; Jean Rankin; and Phil Trahanas; and also Bill Merritt, the company's President and Chief Executive Officer. I will now ask Bill introduce the company's executive management team.

Good afternoon, everyone. I'll start by introducing Kai Öistämö, who's our Chief Operating Officer; Rich Brezski, our Chief Financial Officer; Rick Gulino, our Chief Legal Officer, General Counsel and Corporate Secretary. Also here today are Eric Cohen, Chief Development Officer; Henry Tirri, Chief Technology Officer; Rob Stien, Executive Vice President, Chief Public Policy Officer; Michael Cortino, Chief Information Officer; and Patrick Van de Wille, Chief Communications Officer.

Thank you, Bill. Finally, I would like to note that Al Piscopo and Zach Messinger of PricewaterhouseCoopers LLP, the company's independent registered public accounting firm, are with us today. The agenda for this year's meeting is as follows. First, Rick Gulino, our Chief Legal Officer, General Counsel and Corporate Secretary, will conduct the formal portion of the meeting. Next, Bill Merritt, our President and Chief Executive Officer, will present a brief update on some elements of the company's strategy and vision for the organization. Finally, after that discussion, we will answer questions as appropriate. I will now ask Rick Gulino to conduct the formal portion of the meeting.

Thank you, Mr. Chairman. Members of the audience please note that this meeting is being recorded and webcast live. After the formal meeting has adjourned, we will provide time for general questions. Only shareholders of record as of the record date who have entered their 16-digit control number on the web portal will be able to ask questions in the designated field on the portal. As stated in the rules of conduct, please be succinct in your questions and limit each question to a single topic. I have received an affidavit showing that proper notice of this meeting, together with the notice of Internet availability of proxy materials containing instructions on how to access the company's 2019 annual report and 2020 proxy statement and how to vote online, were mailed to all shareholders who owned InterDigital common stock as of April 1, 2020, the record date for this meeting. As of the record date, there were a total of 30,749,354 shares of the company's common stock outstanding. The company has appointed Broadridge Financial Solutions to act as judge of elections, and representing them here today is Rhoda Anderson. I have received the judge of election's oath and certificate of quorum showing that based upon the number of shares represented in person or by proxy at today's meeting, a quorum is present. Note that the polls will be opening at this time. Any shareholders of record as of the record date who have not yet voted or wish to change their vote may do so by clicking the voting button on the web portal and following the instructions there. Shareholders who have sent in proxies or who have already voted via the Internet or telephone and do not want to change their vote do not need to take any further action. The polls will close after I have described all of the proposals. If any shareholder would like to make a comment regarding any of the proposals, please submit your comments through the web portal. The first order of business is listed as Proposal #1 in the proxy statement, the election of 7 directors. Each director will hold office until the company's 2021 Annual Meeting of Shareholders and until his or her respective successor is elected and qualified. Ms. Gillman; Mr. Hutcheson; Mr. Kritzmacher; Mr. Markley; Mr. Merritt; Ms. Rankin and Mr. Trahanas are the current nominees for election to our Board of Directors. I'll pause for a moment as we check for comments or questions about this proposal.

There are no comments, sir.

Very good. The second item of business is listed as Proposal #2 in the proxy statement, the advisory resolution to approve executive compensation. I'll pause for a moment as we check for comments or questions about this proposal.

There are no comments, sir.

So we will move to the final proposal. The final item of business is listed as Proposal #3 in the proxy statement, the ratification of the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the year ending December 31, 2020. I'll pause for a moment as we check for comments or questions about this proposal.

And just a note to participants. If you would like to raise a comment or a question, you can use the box at the bottom left of your interface that says, Ask a Question, and we'll make sure that we get it answered. There are no comments, Rick. If we do get a comment on 1 of those 3 proposals, I'll raise it for you and we'll go back in the order of business.

Very good. I would like to remind you that representatives from PricewaterhouseCoopers are present to answer any questions if necessary. I now declare the polls for the 2020 Annual Meeting closed. Mr. Chairman, the preliminary report of the judge of elections shows that each of the 7 directors nominated for election has been duly elected, the advisory resolution on executive compensation has been duly approved and the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020, has been duly ratified. That concludes the formal portion of the meeting, which is now adjourned. And now I'll turn the meeting over to our Chairman, Doug Hutcheson.

Thank you. And that concludes the formal portion of the meeting. Patrick, I'll hand the meeting over to you.

Thank you very much, Doug. Thanks to everybody for joining us today. There are 26 shareholders attending and 30 other members of the public at large. Thank you all for joining the meeting today. We've also had some share voted via the interface, and thank you for that. Currently, we have 3 questions in the queue. Again, if you have a question that you'd like to ask the Board of Directors, Doug, Bill Merritt or any other member of the executive team, you can use the box bottom left on your interface that says, Ask a Question, and it will be logged and I will make sure we ask it. I'll turn to the very first question that was asked today, in fact, before the meeting began. The question is, have you considered taking the company private? Bill?

So it's one of those -- it's a question we get a lot from our various investors. And I think the interest in the question is, sometimes licensing businesses would actually run a little better in a private setting. That said, we're a public company. We do well as a public company. From time to time, people have come and talked to us about that. I'd say that we're -- I'm always there to see what will generate the greatest shareholder value. Generally, when you think about private equity, one of the things that they like to see is a long-term set of cash flows. And when we have that and we've had that a number of times, then we're very -- company is very valuable and it's not something they're interested in. And the only time we don't have that value is when those cash flows aren't as certain, and then they're not as interested either. So smart folks. I've said it sometime and enough times, but we're doing well as a public company and we'd like it to stay that way.

Thank you, Bill. A second question that was asked. And again, it's for you, Bill. What business impacts keep you awake at night?

Well, certainly, the recent pandemic has been something that's been keeping me awake only because it's very uncertain. That, I'd say the company has operated extraordinarily well in this environment. As you've seen, we've been able to push deals across the finish line. The R&D teams are working really well. But we've got work to do in terms of bringing the company back into the office and figuring how to do that safely, and -- because obviously, we've got people's health in mind as we do that. So I'd say that that's the most recent one. Otherwise, not much keeps me up about this company. One of the things I like about the company is the business model is very straightforward. The innovation opportunities are very robust. We have a great team to go after them. And even on the licensing side, where there's been uncertainty, the one thing that I loved about the company is we've been able to find our way through what has been a very, very challenging period on IP for a number of years. It's much more settled today. And through, I'd say, a combination of tenacity and ingenuity, we find a related answer. So I built that confidence in the company, and so as a result, I sleep pretty well at night.

What I'll do now, Bill, ladies and gentlemen, we have a slide presentation that gives you kind of an update on where the company is right now. So what I'll do is I'll ask Bill to present those slides. And while he's presenting, if you have questions about the slides or any other questions, again, the box on the bottom left of your screen, says, Ask a Question, feel free. Or if you'd like, and you're a guest at the meeting, you can send me an e-mail. My contact information is on the website under Contact Us, [email protected]. I'll be happy to answer questions via e-mail as well. Bill?

Sure. So Patrick, I'm on Slide 3. So I think, as I described before, I love where the company is at. I think we did a very thoughtful journey to create a much more diverse and even stronger company focused on the things that we've always done well, which is long-term innovation and bringing that to market through licensing. And so today, as a result of the acquisitions with Technicolor, we are incredibly strong in a number of technology areas. Of course, our historic wireless position, the video position that came from them as well as AI and machine learning position. It's 2 areas where the innovation opportunities remain really rich. I was having a conversation with one of our engineers yesterday about the 6G opportunity. And I know a lot of people are still just thinking about 5G and the 5G rollout. Not surprising, the company is already thinking about 6G. And I think one of the things about 6G that's really interesting is, I think the United States is going to flex its muscle, again, on the Gs. I think they feel like they didn't -- in certain aspects, the government didn't put their best foot forward on 5G. There's a great opportunity on 6G because 6G will actually help to deliver a number of the promises that 5G was designed to do. 5G is still going to be a fantastic technology. So great opportunity on the wireless side and a really great opportunity on the video side. And an area that's incredibly intriguing to all of us. Think about it in complement with the wireless it really is what are these devices are all about at the end of the day. It is the 2 technologies that make the device sing. So thrilled to have that very, very deep position in both technologies. Patrick, if you move to Slide 4. It's represented by very large, very valuable patent portfolio focused on those technologies. I talked last year at this meeting about how the 2 patent portfolios of Technicolor and InterDigital were very complementary of one another. We were very heavy on wireless with a small video position. They were very heavy on video with a small wireless position. When the 2 came together, it really balanced out those 2 capabilities. We've done a great job over the last year of narrowing down that patent portfolio because patents come with cost, and there is a lot of things that we could trim out because they weren't going to be valuable to our long-term strategy. We've worked our way through that. Still working our way through some of that, but we're in good shape. And the portfolio today not only has a very strong position with respect to video technologies and 3G and 4G technologies, but our 5G position, we believe, is very, very solid. We've watched how the standards come together. And while it's been a very competitive atmosphere and a number of new companies have come into the mix, our team did a great job of, as usual, punching above their weight. So very, very happy with the portfolio as it's both been developed inside, and now, the combination of that portfolio with the Technicolor portfolio. Patrick, if you go to Slide 5. The question before, what keeps me up at night, it's not much because I think the business model of the company is actually very straightforward. We have this very strong core R&D engine, combined with wireless technologies, visual technologies and complementing both of those being artificial intelligence, which will be very important as we go forward into the next-generation of technologies. That common set of technologies feeds a number of licensing programs that -- either that we are executing on today or that the opportunity exists. So we're executing today on the mobile device platform. We're executing today on what we call the CE box strategy. So think about that as TVs, set-top boxes and things like that. We're executing today on infrastructure, through the trust that we've set up a while back. And we have some work going on within IoT, but really waiting for the IoT market to fully develop. And then there's an opportunity as well within consumer electronic cloud services because there's a tremendous amount of use of both wireless and video technologies that happen in the cloud and that rely on the innovations that we and others have done. And there's a great opportunity to license that opportunity as well. So 5 great opportunities. If you looked at every one of those markets, particularly the 3 on the right side, mobile devices, CE boxes and CE Cloud, these are massive markets and great opportunities for us. Patrick, if we go to the next slide. A little bit between this slide and the next slide, how the acquisitions sort of changed the company's opportunity. So on the -- the revenue opportunities build up over time. Today, we -- last year, we had a platform around the $300 million range. That's grown since the -- with the licensing success we've had. We have our $500 million base for mobile devices. One of the things you saw happen, and we'll talk about a bit, is we were able to get the Huawei deal done with a minimum amount of litigation. That was a huge, huge cost savings for the company and I think a direct result of having a much stronger position that touched more of Huawei's products with both our wireless and video technologies. So we're very confident in our ability to drive the $500 million, and we are also confident in our ability -- while litigation may be needed from time to time, I think the Huawei situation proves that, at least with some customers, those may be short runs. Last year, we talked about a consumer electronics business. We'll get back to that in a second. On the next slide, we talked about all the other opportunities within IoT and 5G. Patrick, if you go to the next slide, Slide 7. So we've grown the platform nicely over the last year, about 15%, which is great revenue growth year-over-year. Very important as well, when you think about revenue growth, that the company's revenue growth typically comes with very little if no cost other than that. We have a modest level of cost sharing on the CE side. So that extra revenue is dropping very quick and hard to the bottom line, which is great. As I said, the $500 million platform remains, and we are very confident in our ability to deliver that. That confidence further supported by the deal with Huawei. Earlier this year, we put a marker out there on the CE business of $150 million per year. We think we can get there in 3 to 5 years. These are big markets. Television market is a big market. Really, the dominant market there, but there are other opportunities as well in that space with set-top boxes and streaming devices and laptops and computer displays. The nice thing about that opportunity is it's driving off that same R&D engine and, to a large extent, net of some modest level of revenue sharing. That added revenue will drop to the bottom line. So a great opportunity for the company. And then when we think about IoT and infrastructure and 5G and other opportunities, you can easily see your way to a revenue potential of $700 million -- beyond $700 million for the company. And all of that being done with the assets that exist at the company today and generally within the cost structure we have today. So it's an extraordinarily valuable opportunity that we have in our hands. And I think when we did the first call this year, we talked about how last year was really putting the pieces together, and this year, it's really about driving success. And I'd say a couple of things along those lines this year. First, we undertook -- and Patrick, I am on Page 8. We undertook what was a very [ tough ] meeting and perhaps, at times, thought-provoking strategy on licensing. We're very, very proud of what we've done on the licensing side. We're very, very comfortable with the value we provide. And one of the issues within licensing and one of the arguments the other side has raised from time to time is a lack of transparency into the licensing process, into the rates, into what's actually being licensed. And we already had a good level of disclosure on that. And what we decided to do was really pull the -- to the extent the curtain wasn't pulled back already, pull it all the way back. Package it up, so people could actually see what we were doing. People -- I'd say, the reaction has been outstanding to what we've done. And it has come from both sides of the aisle from a licensing perspective, not only the people that [ are in placed in stores ], but the folks that also have been historically opposed that may have actually complemented. And you see that quote on this page, "Unified Patents is a group with whom we don't often agree, but on the issue of transparency, they are in our corner." And I think this is -- this has been one of the things that has helped the program move forward this year. And so to the next page, it really has -- we're off to a great start this year. And it's a great story in what is a really, really troubling year from a global perspective. It's -- we're calling -- engaging from this meeting. I'm at home. Everyone else is at home. Travel is difficult. But we have done really well regardless, both on the R&D side, with various efforts within 5G, various honors that we've gotten from industry groups like DVB and IEEE, be able to secure research contracts in Europe through Horizon 2020 and other similar things. So the R&D side has worked really well. One of the things I've noticed is that people -- our R&D teams, because they work at different sites, have actually gotten really good at working remote from one another. And so the fact that they're remote from one another in their homes isn't a big change. And so they've been able to work really well. Licensing teams have been able to really effectively engage with customers over the phone through video conferences, and that's reflected in the deals that we've been able to bring across the table over the last 6 months as well as some other opportunities. So we feel like there's some really good win at our back right now, and we feel like the strategy that we set -- put in place is really solid. The assets are all at the company. And Patrick, if you go to the next page. Critical in all of this is, of course, the team. And we were thrilled to add Eeva today as our new Head of Licensing. Tim Berghuis, who ran licensing for us for a number of years, retired. And so we thought to bring in somebody new. Eeva is absolutely fantastic. If you Google her, you'll find all the different places she speaks at. You'll see her success. She has dealt with exactly the customers that we are dealing with today. She is a brilliant mind, a person that really knows how to drive licensing. Also great to get along with, a fantastic, fantastic hire for the company. And so we're thrilled to have her. And it comes at a time when Tim retires. Tim did a fantastic job. Tim was actually the driver behind the transparency project. I think I chatted with him at the retirement party last week, and he -- I told him that will be his legacy. I also wanted to acknowledge and give thanks to Kai, who will be with us for a few more months. But he secured a great job as new CEO of a company that's based in Finland. We've known that Kai wanted to go back to Finland, and this is a great [Audio Gap]

Well, folks, I believe we may have lost Bill. I'll ask the GlobalMeet folks. Is that the case? And do we still have a connection for the meeting?

Patrick, we're still connected.

Okay. Very good. Well, thankfully, Bill was completing his presentation on the excellent news that we're adding Eeva Hakoranta to the team, which we announced this morning.

There's a couple of questions left. One came in via e-mail. And luckily, it's a question that's probably better suited for Henry Tirri, who's our Chief Technology Officer. So thank you for your question, [ Peter Toos ]. What elements of your business would be considered AI as opposed to 5G? Well, Henry may have dropped off. I'll answer the question to the best of my ability.

No, actually -- Patrick, I'm actually here, but I did not hear your question. Sorry, if you could repeat that?

Sure. The question is, what elements of your business would be considered AI as opposed to 5G?

Thank you. A very good question. Actually, the easiest way to think about this is that AI is not something separate from the other research areas that we have, including wireless research or video research. I think the best way to think about AI, which, by the way, nowadays mostly means something called machine learning, which is new ways of allowing the computer to do things in an adaptive learning manner, you think about the same way like we think about software. It's a set of technologies that are applicable to almost everywhere we apply in general computers or communication technologies and computing in general. It's pervasive. And in InterDigital case, we actually are applying AI methods to improve the solutions that we provide for wireless communication in our research and also in our video research. And then related research like augmented reality research. So it is likely to have a very great role to play in what we call the beyond 5G technology because it's going to be a piece that will improve what we can do now, building a lot of the things that we already know to solve in traditional methods by using the AI method. And we were particularly excited that we could strengthen our AI competencies in the Technicolor acquisition. So even during this year now, we've been moving fast in the cutting edge of the research of applying AI to the relevant domains of research for the InterDigital business.

Thanks very much, Henry. I appreciate that response. Peter, we hope that answered your question fully. I have a question that I'll put to Doug Hutcheson. Has IDCC suspended the buyback or are in negotiations with potential licensees halting it? I guess like most questions, it's got a specific aspect, but also just a general aspect about our philosophy behind buybacks and return of cash to shareholders. Doug, would you address that?

Thank you, Patrick. So the company has been very diligent about returning capital back to shareholders, both through the dividend payment and share buyback and have presented quite a good track record. Our buyback program has certain parameters that we update periodically. We have a buyback program in place and are not contemplating any immediate changes on that. And we'll continue as a Board to regularly review our buyback program and make changes as appropriate.

Thank you, Doug. We have one last question as things stand. It's a question regarding the news that Eeva Hakoranta has joined the team as of this morning -- or will be joining the team starting in July, but we announced it this morning. So it's a question that I'll put to Bill. Bill, essentially, if Eeva Hakoranta was the lady in-charge of the Nokia licensing department since 2012 and she's the one who refused to pay a license with IDC (sic) [ IDCC ], so as some of our long-time shareholders know we were in dispute with Nokia for a very long time, how can you explain hiring her?

Because she's fantastic. Yes, we had a -- actually, our disputes with Nokia go back to 2007. And we did spend a lot of time fighting with them, and she wasn't actually part of that. And I'd actually also say that Nokia, over time, developed a new view on patent licensing because it became very important to their bottom line. And as they developed a new view, their views became much more aligned with us. And I'd say that she was really at the organization when their views became more consistent with ours. And as a result, if you look at how she has communicated in the trade press around licensing and the way she's conducted herself, she is absolutely aligned with the way we look at licensing. And that was a very important thing as we look for someone to come into the company. So yes, we have an interesting history with Nokia, but I would also tell you that one of the folks that's on the other side of our conversations for a while was Kai. And notwithstanding those conversations that sometimes were very difficult, we became friends. And that's the way the world works.

All right. Thank you very much, Bill. As things stand, there are no further questions either in the queue for the annual meeting interface or in my e-mail inbox. So with that, once again, I'll apologize to shareholders for the challenges of putting this meeting together compounded with coronavirus. We've had weather that's made connecting to this meeting pretty challenging. Those of you who are in the Philadelphia area probably are experiencing that right now. But we want to thank everybody for joining us again this year. If there are any additional questions, by all means, feel free to reach out to Investor Relations. You can find my contact information on our website, and we're always happy to answer questions that shareholders have. With that, I'll thank Doug Hutcheson, our Chairman of the Board, and I'll also thank Rick Gulino, our General Counsel; and Bill Merritt, our President and CEO, for joining us today. And thank you very much, and we'll see you again next year.