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

Good morning, and thank you for standing by. Welcome to the Second Quarter 2022 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Richard Lloyd. Please go ahead.

Good morning to everyone, and welcome to InterDigital's Second Quarter 2022 Earnings Conference Call. I am Richard Lloyd, Communications Director, and with me in today's call are Liren Chen, our President and CEO; and Rich Brezski, our CFO. Consistent with last quarter's call, we will offer some highlights about the 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 2021 annual report on Form 10-K, our second quarter 2022 quarterly report on Form 10-Q 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 measures tracker, which is available on the Investor Relations section of our website. With that taken care of, I will turn the call over to Liren.

Thank you, Richard, and good morning, everyone. In the second quarter, we continue to make excellent progress across all parts of the business. And I'm particularly pleased that the strong momentum we built in 2021 has continued into the first half of this year. In Q2, we significantly increased revenue and net income on both a sequential and year-over-year basis. We entered into a multiyear worldwide non-exclusive fee-bearing license with Amazon, covering a range of Amazon's consumer electronic devices and their individual patents. We made a major addition to our leadership team. We strengthened our balance sheet, and we saw significant growth in revenue of the core smartphone market. In the second quarter, our total revenue increased 42% year-over-year to $125 million. We also delivered a substantial improvement to our profitability, more than doubling our adjusted EBITDA to $78 million, and we grew a 14-fold increase in earnings per share to $0.69 per share. I will let Rich talk you through our financial performance in more detail, while I cover some other notable highlights from the quarter. Starting with the recent announcement that Dr. Rajesh Pankaj has joined InterDigital as our new CTO. Rajesh was previously a Senior Vice President and the Head of Corp R&D at Qualcomm. Rajesh spent 25 years in research and senior leadership roles. His pipeline in cellular wireless, including both 4G and 5G and the application of AI to connectivity is a perfect fit with our technology footprint and with the long-term direction of our innovation. He's a named investors in 230 patents worldwide, and he has a strong track record of translating technical breakthroughs into patented innovation. I'm delighted that Rajesh has joined us, and I'm confident that he will lead our R&I team to even greater heights and will build on the leadership of his predecessor, Dr. Hung Retiree. along with our ability to attract world-class talent, one of the keys to our recent success has been the value that we continue to drive as a leading innovator across a range of critical technologies. Our research on additional horizontal technologies like cellular, WiFi, Video and AI and machine learning. We license IP that covers these horizontal technologies across many verticals that utilize them. Smartphones use all of these technologies and continue to be our core market. Meanwhile, CE devices as well as a growing array of IoT products over use multiple technologies such as WiFi and video. In short, we are in excellent position to drive growth from both existing relationships and new opportunities. In recent years, our strength in video has become even more valuable, as we have built a formidable innovation pipeline, explore opportunities in building more immersive consumer experience and continue as a leading contributor to both the HEVC and VVC video standard. We have also achieved impressive growth in our video portfolio which now numbers approximately 7,000 patents and applications. In wireless, our portfolio of cellular SEPs for 5G multimode device continue to grow in the second quarter and now stand at more than 10,000 patents and applications, giving us an incredible strong base in a generation of mobile that will define connectivity for the rest of this decade. This foundation has been enabled by our team of superb engineers. In the second quarter, the institute of electrical and electronic engineers, IEEE, recognized 1 of our senior virus engineer for his work in 5G by awarding him the prestigious Benjamin Franklin Key Award . Specifically, he was recognized for his groundbreaking contribution to millimeter wave, which is a foundational technology that enables both 5G's incredible speed and its ultralow latency. Staying on the IEEE, another InterDigital engineer was recently appointed for the chairperson of a topic interest group that is responsible for identifying and exploring use cases for artificial intelligence and machine learning in WiFi. While we continue to reap the rewards for innovation being implemented in today's devices, many of our research efforts are firmly focused on the technology that will shape connectivity and content consumption in the years to come. I'm especially excited by the new partnership we announced in June with Inria , France leading institute for research in digital science and technology. This new innovation will not only support innovation -- this new initiative will not only support innovations across France, but also enable engineers to pursue cutting-edge scientific research and to explore technologies that will define media currency in the future in areas such as XR and metaverse. On the licensing front, we believe strength of our innovation, the increasing value of patent portfolio and our licensing track record will position us to renew key agreements and sign new ones. In the second quarter, in addition to the Amazon deal I mentioned earlier, we also closed additional agreements with industry device manufacturing Zebra technology covering our 4G, 5G and WiFi technology. Zebra devices are used in retail, health care, banking, manufacturing, transportation and other industries. This license agreement demonstrates the broader stability of InterDigital's foundational innovation and our patent portfolio beyond smartphones. We also enjoy significant progress in licensing our innovation to auto sector with new deals signed with GM and Ford through our licensing platform partner. Almost half of the connected cars on the market are now licensed to our 3G and 4G standard essential patents. In summary, our licensing platform performance this quarter underlines the opportunity that we see in our core markets and in newer areas where our innovation is helping creating considerable value. This is an exciting time to be an innovator in connected technologies, and I'm pleased with our strong foundational innovation translates into new licensing agreements. In terms of litigation activity, we continue to look forward to the upcoming decision from the U.K. High Court in our FRAND trial against Lenovo. And I will reiterate my message from our last earnings call that we remain confident in the strength of our technology, the quality of our IP portfolio and the merits of our case. On the policy front, I want to highlight that the DOJ, NIST and USPTO recent we saw of our 2019 policy statement on SEP licensing and FRAND remedy is a positive development. I will not get into all the details here but the announcement has moved the ICC policy in U.S. in a third, balanced and more particular direction and confirmed our belief that while dispute over SEP license do arise, factors such as the value of the under innovation should guide across decision-making. The second quarter also saw more progress in our ESG program. We then released our second annual corporate sustainability report. At InterDigital, we passionately believe that our technology contributes to building a better and more sustainable world, and this year's report details not only how we mitigate our environmental footprint but also how we maximize our social impact, ensure our governance meets best practices and how we strive to help our employees to excel. I will encourage you all to read the report, which can be found on our website. With that, I will turn it over to Rich.

Thanks, Liren. As Liren noted, we delivered another strong quarter with significant increases in revenue and profitability on both a sequential and year-over-year basis. we grew total revenue, 42%, over second quarter 2021 to $125 million, including $100 million of recurring revenue. While mobile agreements such as Xiaomi have driven a large part of our growth, we have also begun to see meaningful growth in the CE, auto and IoT markets. In second quarter 2022, we had over $35 million in combined revenue from the CE, auto and IoT markets, including almost $12 million on a recurring basis. Both the total and recurring revenue from these markets represent record levels. For the first half of 2022, we recognized about $23 million of recurring revenue from these markets, representing a 70% increase from the comparable period in 2021. While we are pleased to report such strong revenue from these markets, we remain committed to driving continued growth. Moving on to expenses. You can see the benefits from the cost management actions we initiated a year ago in our first half 2022 results. On an annualized basis, excluding litigation and stock-based compensation, we have reduced our operating expenses by almost $35 million. This savings is net of the reinvestment we have already made, and we believe that we have improved our capabilities while lowering our cost base. Moving on to capital allocation. We made the decision to refinance our convertible debt during the second quarter as it became clear, we were heading into a volatile period marked by inflation and rising interest rates. Similar to our prior financings, we entered into an option structure that increases the per share price at which we experienced dilution from our new debt to [ $106 ]. The net proceeds from our new debt were primarily used for 2 purposes. First, to buy back approximately 2/3 of our old debt and second, to concurrently buy back $75 million of our common stock. Looking forward to the third quarter, we currently expect revenue to come in between $96 million and $100 million. At this point, our revenue guidance is based only on existing contracts, so the entire range is comprised of recurring revenue. On the expense side, we expect additional investments in research and development and an uptick in litigation costs related to ongoing proceedings will drive operating expenses to the range of $76 million to $80 million. Finally, we expect nonoperating expenses comprised of interest and other expenses to be in the range of $6 million to $8 million and an effective tax rate in the range of 25% to 27%. With that, I'll turn it back over to Richard.

Thank you, Rich. Thank you, Liren. Operator, we can now open the call for questions.

Thank you. [Operator Instructions] Anja Soderstrom, Sidoti. Please go ahead. Your line is open.

And congrats on good progress. Can you [indiscernible] and maybe if at all the sentiments among your counterparts have changed given the economic environment and geopolitical situation? Is that affecting at all your discussions?

Yes. Hey Anja, this is Liren. So I understand the geopolitical situation in [ parts ], in particular,it's very sensitive. And then the economic has been in turmoil in the last couple of years, partially due to COVID. But our current revenue is primarily supported by our fixed revenue contract. So we are largely very shorter from the near-term turmoil. And some of the downturn may play a role in our renewal discussion, but the major contract we are currently negotiating, they're not being that much impacted by some of the issues. So we are well positioned. On the geopolitical side here, we are a global player. So we have been watching the global environment very, very carefully. And so far, we have been demonstrating a very strong track record through striking fairly deals across multiple vendors in many different continents. So -- but we are watching it very carefully.

Okay. And Rich, you mentioned the operating expenses were reduced by $35 million, net of reinvestments already made. What kind of remaining reinvestments do you have?

Yes. So we've been reinvesting primarily in R&I, and we expect that to continue. For the moment, I'll stick to the guidance I've provided for the next quarter where we mentioned an uptick led by R&I reinvestments, but also a little bit from the litigation associated with the ongoing matters.

So that uptick is related to the third quarter?

Yes. Yes. That relates to the third quarter guidance, the uptick of being on a sequential basis versus Q2.

Our next question comes from [ Jonathan Ivinson ] from Bank of America.

The first thing I want to touch on is if you have any visibility for your OpEx guidance given that the implied operating margin seems to decline sequentially. So would appreciate any color there. And then I also just wanted to ask if you have any updates on the Apple and Samsung deals?

Sure, Jonathan. I'll take the first part. So our -- there's not a close association between our revenue in a given period and our operating expense in any given period. The R&I that I was just referring to relates to the last question that we are investing in today is to drive revenue that we would see years down the road because we make such long-term investments in fundamental research. So it's not so much that we really have a effectively 100% gross margin on new business because there's not variable costs associated with it. When we license, we're granting permission to use technology that we've already invented in the past. So is that -- so this uptick in R&I is really to drive future growth, not related to the upcoming third quarter. So hopefully, that answers that part of the question. I'll let Liren answer the second part.

Hey Jonathan. For the Apple-Samsung negotiation, obviously, our relationship with Samsung is very, very important to us. We have been focusing on the renewing our contract for quite a while. And I think that everyone is aware. The Apple contract expires end of Q3 of this year, and Samsung contract expires end of Q4 this year. And it's always worth reminding that, hey, those licensing agreement with us, it really represents a very long-term relationship. Apple has been our licensee since 2007 before they shipped the very first Iphone, and Samsung has been our licensee for IP more than 25 years before they ship the very first Galaxy phone. So through such a long-term relationship here, there have been multiple renewals happening. And we feel confident about the currency negotiation based on how much our technology has advanced. And frankly, they have become even more important with the connected world with -- it's a lot of multi-video content in consumer on the device. Obviously, the 5G adoption will be a pretty major driver in our negotiations. And also, it's worth noting that both Apple and Samsung has a much higher concentration of the premium devices in the worldwide sales. So those devices actually make more and better use of our high-end technology. So to that degree, it's worthwhile obviously for us to remind them how much they have benefited from everything we have developed.

Our next question comes from Tal Liani from Bank of America. Your line is open, go ahead. Tal, your line is open.

Perhaps it was an inadvertent analyst.

Okay. Tal, did you have a question?

I'm sorry. I was on mute, and I was talking to myself. So can you hear me now? I had really good question for you. I have to repeat that. We get...

Yes.