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

All right. We're going to go ahead and get started. So I'm so excited to have Rich with me here today from InterDigital. And I have to give a small anecdotes that I've been with NASDAQ for 15 years. And in my junior life, I covered InterDigital at NASDAQ, took a 5-year break to go run a different business at NASDAQ and just came back. And wow, were you guys successful over the last 5 years? I pull this doc chart and you guys have been busy. So it was fun to come back and see -- I need a recap on what you guys have been up to because it clearly is paying off. So I'm very excited to have a conversation today and to learn about everything that I've missed.

So for those less familiar with your success, can you give us an overview on InterDigital? And given your tenure, I'd love to hear more about how you've seen InterDigital change over the years and how the current organization differs from the 2000s.

Yes. So I'm Rich Brezski, CFO at InterDigital. And InterDigital, if you take nothing away from today's discussion, please understand that we're a research company. A lot of times, people refer to us as a patent licensing company. And it's true, we make our money by licensing the patents that were generated by InterDigital researchers. But we generate almost all the patents in-house. We've been doing that since 1972. So we have a long history, originally around digital telephony. That was the first couple of decades. But then we expanded -- before the pandemic, we acquired Technicolor's entire research team in video. So now we're in fundamental technologies like not only cellular and WiFi, but also video, including video compression. And that expansion of our research breadth, along with some -- we had a great management team before. But in the current iteration, Liren Chen joined us in 2021 from Qualcomm. So for the last 5 years, Liren has been leading some of the success you're referring to, brought on Rajesh Pankaj, our CTO from Qualcomm. Rajesh at Qualcomm led their entire corporate R&D department. So we really up-leveled across the organization, and you see that in the results.

That makes sense. I mean you gave you some fun anecdotes about flying on planes to get to the office right in the middle of COVID and the most are clearly dedicated and committed. And so I know that you're a frequent flyer of the London program. So you've been on the stage for many, many years. So we're going to touch a little bit about conversations that we had last year and hope that investors are just getting up to speed on the latest. And one of the things we talked about last year was a foundational knowledge about your business, and that's the difference between standard essential patents and implementation patents. For those of us that do not live in that world, like myself, can you go into what the difference is and what the current patent portfolio is made up of?

Yes. So we have -- although we're a small company by headcount, we have some of the brightest people in the world and the foremost experts in the fundamental areas I talked about, wireless and video, especially as well as AI in support of those 2 technologies. A lot of the work that we do is around wireless standards like on the cellular side, 5G, okay, 2G, 3G, 4G, 5G, new iterations of the standard. There are similar standards in WiFi, WiFi 6. And then in video codec, there's standards as well. So all around us, we live in a world of standards. If I took a light bulb out of that light fixture, I don't need to figure out who the manufacturer the light fixture to figure out how to replace the bulb. I just know that any manufacturer can produce a bulb that will fit in that socket because it's a standard. In a similar way, our cell phones all work on the same network, whether it's an Apple or a Samsung phone because they're all built to the same standard. And InterDigital is key to developing those standards that I referenced. And that creates this multi-operator, multi-manufacturer environment. And when we get our technology into the standards for us, it ensures that, that technology is going to be massively adopted, 1.2 billion smartphones sold every year. And we currently are getting compensated -- we're in 100% of them. We're getting compensated for 85% of the 1.2 billion smartphones sold around the world every year. So standard essential patents are those that are required and need to be used to basically deploy and use the technology.

Got it. Understood. Understood. I'll never look at a light. So last year at your Investor Day, you laid out a plan to $1 billion in recurring revenue by 2030. Walk us through the pieces of that plan and what are the key assumptions to achieving it and how you feel you're progressing toward it now that we're in 2025?

Yes. So it was just a little over 14 months ago, we had our Investor Day, set out this $1 billion target for ARR. At the time, our total ARR was around $400 million. So it was a pretty lofty goal, pretty strong goal. But we've made great progress since. In just that 14-month time period, we've grown it from roughly $400 million to $588 million in ARR. So making very good progress there. The assumptions or components around that, $500 million from smartphone. And that goal, although the $1 billion was a 2030 goal, that's our longest tenured market, our most mature market. So it was $500 million by '27 for that aspect. The other half was split between consumer electronics and IoT, which is $200 million and then streaming, which is another $300 million plus. So since that time, we've signed OPPO, Vivo, Lenovo and Honor on the smartphone side. So we've taken that smartphone revenue from $350 million thereabouts up to just shy of the $500 million, about $490-plus million just in the last 14 months.

Wow. All right. So let's -- you just mentioned OPPO. Let's drill into that a little bit. So in what has traditionally been a more challenging market in China, you've seen success. And how do the company -- how does your company strategy vary by geography? And does macro or geopolitics come into play when you try to close those types of deals like OPPO?

Yes. So however you want to characterize the environment, the geopolitical tensions and so forth over the recent time period, we've obviously been able to be successful within it with the growth that I'm discussing. At the end of the day, whether it's OPPO, who's a Chinese-based manufacturer or Apple in the U.S. or Samsung in Korea, these are all global players, have global sales, and we run a global program. Our innovations are contributed to these standards, which are global standards. We file our patents all around the world. So there's not really an issue per se dealing with any specific country because we're really dealing on a global stage.

Got it. Got it. So I think what's so interesting and what has changed in the last 5 years since I've talked to you guys is your venture into the gaming space. So I'm excited to talk about that for a little bit. So when you think about streaming in the gaming markets, can you talk about how they fit into your long-term growth plans? And what you think are the key catalysts to growth within this market?

Yes. So that's the $300 million plus that I referred to. At this point, our revenue is 0, but it's not for lack of adoption. So like if we think about the streamers, whether it's advertising video-on-demand or subscription video-on-demand, they're all using our technology, video compression, which, again, it's a standard to deliver their content to you, to deliver it on your phones, on your TVs, whatever devices you're using. And similarly, gaming, video conferencing, a lot of other verticals and streaming markets are using it as well. But our initial goal of $300 million plus is focused on the AVOD and SVOD players. Again, the adoption is there, but it is a new market that we haven't licensed before. Historically, we've been licensing devices. This is actually licensing a service. So we're making good progress. We've kicked off the program a number of years ago. This past year, we've launched our first litigation after negotiation with Apple -- excuse me, Amazon and Disney. We're now in litigation to enforce our rights and try to collect fair royalties for the use of the technology.

Yes. Great. Great. Well, good luck with that. So let's put your CFO hat back on nice and tight. And let's talk about the balance of growth, margin, biggest drivers for each and how you're thinking about that with that CFO lens?

Yes. So we enjoy very strong operating margins. We've been operating at 60-plus percent adjusted EBITDA margins. We do have a goal of 60% adjusted EBITDA associated with that $1 billion to $600 million of adjusted EBITDA. And when we announced that goal, some people said at Investor Day, well, Rich, you're already kind of there. Shouldn't it be higher if incremental revenue is 100% gross margin. I said, in theory, yes, it should. I mean you should just expand that margin with new top line growth, but we're allowing some room for further investments so we continue to grow beyond the $1 billion. Having said that, if I have to weight the 2, knowing that we kind of have in our business model built-in leverage, I'm focused on driving that top line, knowing that's going to translate to continued growth in our operating margins.

Right, right. That makes sense. That makes sense. Okay. Well, we could not be on stage here at the London Conference in 2025 if we don't talk about AI. It's kind of a requirement. So let's talk about how GenAI has impacted your company in the markets and where you see it impacting you in the future, positive, negative hurdles, obstacles and tailwinds.

Yes. I think we're probably no different than anybody else. It's an opportunity and a threat. For us, we've been -- as I mentioned, I think before, acquired the AI lab from Technicolor back in 2018, 2019 before people were talking about it the way -- AI the way they are today. So it's been pretty fundamental in our video research and more recently, our cellular research. It's how those standards and how those networks are going to continue to improve and get gain in the future. We're like everybody else, deploying it in the back office, trying to be more efficient. I mentioned we're relatively few in headcount, but AI is exciting because it's not always just addressing scale, it's addressing complex problems. So in that way, it can be very useful for us. And then when we think about how it's going to affect the markets that use our technology, you think about Gen AI, we hear large language models, but there's large video models as well. So those video models need to ingest video. They need to store whoever will create video that will need to get distributed. So these are new use cases for our technology as well.

That's interesting. That's interesting. Got it. Got it. So we talked about -- the first thing that you sit on stage which I thought was really important is that you're a research company, right? You're not a patent litigation company.

Research company.

Research companies, that's stuck in my head because I think you're right. I think there is a misconception. Let's dive into that a little bit more strongly. So what is the biggest investor or market misconception about InterDigital? And we already heard you say that. So if you want to dig in deeper or address it in a more broad way.

Yes. So I would say it's just that. It's the business model. But I'd say, if I wanted to expand on that, we -- as I mentioned, we're in litigation right now with Disney and Amazon. The vast majority of our licenses are concluded without the need for litigation. Since Liren joined 4 or 5 years ago, we've signed more than 50 license agreements, driving over $4 billion of total contract value. Only a handful were the result of litigation. So 90-plus percent of those agreements were resolved just through bilateral negotiation. Unfortunately, we do have to enforce our rights from time to time. We wish that weren't the case, but we need to make sure that our shareholders are fairly compensated for -- I mean, we make a big investment in research every year, and it's a long-term investment. The research dollars we're spending today are around 6G, which won't be in your phones until 2030. It's around future versions of video codec, which won't be streaming until even beyond that. So we're making these very long-term investments. We want to make sure that we're getting fair compensation where we need to, we'll enforce our rights, and we've been quite successful in doing so.

I love that. I love that. Okay. So we talked about your 2030 vision that you've disclosed at your Investor Day. But let's talk more broadly about the next 5 years and what really makes you excited both in the marketplace overall with emerging technology and also with the business at InterDigital.

Yes. What I'm just so excited about is -- and I've been with the company since 2003, CFO since 2012. And never in that time period, have we had such opportunity to grow not just on what's before us, that $1 billion of ARR, but all the places we can go from there. 10, 20 years ago, we were very focused on the smartphone market. And it was comparatively harder to envision how we were going to grow beyond that. Now through the Technicolor acquisition, we've expanded it's cellular, it's WiFi, it's video, not just video compression, but technology in HDR and other video use cases. So there's just so many different opportunities for that technology set, so many different combinations to bring it to market. But we've also demonstrated our ability to add new fundamental technologies onto our platform and be successful in licensing them.

Right. Right. That's great. That's great. And I'm going to take a pause now. We're a little bit over halfway through. Are there any questions from the audience before we continue? Just if you can hold on one second for the microphone. This is where we pause for a water break.

Very helpful on the 2030 ARR targets. Can you just help us understand the kind of the revenue cadence until then? It looks like the Street has you jumping around a bit.

Yes. So one thing to emphasize is that's an ARR target, right? When we sign a new license with a customer that has not been licensed before, typically, they've already been using our technology. Remember, I said the key for our growth is an adoption. It's already adopted in many of these markets. It's really just getting folks under license, getting a fair royalty for that use. So when we sign a new license agreement, we typically have catch-up sales is the term that we use. It's basically what they're paying us for the prior infringement before entering into that agreement. We're very focused on getting a fair royalty rate going forward, but we want to be compensated in some way for that past as well. So what that results in can be a choppy top line. And sometimes year-over-year comparisons can throw you off as well. So for example, in the first quarter of 2024, we signed Samsung TV as well as some other new licenses, and that drove well over $100 million of catch-up sales in that quarter alone. So when you look at first quarter 2025, it was a very strong quarter, higher ARR, but you have to adjust for the fact that we had so much catch-up sales in Q1 '24. On a similar basis, when you look year-over-year and you look at the trajectory to $1 billion, we expect to see ARR growth along the way, not necessarily linear. We still tend to have step functions as we bring on new contracts that will elevate the ARR. It's -- these are -- tend to be concentrated markets. So it's not like you're adding 100 customers a quarter. It might be a couple, and some of those will result in more of a step function increase. But I think when you look at the overall trend, know that there'll be catch-up sales on top of it, and that will make the overall top line a little bit choppier.

That makes sense.

Just a simple question. I don't hear your company very well, but other instances where you have had an exploration or [indiscernible] on that type risk or a patent becomes, say, obsolete because of a new technology.

Yes. So the interesting thing, obsolescence and exploration are -- tend not to be issues because -- and let's just take the cellular industry, right? Each generation has -- comes out like maybe 8- to 10-year cycles. So -- and the phones that we use today, and I have an iPhone, it's a 5G phone, but it's also 4G and 3G and 2G, it's backwards compatible. So the way I think about it is each generation kind of moves over time from kind of first chair where 5G is now to second chair where 4G is to third chair where 3G is. And it gets less valuable as it ages because there's more valuable new technology that comes online. But we're, as I said, constantly investing in research and driving the adoption of the new technology. We actually lead some of the standards. So in the 3GPP standards that set 5G and are now working on 6G, we lead 2 of the 15 working groups that are actually responsible for coming up with what 6G is. So we're only 1 of 3 companies that has multiple chair positions in that. So it's a way that we know we're being recognized by our peers as having a lot of influence and having strong contributions to the evolving ecosystem that is the cellular technology.

That was a good question. Anyone else before we continue? Great. Two phenomenal questions. So thank you, guys. So Rich, when we're thinking about companies who have not yet signed licenses, what are your strategies to conversion? And how often -- you talked about how often you take legal steps, but talk a little bit more about the strategies to conversion.

Yes. So I mean, first and foremost, as I said, we're always focused on getting a license concluded through bilateral negotiations. So we're ready to sign licenses on fair terms at any point. It's really just a matter of getting the other side to a point where they recognize that, that's in their best interest as well. If we find out that -- if we believe that they don't have an interest in paying at a fair rate and the negotiation is not progressing in a way that would suggest we're going to get to that endpoint, then we have to consider enforcing our rights through litigation. Again, not often do we -- are we forced to take that step. But it's important that when we do that we're successful. I think the market looks and they can see that we're willing and capable of enforcing our rights. And frankly, that willingness, that capability helps ensure that we don't have to litigate....

Yes. like that's flywheel and that -- yes, that's great. That's great. So we talked about traction in other areas besides what we've already talked about in consumer electronics, Internet of Things and auto markets. So can you talk about -- we haven't talked about those at all yet? And how are they different than your success in mobile?

Yes. So they're similar in that in those technologies, again, it's not -- in those verticals, it's not a matter of adoption, okay? They're all using our -- in different combinations, cellular, WiFi and video technologies. It's just about getting fairly compensated for that use. On the consumer electronics, I mentioned before, the goal there was $200 million. We're about halfway, just shy of $100 million of ARR today. That's actually been one of our fastest-growing areas. I think when Liren joined in '21, it was maybe $20 million or less. So we're about 5x that level today, looking to double it by 2030. Automotive is a component of that. And we're one of the founding members of what's called the Avanci platform, along with Qualcomm, Nokia, Ericsson and others. So there, it's a go-to-market where we pool the collective patent resources and automotive customer signs a single license agreement to gain access to that technology. So that's been growing as well. And then IoT is probably the most fragmented of those. There are so many different verticals within IoT, tend to be a little bit smaller companies. So you don't have the step function changes that I referred to before in smartphone within those markets. But there is an opportunity to sign smaller -- more smaller agreements and have them aggregate.

Got it. Got it. And then going back to mobile again very quickly, 85% penetration, is that right?

Yes, that's right.

So what is your plan on addressing the 15% and the limited upside and what's next?

Yes. So we -- again, 100% use the technology. So it's a theoretical outcome that we could get to 100%, but I don't know that even Qualcomm, Nokia and Ericsson can get -- have gotten there. We certainly believe we can further penetrate that. We can continue to grow in mobile. We have 8 of the top 10 mobile manufacturers under license smartphone manufacturers. The 2 that are not are Transsion and Huawei. And we are currently in litigation that's another area we're enforcing our rights is against Transsion.

So let's take -- we've talked a lot about business, and let's take a step back and kind of end on 2 questions. Let's talk about core drivers and just overall philosophy of InterDigital, right? You've been there for a long time. You see the company through a lot of global changes in the marketplace, globalization of the economy in general. So can you talk about some core drivers and philosophies as a company where you see the most value creation and what steps you're taking to continue to build on your market position?

Yes. So I think it starts with solving the hardest problems. We have incredibly talented engineers and scientists and physicists, et cetera. And the problems that we solve in, for instance, cellular, there's a lot of other wireless communications, Bluetooth, ZigBee, et cetera, that are much more simple. That's not as fertile an opportunity for what our strengths and capabilities are. For us, it's what are the hardest problems and making sure that we have a pipeline of talent of the smartest people in the world to solve them.

High risk, high reward.

Yes. And long cycles.

Yes, long cycles, patience.

That's right.

Yes as you've learned through your tenure there. Yes. So we're about wrapped up, but I'd love to just end on covering anything I forgot to ask and then also just some overall things that you're excited about in 2026. You talked about your 2030 plan. We've talked about some other expectations for long-term growth, but it doesn't have to be about growth and drivers. It can be just about '26 in general.

Yes. No, I'm just -- again, I've never been as excited today or before as I am today. I've been with the company a long time, but we have a great team. And I think not only do we have great opportunities to grow, but we've really demonstrated our ability to execute. So I just look forward to continuing that progression and look forward to another great year.

Yes. Yes, us too. So I am so excited to be back in the InterDigital universe again, and congratulations on all the success. We're so excited to welcome you back to London next year.

Okay.

Thanks, everyone.

Thanks.