InterDigital, Inc. ($IDCC)

Good afternoon, everyone. Thank you for joining us. On my left, we have Liren Shen, the CEO and President of InterDigital and also Rich Breski, the CFO. Thank you so much, guys, for making the time. It is not every day that you get to spend time with the company that literally touches every single aspect of our day to day. So it's especially exciting to have you guys. I know this is your first appearance at the JPMorgan TMC conference. So welcome.

Because it is your first time, let us get started by giving us an overview of the business, what exactly does InterDigital do? Who are your top customers, the geographic reach, things like that just get us started on that.

Good afternoon, actually. Thank you for having us. And my name is Liren Chen, CEO for the company. And I joined the company 5 years ago, but InterDigital as the company was founded in 1970 -- so we are a company of 54 years old. And we focus on foundational research in wireless, video, video compression and artificial intelligence foundational research over the multiple decades, we built some of the most important innovations that benefit the whole industry, but equally importantly, we built 1 of the largest and most valuable patent portfolio in the world. And then we share the technology primarily through open standard. We have engineered participating and over time leading some of the most important standard creation that by participating in leading the standard process -- we have some of our patent technology that's adopted to be part of the standard process and over time being while they're adopting into billions and billions of devices and many, many billions of user experience over the years. And they'll be monetizing by licensing the pattern, and we take the revenue we generate from licensing back into R&D so we can create the next generation technology either for wireless, we do an artificial intelligence that just benefit industry going forward. That's our base onto.

It's very interesting. For your top customers?

Yes. Our largest customer so far are currently in the smartphone industry. We have license of the top 10 smartphone vendors in the world. Those include Apple, Samsung, Xiaomi, Oppo, Vivo owner, Lenovo and others. So we have about 85% of the smartphone industry under license, but we also have some of the largest consumer electronic vendors, TV makers, PC makers, and also increasingly the connected car industry license. That's our current licensing customers.

That's incredible. 85% of the smartphone market is amazing. Just going back on your point. So just walk us through the process of you inventing something, filing a pattern for it? And then how does that become part of a standard package? Or how does that become a standard?

Yes. So everything in our company starts with innovation. So we employ some of the best engineers in the industry. And we are geographically distributed by the way. We have 15 different sites in 7 different countries. Generally speaking, they are right around major universities. We recruited some of the most brilliant PC students where we work with the sponsor and their research and over time, employ some of the best system engineers in the industry. We solve the most difficult problems end to end, and we file pattern along the way, but that's only half the story. Then we go to open standard development organization that can be in cellular space that's called 3GPP. That can be in the WiFi space IAE primarily. And then we go to NPAT and others to driving the video standard forward. By participating to begin with and also RNGs over multiple decades, has gained the trust over a pure company. So in those standard development organization is open, it's collaborative and very open over time, there will be a leadership role coming up and that leadership role is slacks reelection. So our pure company will elect our engineer to be the chair of the culture or sometimes wise share of the organization. Over time, we have built an incredible amount of leadership in SDUs. I'll give you a couple of numbers. As of today, we have more than 110 leadership roles in the standard development organization. And as a casing point in 3GPP, which is the standard of mediation defining 5G and going for -- there's only 15 working groups, which means it's a delicate group working on a certain area of technology. We are 1 of the 3 companies in the world 1 of the only company in the United States that has more than went the 23 of the 153 DPP leadership role. That just demonstrates how much our engineer has been respected and how our role leading the industry is benefiting everything that come out of it. In terms of how our technology become part of the technology standard, that process is a collaborative process. So what tends to happen is we will bring our technology solution to those meetings. We will demonstrate with our pure company to see why our solutions better, buy better, I mean, faster, more efficient, more reliable, lower delays and hopefully convincing our peers, this solution offers so much technology advancement to adopt the technology to be part of the standard. That's really generally hard work to we work on everything day, every single meeting and over the course of multiple decades, we have built a very incredible leadership in this role.

That's incredibly interesting. Rich, I know you set out a $1 billion target for the end of the decade. Just walk us through all the different steps that you need to achieve and the targets, internal targets that you need to hit to be able to achieve that.

Yes. So our target for the end of the decade is $1 billion or $1 billion or more of ARR. We're already at about $560 million, a significant growth from the roughly $400 million that we ended 2 years ago. And we announced that goal in September 2024 at our Investor Day. So since our Investor Day, we've had a lot of growth in smartphone. Our smartphone ARR goal is $500 million. We're almost there now. We just had a record level of smartphone ARR in the first quarter of this year. So we're really pleased with the progress we've made there. We've also made a lot of progress over the years on consumer electronics and IoT, that's $200 million of the $1 billion ARR goal. And then finally, the big, big opportunity for us is in video services, cloud and content more broadly. But by 2030, our goal is to have $300 million or more of ARR from video services. Now presently, we're at 0, but it's important to recognize that, that doesn't mean that we're at the starting point because we've already developed the technology. It's already used by all the major subscription and advertising video-on-demand models. And really, it's now a matter of getting paid for that use.

Yes. There's a long deal of usage that you haven't monetized yet.

That's right. That makes sense.

You talked about smartphones a little bit, and I know you already have 85% of the market share. the last over cycle was obviously 5G, and we are coming up on the cusp of 6G. So just talk us through what are some of the strategies around 6G, -- what are the drivers that you see, how you plan to monetize that.

So if you look at our technology wise, in our company, as always start with innovation. For 6G, our engineers have been working on Switcfor multiple years now. And by the is scheduled to be finalized by 2029, generally speaking, and the white adoption is expected to be about 2030. And if you look at the main pillars of CC, there's a multiple of them wise native building AI for the wireless connectivity level, integrate sensing and together with communication, which means you'll build the network for 6 more than just communication network. It will be a physical sensing network because if you think about RF signal 23-degree just like a radar. If you build a network to be building with sensing capability, you're merging the physical world together with the logic world, for the communication network. That's a very powerful use case. And then we are also working on technology people or nonresort base, basically combining cellular communication primarily with our satellite communication not just for emergency at for the high-speed connectivity. Those are some of the examples our engineers have been leading. And it started with fundamental research. But we have already built a fairly large patent portfolio, and we hope over time, we'll be upping for 260, but it also boilonto our leadership in the 6G standard development organization, which is the 3GPP as I refer to -- so all these infants come together, and we are hoping get will not only unlock the smartphone use case, which we know it well, but we are enabling so much more. Based on connectivity based on intelligence and based on this immersive user experience at building the same things and frankly, communicated.

Yes, makes sense. I do have a question on connected devices. But before we go there, even when 6G comes, is it true that you will continue to monetize some of the 4G, 5G innovations that you've made and companies will continue to use and deploy those technologies in -- is it true that you continue to generate some sort of revenue from that long tail, like really inclusivity in the technology. And also, there are some geographies where 6G may not appear on day 1. It will take a few years to get there. So just talk us through all of that.

That's absolutely true, by the way. The same dynamic is in every end to MG transition. If you look at it, right, we are currently already built most of the 5G and pretty much most of the device, if not all the devices sold in the United States are 5G-enabled, right? But it's important to know that this phone is a 5G phone. At the same time, it's still connecting and supporting 3G and 4G, right? It's a multiple device. So the same dynamic will happen by end of the day, given people started selling 6G phones, and that 60 phone will, at the same time, support for 5G and maybe alibis The real is exactly what you have mentioned is a carrier would not deploy a network overnight that's supporting the latest generation technology, it takes them time to deploy it. When you are using your phone, particular to me or to the phone has to be supporting different generation of technology at the same time that to us, from a licensing perspective, exactly a good thing -- we will be licensing a multi-generation technology to them. And hopefully, we will be demonstrating value to our customers to see with the latest generation, frankly, we are providing you even more value of what I call the IP content in the device, right? But keep in mind, the cellular connected with just 1 piece -- during the meantime, we are driving WiFi evolution with every generation WiFi that's getting in. We are also driving video codec, which is itself has a similar evolution of more advanced technology being developed over time and we are 1 of the few companies that can put together everything together into a coherent user experience has to end to end. So that's the power we bring to the.

Yes. So it's not just the infrastructure of the technology itself. It's also what you consume on videos, for example, that you're also working on technologies for -- it's very interesting.

That's absolutely true. That's true on the device side. But then frankly, that's also true on the service side. That's rich referred to early.

Okay. Switching gears to connected devices. There are a number of devices that are -- have in-build communication or sometimes now you see laptops that have the ability to put a SIM card in autonomous cars is going to be a huge thing. Recently, there was this photograph of a robotaxi with the satellite device connected to it, there will be human oils in the future as well. So just talk us through what you're seeing from the demand from that space? And how do you plan to address that?

Yes. Look, I think it's very fair to say that our technology has never ever been more important. It's frankly easier for me to name the device that's not using our technology than try to make everything in think about it. Our technology are foundational to the wireless connected world. It's foundational to the delivery of video capture, delivery and decoding video end-to-end. Very few things that you think about that's important to you are not connected already. If they are connected chances that they are wireless connect, nobody want to be tethered to a war or a socket -- and most users prefer and craving immersive user turns that generally drinbivideo, right? Not just by 2D, we do over time will be driven by 3D video by surrounding video all kind of stuff here. And then the human needs for more intelligent connectivity for everything to be pieced together for very low tolerance of latency of delayed use case. It is all driving the holding together, right? You're talking about human robust. You're talking about the different use case for the industrial side and you're talking about smart agriculture, smart manufacturing, you're talking about, frankly, satellite versus cellular versus low-care connectivity. It's just enormous amount of use cases here. And the fuel cases that Rich has identified is not all the use case people are deploying our technology is simply as we are talking today, those are the major use cases. I'm certain that we will evolve our frankly licensing model over time. There will be brand new use case? Is that we frankly when you think about it as of now going forward, that become more obvious for us.

Yes, makes sense. And very exciting. So you make an innovation, you filed a patent. That patent becomes part of the standard essential patent that everyone is now required to use or supposed to use for the broader reach. Sometimes you sign multiyear contracts and then when the contracts end, sometimes customers you have to renegotiate those contracts. And so you just talk us through how that process is and sometimes when customers don't realize that they're infringing on your patents you pursue an injunction against them. and you've won 6 out of the 6 recent injunctions, which is great because it sort of snowballs from there. How do you think about using injunctions and just using the legal system as a way to enforce our patents and then also make sure that you get a recurring revenue out of it. And then the second part of the question is just talk us through the legal reputational aspects of pursuing a strategy like that.

Absolutely. So that's a really complex question. So allow me to unpack it, right? So to begin with, how do we license our technology. We license our pattern, but most importantly, do you think we are licensing pattern that protects the technology people are using. So generally speaking, in our business, we are a B2B business auto, okay? Our customers, generally speaking, are extraordinarily large and certificated vendors who knows how they are benefiting from our technology, right? I mean, literally, our largest customer coming like Arpan Samsung and a number of very large smartphone makers, all the consumer electronic, all the service providers we have service, midstreaming service to very large companies, we're going much bigger than we are. And we, frankly, understand how they are benefiting from our technology. And by the way, in case we don't we spent a lot of time informing, educating and discussing with them. Our licensing cycle, generally speaking, is fairly lengthy. We were seeing engineers and patent attorneys and sometimes even with outside counsel, explain to them here's our contribution to the industry. Here, the technology we have created. This is our patent portfolio. And by the way, let me prove it to you. Here's how our patent covers those technologies. So we're damage to them, right? And that's a somewhat lengthy process. And generally speaking, once we license a vendor and then we license them over the term of the contract. By the way, our thermo contract is roughly around -- we try to look for a long-term contract. It's a spot of our technology is very foundational. I mean, frankly, they have been unit for a long time very often. And we also want to make sure we don't sign too long -- or to shorter contract in terms of how long you need to negotiate a contract versus how much vendor or industry may go up and down regarding volume and rate, right? So we need to find a sweet spot. So once we have done it, and generally speaking, our customers in the industry stay with us for serve our Samsung agreement started with mid of 1990s, right? They have been a customer for us for like 30-plus years, right? That just means we know the benefit our technology and frankly, our airport agreement started before they even shifted very iPhone, the very first item, right? So again, in the existing industry, we are frankly well established. And as we said earlier, due to the standard sort of the layering effect, we generally speaking, we will demonstrate our customers how we are adding value over time. Okay. Moving to our brand-new industry. Now we are frankly tried to demonstrate our value and proving that the benefit to the streaming industry. We are at some stage. We are not at 20, but we are not the finishing line yet. So a damage value to this industry. By the way, we have been negotiating with a major player for matters and we did, as you mentioned earlier, for a number of pattern enforcement action against Disney February of last year. But as we have disclosed in our frankly, litigation filings before that, we have negotiated for multiple years. We have demonstrated to them the value of our innovation contributor engineers, how we have treated the most important foundation leader that they benefit from for multiple tens of billions dollars per year in revenue and frankly, increasing profitability already over time. So that's already done. However, we couldn't get a deal because, frankly, we couldn't agree on the value of the patents. So in United States as well as in most other jurisdictions. A patent holder need to take the positive action to enforce its IP rights for the patent to be enforceable. It's on the border of the patent holder, holder generally speaking, have to damage the ability to protect our IP, okay? So which is what we have done. And we are, as you mentioned here, we are asking for damages, basically they need to pay us for the past use of the particular pattern we are enforcing. We are also asking for core to issue injunction after the court has decided the patents value in-force. And enforce and being infringed by the way. So it's not up to us, it's up to the court to make that decision -- so back to your comments earlier to say, hey, if you're seeking injunction, do you worry about cooling reputational damage? The answer is absolutely not. The rhythm being IP right is the right to protect your innovation unless other people pay a license for it. So all points -- if I'm a valuable IP holder, I keep on setting for my IP right without ability to defend it, then in fact, over a long period of time, your business is not sustainable. You as a valuable IP holder, you have to do it. So that's the only way for us in that particular incidence to get a deal done properly and also to be fair to other paying customer over time, right? But 1 last comment that I'll add, it's not lost on me that company like Disney is an IP company itself. If you think about the value of Disney, even though it's much, much bigger than we are, which, by the way, have enormous risk back for Disney. Currently, Disney is enforcing its IP, right, against other AI companies. If you do a search for you will find it -- and if you dig a little bit deeper, you will notice, Disneys asking for money damages as well as injunction against AI company for their IP right, okay? So that just means having the protection of IP is really important to their business and being able to enforce IP for damages and injunctions absolutely normal course of business for IP-centric company.

Yes. No, it probably makes sense. Switching gears. So I had the investment banking version of a bite coating. I've spent in the last week just talked to CGP just trying to understand how video compression works and the traditional systems -- and what you've done with the AI-based video compression is actually really interesting. So -- can you just give us an overview of how does the technology work? And what do you see as opportunity in that space? Maybe it's a question for you, as well Rich. You mentioned that there's a lot of revenue opportunity there. And so just talk us through that as well.

Yes. So first of all, we, as a company, are huge favor for AR. We have been working on AI for multiple decades, and we are 1 of the very few companies in the world who has deep expert in video wireless and AI technology and the power of combining them is enormous, okay? It's enormous. So in terms of research wise, we are focused on several different things here. We are focused on applying AI into wireless system and make the network more intelligent from ground up. As I said earlier, 6G on the main pillar for 6 research is native AI building. That's just 1 example for it. We are, frankly, at the same time, applying AI technology into video codec. And on that note here, we have acquired a start-up company that's based in London. It is a company called Deep Rinder, where they have worked on some software solutions that try to compress video cut we do signals into something much, much smaller and more intelligently using AI that's different from traditional codec. And the reason we acquired them is their current technology, honestly speaking has too much complexity, and it's still a porter solution. What we try to do is work with our engineering team to simplify the solution and ideally enable some of the solution into the next generation video codec standard. By doing standardize, we are enabling AI video codec to a much broader audience. We are not guaranteed to be successful, but we are trying really hard, right? But that's only half the part. The other half of the puzzle if we redesign the irsystem,so video could have for AI use case. Let me give you a couple of examples, right? Traditional virus is in particular salary system is built to support much more download traffic that operating traffic. Downloading traffic just means you are broad in the Internet, you are watching YouTube videos, motor traffic is down going from network to you. When people have deployed currently the edge AI, the physical EI, once they get wider adoption, the traffic will be shaped differently there'll be much more uploading traffic as you are doing real-time training you're doing influence among others with the AI distributed model. So our engineers are working with our peer company to reshape the network architecture to allocate more resource on operating traffic for the next generation. That's just making the network overall more adaptive for the machine-driven traffic pattern that people driving traffic. That's a part of the network research we're doing really active on. The other real interesting research we are currently doing is to create a brand-new coat that's for machine use. So currently, our resource is creating a next-generation codec, but the assumption was a human being will be the user for the Kodak, right, for us to watch a video human being has our limitations, right? We have how many frame making detect or so how many color they can tell where certain spectrum of the light we simply couldn't be able to read. Once you remove human from the interface from the part of the system, you can design the whole machine video could much more effectively and much more efficiently. And that has a very important use case such as autonomous vehicle driving, right? If you're having cariemultiple camera look at the road, the processor for that redosing is not the driver anymore exactly the computer system. So by redesign the town this whole code for AI use case a lot more effectively. So as you can tell, there's actually multiple angles of how we are applying AI to sell we do problem. We also redesigned a video and wired system better for AI machine as part of the key user in that system. And our engineers doing frank

Yes. And there's immense opportunity both in video streaming as well as autonomous driving, as you said. And these are all streams that are not fully monetized and there's a massive opportunity to monetize that in the future.

That's right.

You're 1 of the world's 100 most innovative companies consistently across all benchmarks. You have a 40,000-plus IP portfolio. I read somewhere that you filed like 7 patents a day on an average. What are some how do you balance quality versus which projects to prioritize on? How do you identify, okay, this problem is going to be really fundamental and this is what we should be working on like, how does the prioritization framework operate?

Yes. First of all, we are extremely proud of our innovation, quality and heritage. So what you're referring to is this is leading research company, frankly, they are specialized in riding IP portfolio in this company called Leganes. They have published an annual report at ranking all the company in the world, not by an industry, not by even United States, all the company in the world, they have ranked us consistently top 100 most innovative company in the world, 5 years in a row. The reason we only ranked 5 years in a row for the research at the only public that reported for 5 years, okay? So we basically have been run from the and they published a report every single year. And the specific comment on the quality of our innovation and in the future avaidability of our IP portfolio. That is a quality research. It's not just by number of patents, right? But in the meantime, a number of matters, okay, I'm not saying a number, it doesn't matter, but you also mentioned here, everything go day on average, they get 7 new patents granted to us, every single including weeks. Right? We have a very robust innovation I know we keep on adding to it. So back to your question, how do we make sure the quality of our patterns over time become even stronger, again, back to a few things. We want to make sure we have the best people. One thing I didn't mention so far yet, which is super important. So we are a company of inventors, right? So we are not gigantic by headcount but we try to attract some of the best people in the world. We open and operate research in the primarily around major universities. We attract the best PhD student. We, over time, build around the most advanced research team in the world occupy share size-wise, I believe we are the largest pure research company in the world. And 1 thing that really separates us from any other company is 90-plus percent engineers and scientists in new vendors. So think of us as doing only groundbreaking research work, right? In most other companies, that percentage is in single-digit percentage. 1%, maybe 3%, probably a 90-plus percent. So that's the first thing. Second thing is really we only work on the most difficult problem in the system level. We are now trying to repeat because our product is IP. It's intellectual property, it's patent. You can only get a pattern by solving a problem that has never been solved before. So we are not interested in repeating the people's solution. we are interested in doing groundbreaking work. And thirdly, which is really important to know is despite most people's perception innovation at TeamSport -- we actually build project. We have some most brilliant people working together, we challenge each other. We make sure they bring their expertise. Sometimes in different domain field, by the way, as I referred to earlier, we want the wireless people to work with AI expert. We want the AI expert to work these radio people. We want to be the people to work with Virtis by pushing those experts to work together, very often, we can find the best solution into it. And then hopefully, we don't do about patenting our innovation as we create the innovation. So all the stuff coming together give us the best chance of building our value portfolio.

That's amazing. Rich, the business seems to be firing on all cylinders. You've consistently growing double digit despite managing a machine of innovation and researchers, you're doing it very efficiently as well. The business generated more than $500 million of free cash. There was also a big uptick in the EBITDA margin. So just talk us through the drivers there? And how do you see that trending in the future?

Yes, that's right. One thing I love about the business is we make these long-term investments, right, the long-term investments in research. And then when we hit on those investments, it means that, as I described before, it's going to be massively adopted. And then when we get licensing revenue from the use of our technology, it generally comes -- with a few exceptions, it comes in with basically 100% gross margin. So as you're growing the top line, you have even higher growth on your profit margin because why is that? We've made that investment in the past 5 or more years ago oftentimes. So now when somebody is already using my technology and I license them, there's no additional cost, okay? I'm just bringing in the revenue, getting paid for what they were already using.

Okay. Got it. In many ways, it's also a revenue diversification already working on the next problem. And so all the investments that you're making currently are sort of revenue that you will see in the next few years.

That's right, yes.

Makes sense. You've also paid down debt. You continue to return immense amount of capital to shareholders, about $800 million. You've reduced your share count by about 15%, 16% in the last 5 years. So how do you think about just capital returns, shareholder distribution, deploying capital towards organic versus inorganic? Because you are sitting on a big amount, big balance of about $1 billion of cash.

That's right. And for us, cash is a strategic asset -- we are so excited about the opportunities that we have. The #1 thing that I think about is making sure that we do everything we can to achieve that -- so it's not opportunity, it becomes reality, right? And as Lauren mentioned, We do have to enforce our rights against very large companies that use our technology from time to time. And having a strong balance sheet is important in that regard. Having said that, we do generate a lot of cash, as you noted, and we want to be good stewards of that capital and return that capital to shareholders, and that's resulted in $800 million return of cash over the last 5 years.

Okay. Let me just take a quick pause and see if anyone in the audience has any questions.

I was just wondering if you could maybe touch on the streaming side of things, specifically, any updates on the Disney and Amazon fronts?

Yes. So as I said earlier, we believe we have created some of the most valuable technology that enable that whole industry, including Desena Amazon. And we have negotiated for multiple years and try to get to a, frankly, a deal that's for both parties. And so far, we have not been able to reach a deal, but we are continuing to negotiate. In the meantime, we have filed a multi-jurisdictional enforcement for patents against Disney February of last year. And then a number of the patent has gone to trial and so far, the 5 patents going to trial 2 in Brazil and 3 in Germany. All the cases that have been decided, we have win all of them, right? Or the court has decided our patter being infringed and the court in all those 5 cases that order either preliminary junction or injunction against them. We are in the process of enforcing them. And in the meantime, though, there's also a number of other patents are coming to trial. That can be in Germany. And we also have patents that gone through the first hearing in UPC. It's a unified patent court that applied to multiple country up to 18 countries in Europe. And we have, frankly, a number of patents coming to trial in United States that's currently scheduled for February of next year. So again, as I said earlier, I'm very happy with the quality of portfolio and we are very pleased of the program we have made so far. But as I also said earlier, litigation is not our angle. -- litigation franking enforcement is part of our campaign to get a deal down in this case. So we are hopeful that we can get a deal down that reflect the value of our portfolio. And if you look at our history as a company, streaming industry is relatively new for us. But in other cases, when we enforce our patents we always end up getting a deal down, right, in different industry than we have done before. For the Amerson litigation, it's a bit different. Ameris are actually did against us first. We had a small licensing deal on the device side last year, Emerson edge gains us before that deal expired. So we basically are responding to the litigation. They sold us in September, if I remember right, we counter through in November of last year. So retail speaking time line-wise, these kids are a little bit behind the dice.

Anyone else? Okay. Thank you so much, Rich. Any final thoughts, misses that you would like the audience to take away and investors in general to take away with them.

Look, we are very excited about the opportunity -- thank you for having us, and we love to engage with investors. And at the end of the day here, I feel very strong about our position. Our value to the industry have been demonstrated Uran over andand I feel good about where we are and we'll keep as is.

Thank you on behalf of the Indicate. Thank you so much again.

Absolute. Thank you.

Thank you.