InterDigital, Inc. (NASDAQ:IDCC) Q1 2024 Earnings Call Transcript

InterDigital, Inc. (NASDAQ:IDCC) Q1 2024 Earnings Call Transcript May 2, 2024

InterDigital, Inc. beats earnings expectations. Reported EPS is $2.88, expectations were $2.75. InterDigital, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the InterDigital First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Raiford Garrabrant, Head of Investor Relations. Please go ahead.

Raiford Garrabrant: Good morning to everyone and welcome to InterDigital’s first quarter 2024 earnings conference call. I am Raiford Garrabrant, Head of Investor Relations for InterDigital. With me on today’s call are Liren Chen, our President and CEO; and Rich Brezski, our CFO. Consistent with prior calls, we will offer some highlights about the quarter and the company and then open up the call for questions. For additional details, you can access our earnings release and a slide presentation that accompany this call on our Investor Relations website. 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 section of our 2023 annual report on Form 10-K and in our other SEC filings. In addition, today’s presentation may contain references to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the supplemental materials posted to the Investor Relations section of our website. With that taken care of, I will turn the call over to Liren.

Liren Chen: Thank you, Raiford. Good morning, everyone. Thank you for joining us today. On our last call, we provided annual guidance for 2024 revenue of between $620 million and $670 million. This guidance highlights the increasing momentum of our business and the multiple growth opportunity that we have identified and expect to achieve through the rest of the year. Today, I am pleased to share that we have made significant headwinds in achieving our goal and reconfirm our 2024 annual guidance. Revenue for the first quarter were $264 million, up by 30% year-over-year and above the high-end of our guidance. Our Q1 revenue was one of the highest in our history and an all-time high for our CE and our IT licensing program. Through the quarter, we have made great progress on multiple fronts of our business.

We signed 7 new license agreements. We enhanced our position as a leader in the application of AI in both wireless and video and we received several positive core decisions, which we believe will help us to advance negotiations with certain unlicensed smartphone OEMs. We began the quarter with a new landmark license with Samsung TV business. The agreement covers patents and our joint licensing program with Sony and introduced our own pattern across a range of video and Wi-Fi technologies. Samsung is a market leader in TV and this agreement highlights both the value of video and Wi-Fi innovation and the growth we continue to build in licensing the consumer electronics sector. I would emphasize that this new agreement is separate to the Samsung smartphone license.

We announced at the start of 2023 that Samsung and InterDigital has agreed to renew the license for their smart TV to our portfolio. The final term of the smartphone license includes how much spent on mass payouts are still the subject of arbitration hearing, which is on track to be held this summer with the final resolution expected by end of this year. The 7 new agreements that we signed in the first quarter reflect the momentum we continue to see across all our licensing programs and our strength in consumer electronics and our IT in particular. The revenue and recurring revenue in Q1 from our CE and our IT program were both record highs. With Samsung and other agreements that we closed in the quarter, we have increased the cumulative value of contracts that we have signed over the last 3 years to almost $2.7 billion, giving us an incredible strong base from which to drive new long-term agreements and pursue additional growth opportunities.

Staying on license, we are making significant progress in our effort to ensure that we received further compensation for our innovation from unlicensed smartphone OEMs. Earlier today, a German court issued a very positive decision for us in our dispute with Lenovo. The court ruled that Lenovo infringed one of our 4G and 5G standard essential patents that InterDigital has acted in a friend manner that Lenovo is an on-leading licensee who engaged in hold out and should therefore be enjoined in the German market. The injunction means that Lenovo will be prohibited from selling 4G and 5G contract devices in Germany. Also, as part of our dispute with OPPO, a German court also wrote that OPPO infringed Interdigital’s 4G and 5G standard issuance of patent in sued.

The Interdigital has acted in a friend manner that OPPO is an on-leading licensee, the court also awarded injunction against OPPO. In India, in another trial against OPPO, we received yet another positive decision, but OPPO was ordered to pay royalties in the form of a security deposit to the court. The Indian court also heavily criticized and fined OPPO for delaying tactics during our negotiations and ordered as the trial be concluded before end of the year. We are encouraged by this recent development in our cases and we believe we have built significant momentum in our negotiations with both companies. As I have said many times before, we always prefer to sign long-term license through amicable negotiations, but we are ready to enforce our patent rights, if necessary.

Our strength as the fundamental innovator in critical technology, continue to underpin our progress. Our research team has long been recognized by the world leaders in the development of wireless and video technology. And increasingly, our leadership in AI is coming to the forefront. In Q1, one of our senior engineers was appointed to hedge the AI and machine learning standing committee of IEEE, the standard development automation, which leads the evolution of Wi-Fi. At this year’s Mobile World Congress in Barcelona, we showcased two demonstrations, which has AI at their heart. One was in partnership with Keysight, which use a newer network developed by our genres to demonstrate the application of AI in our 6G network. And a second combined advanced video compression and AI to significantly reduce energy consumption of streaming video while preserving picture quality.

Also at MWC, we demonstrated cutting-edge immersive video and haptic technology in a specific use case of eSports and showed our increasing leadership in integrated sensing and communications and emerging technology, which will be a pillar of 6G. Our research success continue to be reflected in the development of our global patent portfolio. Recently, we were confirmed among the top 25 companies globally that filed the most new pattern applications with European patent office last year. Our number of new applications filed with the EPO increased by 40% year-over-year in a clear indication of our success in translating our foundational innovation into patent assets. The strength of innovation and patent footprint give us an excellent platform to drive further growth in our existing licensing program and in green field opportunities such as cloud-based video services.

And with our track record for delivering new license agreements with leading manufacturers such as Samsung, we believe we are in an excellent position to reach our financial target for the year. With that, I’ll hand it over to Rich to talk you through the numbers in more details.

Rich Brezski: Thanks, Liren. Q1 was another outstanding quarter for InterDigital as our strong revenue growth drove both non-GAAP EPS and adjusted EBITDA to the high end of our guidance range. This growth was powered by new licensing agreements, most notably Samsung TV. These results support our long-term objective of delivering consistent revenue growth combined with strong margins. Total revenue increased 30% year-over-year with CE and IoT leading the way. Based on new licensing agreements reached in Q1, recurring revenue for CE and IoT reached an annualized run rate of almost $90 million, an increase of 57% year-over-year and has roughly doubled over the last 2 years. When combined with catch-up revenue of $160 million, CE and IoT total revenue for the quarter reached an all-time high at $183 million.

This performance highlights our ability to deliver significant growth beyond the smartphone market. Our adjusted EBITDA for the quarter of $130 million equates to an adjusted EBITDA margin close to 50%, consistent with our guidance. These results demonstrate the power of our business model. Our investments in fundamental technologies drive top line growth while the reuse of those technologies across multiple verticals delivers high margins and drives cash flow. Our strong performance in Q1 produced cash from operations of $51 million and free cash flow of $41 million. This strong cash flow, combined with a cash balance of nearly $1 billion, supports our continued return of capital to shareholders. In Q1, we repurchased approximately 300,000 shares for $29 million.

We repurchased another 200,000 shares in April for a year-to-date total of roughly 0.5 million shares. Since we first paid our dividend in 2011, we have now returned approximately $1.8 billion to shareholders through share buybacks and dividends. In that time, we reduced our outstanding share count by almost 45% from more than 45 million shares to just over 25 million shares. And with $246 million left on the current buyback authorization, we’re not done yet. Looking forward to Q2, we expect recurring revenue will include $93 million to $97 million of revenue from existing contracts plus any amounts we recognize from any new agreements we may sign over the balance of the quarter. Based only on existing contracts, we expect an adjusted EBITDA margin of about 38% and non-GAAP diluted earnings per share of $0.70 to $0.80.

Any additional agreements would be additive to those totals. Our strong first quarter results have us on track to meet our full year 2024 targets, and we are reaffirming our prior guidance of revenue in the range of $620 million to $670 million. We continue to expect an adjusted EBITDA margin of roughly 50% for the full year of 2024 and non-GAAP diluted earnings per share of $7.45 to $8.76. Before I conclude, I’d like to mention that we’ll be attending four conferences over the remainder of the second quarter, the Bank of America Global Tech Conference in San Francisco on June 4. And the William Blair Growth Stock Conference in Chicago on June 4, the IDEAS Investor Conference in New York on June 12 and the Roth 10th Annual London Conference on June 26 and 27.

Please check with your representatives at those firms if you’d like to schedule a meeting. With that, I’ll turn it back to Raiford.

Raiford Garrabrant: Thanks, Rich. At this point, operator, we are ready to take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Arjun Bhatia of William Blair.

Arjun Bhatia: Alright. Thank you, guys. Appreciate you taking the question. To start, Liren, maybe a couple of questions on the Samsung side. More on the smartphone side, not necessarily on the TV side. But as you think about just going through arbitration here over the summer and looking at a potential outcome later this year, how should we think about maybe the range of outcomes that you’re considering that could result from that arbitration? I mean, is there a possibility that prices are going up and maybe how is your royalty rate is coming up? And how do you handicap that? And then for Rich, the same thing on the Samsung smartphone side, can you just remind us how you’re accounting for the license revenue in the recurring line from Samsung thus far? And might that be something that’s contributing to the decline in smartphone recurring revenue. Thank you.

Liren Chen: Take one or two simple questions. So, on the Samsung smartphone arbitration, as we have discussed in the prior call, since having our customer for the smartphone side for actually a long time since 1995 and before they release the variables, with guidance. The last contract was a 10-year agreement and which covered frankly, the previous generation technology and not including very valuable assets like 5G and a lot of the advanced video technology we have done. So that agreement acts for December 31, 2022, and both parties has agreed through negotiations that they will renew the agreement without disruption and that we frankly couldn’t get a pricing agreed upon in time. So we both agreed to do a binding arbitration that started January 1, 2023.

We are, frankly, well into the process. The panel has been assembled and the hearing has been confirmed this summer and will be decided before the end of the year as the current projection. So regarding valuation for multiple reasons, we feel very confident that the value of portfolio has gone up, that Santa’s benefited more through the years compared to the time of the last agreement. So that obviously, we still need to have the arbitration to go through to confirm our belief. And I’ll hand it over to Rich to comment on the revenue recognition side.

Rich Brezski: Yes. Thanks, Liren. On the rev rec, we’ve been recognizing since the first quarter of last year at level with the prior Samsung agreement, which is just shy of $80 million a year. That’s what we believe is a conservative estimate. We have effectively a license in place with Samsung, and we are just estimating what the ultimate outcome will be on a conservative basis. But because of the conservative nature of the GAAP requirement, we are certainly hopeful that we will have a positive true-up when it’s ultimately concluded. And as to the question on the decline in recurring revenue, I presume you mean ‘23 going into ‘24. So, based on what I just said, it’s not because of Samsung, but rather expiration of other agreements, most notably Huawei, which expired at the end of last year.

Arjun Bhatia: Yes. Perfect. Alright. Thank you. One more, if I can. It was interesting to hear the injunction against Lenovo and OPPO. And I am curious, in the past, Liren, to the extent you have experienced with these injunctions, how do you think they – or how have they may be changed behavior of some of these manufacturers in the past? I mean is it enough of an incentive to bring them to the negotiation table and say, hey, we want to strike a deal. Like how punitive can those injunctions be for these companies to get them to strike a deal with you?

Liren Chen: Yes. Hey Arjun. As we announced in a separate press this morning, the Court in Munich has issued a decision. In that decision, basically, the court decided that InterDigital has consistently act in good phase under the front obligation at all times. The court also said Lenovo has systematically actively in hold out, and frankly, it’s not in combined of the front obligation. So, as a result, the court has issued the injunction of a patent that’s standard essential for both 4G and 5G. And unless if something happens, Lenovo will be prohibited from selling devices with those features in German market. Regarding how the company may behave, I don’t want to spec on Samsung – on Lenovo, how they will proceed from here.

I can see Germany is obviously a very major market and this injunction applied to a pretty wide range of devices beyond the cell phones. So, I hope with this decision that Lenovo will come back and frankly, take a licensing and fair terms from us. And I am definitely hopeful.

Arjun Bhatia: Alright. Appreciate the color. Thank you.

Operator: Thank you. [Operator Instructions] And our next question comes from Anja Soderstrom of Sidoti. Your line is open.

Anja Soderstrom: Hi. Thank you for taking my question. Can you just – you talked about this in the past, but maybe go over again the different opportunities you have to reach your guidance for 2024.

Liren Chen: Yes. Hey. Good morning. This is Liren. So, we have multiple passes. On the smartphone side, just for example, we have OPPO negotiation where we will, as Rich just mentioned here, have has expired, which we are bringing renewed discussion with them. And then Lenovo was licensed through the UK court decision for the cellular side until end of last year. Now, the unlicensed as we announced this morning, we received court injunctions, and we hope to be able to, frankly, sign a long-term agreement with them. So, that’s just on the smartphone side. On the CE side, as we mentioned in the prepared remarks, we signed Samsung TV, which is the largest vendor in TV space. We are working diligently on the next multiple layers of TV vendors include LG, TCL and Hisense.

So, on top of all the stuff here, we are also working on the Samsung arbitration, and we expect that to be finished before the end of the year. And if we are able to get a favorable judgment beyond the revenue recognition that will be a positive true-up pass.

Anja Soderstrom: Okay. Thank you. And when it comes to Huawei, how constructive are those discussions given you fairly recently signed an agreement with them?

Liren Chen: Yes. Probably negotiation is proceeding according to plan. And our last agreement expired the end of the year, and frankly, Huawei business has gone through a certain amount of period of up and down. So, we are currently in negotiation with them, and we are hopeful we will get a long-term deal down with us soon.

Anja Soderstrom: Okay. Thank you. That was all for me.

Operator: Thank you. [Operator Instructions] And our next question comes from Scott Searle of ROTH MKM. Your line is open.

Scott Searle: Hey. Good morning. Thanks for taking the questions. I apologize in advance, I was on the call late, so if you already covered this, but. Liren, in regard to the Lenovo injunction, what is the actual process and procedure there in terms of how that’s going to be implemented? And are there additional costs associated with it? I believe that there is an appeal period from their standpoint. So, can you walk us through the milestones timeline and the cost element?

Liren Chen: Yes. Hi Scott. Good morning. So, we don’t – I am not certain you were on the call when we were describing it earlier. So basically, the court has decided that we have acted in front manner consistently all the time. The Lenovo has systematic conduct sold out and their non-infant obligation and they are frankly, on-leading licensee. As a result, the court has issued injunction against them that covers devices with 4G and 5G features built in. So, there will be some procedure stuff which we are frankly working through and our intention is to enforce this injunction as quickly as we can. And you are also teat this is what they call a first insulin decision, which is automatically appealable. So, I don’t want to speculate on the Lenovo’s legal strategy, but that’s frankly up to them.

Scott Searle: Got it. And Liren, just to quickly follow-up on that front. This is in Germany, will that extend to the rest of the EU, or what is the plan there in terms of how you implement across the pan-European marketplace?

Liren Chen: Yes. Scott, this is the case that – this is a German pattern, and it’s a German court. So, just the decision will be limited to the German market. As you are aware, Scott, we do have other cases, including our PC, ITC in U.S. against them in different technology area. But this particular decision is Germany only.

Scott Searle: Got it. And two others, if I could, just the latest update in terms of video IPs licensing into the streaming and services model. Are there any updated thoughts, timelines in terms of how that’s evolving and the impact in ‘24 and ‘25?

Liren Chen: Yes. Hey Scott, we do view the video cloud service licensing as a very, very good, greenfield opportunity. We are proceeding according to plan, which we believe we have very valuable IP asset and frankly, very strong technology leadership. Regarding our direct financial impact, as of now, we are not projecting material impact to 2024. And if we have more update, we will share with you timely.

Scott Searle: Got it. And lastly, if I could, you have maintained the guidance range for the year of $620 million to $670 million. I am wondering if some things have kind of moved around in terms of higher probability versus lower probability. I am not sure if you can address it, but just kind of – I know there are multiple paths to get to that range if there are certain things that have materialized and become a little bit more confident about. Thanks.

Liren Chen: Yes. Hey Scott. As I said in my prepared remarks, when we issued the guidance beginning of the year, we feel very strongly that our business momentum has increased, and we have identified multiple past recent results. And now we have delivered a resounding strong quarter in Q1 for both the top line or adjusted EBITDA and EPS, and especially in the record recency and our key space. So, we feel very good about where we are, and we are on track to deliver the results. And as of now, we are not either predict the rest of the quarter other than we feel very confident about our ability to deliver for the year.

Scott Searle: Great. Thank you.

Operator: Thank you. This concludes the question-and-answer session. At this time, I would like to turn it back to Liren Chen for closing remarks.

Liren Chen: Thank you, operator. Before we close, I would like to thank all of our employees for their dedication and contribution to InterDigital as well as our many partners and licensees for an outstanding start to 2024. Thanks to everyone who joined our call today and we look forward to updating you on our progress next quarter.

Operator: This concludes today’s conference call. Thank you for participating and you may now disconnect.