InterDigital, Inc. (NASDAQ:IDCC) Q3 2023 Earnings Call Transcript

InterDigital, Inc. (NASDAQ:IDCC) Q3 2023 Earnings Call Transcript November 2, 2023

InterDigital, Inc. beats earnings expectations. Reported EPS is $1.72, expectations were $1.19.

Operator: Good day, and thank you for standing by. Welcome to the InterDigital Third Quarter 2023 Earnings Call. At this time, all participants are in the listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [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. Please go ahead.

Raiford Garrabrant : Good morning to everyone, and welcome to InterDigital’s third quarter 2023 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 last quarter’s call, we will offer some highlights about this 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 2022 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 our financial metrics 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.

Liren Chen: Thank you, Raiford, and good morning everyone. Thanks for joining us today. This was another very strong quarter for our company, supported by outstanding execution across all aspects of our business. We have signed two new license agreements that build on our strong base of recurring revenue, expanded our industry leadership, had record-setting pace from our inventors in expanding our innovation pipeline, and received acknowledgement of our 5G patent portfolio leadership by a leading third-party report. I’ll start with a few highlights from our financial result. Revenue for the quarter was $140 million, up 22% year-over-year. Our smartphone licensing revenue was up 19% year-over-year, and our CE and IoT licensing revenue was up 30% year-over-year.

Our net income was almost $48 million, up 116% year-over-year. Our adoption EBITDA was about $84 million, an increase of 48% year-over-year. I’ll let Rich discuss more details in his section. These strong financial results demonstrate the continual momentum we have created to grow our smartphone licensing program and our CE and IoT program, and demonstrate how our technologies are more important than ever, to a growing number of increasingly connected industries. In late September, we signed a new multi-year royalty barring license with Lenovo, covering our HEVC video compression technology. Lenovo incorporates HEVC video compression in both smartphones and consumer electronic devices, such as PCs. Under this new agreement, we received a catch-up payment for the past use of our technologies and recurring revenue going forward for both our smartphone licensing and our CE and IoT licensing programs.

The latest agreement has brought our related HEVC litigation with Lenovo to an end, and we remain committed to resolve the rest of our licensing disputes with them. Staying on the licensing front, in Q3 we also signed a new license agreement with Humax to cover the company’s set-top boxes. Together with the Lenovo HEVC agreement, this is another validation of our video portfolio as one of the largest and one of the highest quality in key technologies, such as HEVC, as well as the newer VVC video codecs. These technologies are applicable to smartphones, CE and other IoT devices, and looking forward to what we see as our large Greenfield opportunity to license video streaming and cloud services. Adding to our momentum, we recently became a founding member of Avanci 5G automobile patent licensing platform, as we look to build up the success of related 4G patent pool.

In the third quarter, the platform licensed both Mercedes-Benz and BMW for 5G. Due to the increased value of 5G to automobile manufacturers, the 5G royalty rates are roughly twice the original 4G rates. We believe our revenue from the connected cars will grow with increasing 5G adoption over time. We continue to make strong progress with our smartphone program. In our Samsung arbitration, based on the latest case schedule, the hearing date is set for summer of next year, and we are on track to receive our final determination towards the end of 2024. As a reminder, Samsung has already agreed to take a license to our portfolio starting January 1of 2023, with the final terms of the license due to be determined through arbitration. As we have said many times before, the most valuable assets for our company are our people.

We have some of the world’s best innovators in the development of key wireless and video standards and other technologies. Recently, our leadership in cellular space was highlighted by the election of our Senior Wireless Standard Engineer, Diana Pani, to chair the RAN2 working group within 3GPP. The cellular wireless standard body responsible for 5G and future 6G development. The RAN2 chair is one of the most critical leadership positions in 3GPP. In her election, Diana received broad support from more than 200 companies across the industry and are lying in digital status as a strong leader in cellular technologies. We also take great pride that Diana is the first woman to be elected to the post as a critical point in 5G evolution with the introduction of 5G Advanced.

Her role within 3GPP is one more than 100 leadership positions that our engineer hold across multiple standard development organization for wireless and video technologies. In Q3, we also achieved an important milestone with our patent portfolio now exceeding 30,000 granted patents and pending applications. It was also our highest quarter ever for new invention findings, and we are on track for a record year for new invention creation. The strength of our portfolio was recently confirmed by a new analysis from LexisNexis. This analysis, which measures both the quality and the quantity of 5G portfolios from more than 130 companies, recognizes InterDigital as having one of the top five 5G patent portfolios in the world, ranking as the head of multiple well-known innovators in the cellular space.

This confirms our belief that we are in an excellent position to realizing further value from our cellular assets at a time when we believe 5G Advanced will drive new use cases for our innovation. Recently, we have announced partnership with University in India and Spain to explore research in technologies that could enable future 6G wireless network. This is another example of the kind of early stage research we do and our efforts to enable broader ecosystem in the wireless space. As I look at our portfolio and our innovation pipeline in the wireless space, we are ideally positioned between our ongoing focus on 5G and our long-term research in fundamental technology for 6G and beyond. In summary, we deliver excellent performance across our business in the third quarter and continue to build momentum to position the business for long-term growth.

With that, I’ll hand you over to Rich who talks with the numbers in more detail.

Rich Brezski : Thanks, Liren. I’m excited to report that in Q3, we delivered another excellent performance with revenue, diluted earnings per share, and adjusted EBITDA that were all well above the high end of our guidance range. This is primarily the result of the largest standalone HEVC license we’ve ever signed, which drove upside to both recurring and catch-up revenue. These results support our long-term objective of delivering consistent revenue growth combined with strong margins. Total revenue increased 22% year-over-year, highlighted by continued double-digit growth and recurring revenue for CE and IoT. Year-to-date, recurring revenue for CE and IoT is up 17% and demonstrates the multiple growth vectors of our business.

As Liren mentioned, the HEVC license covers both smartphones and PCs. We have recognized $145 million of revenue from Lenovo over the first three quarters of this year with over $40 million coming in Q3, including a significant catch-up for prior infringement. The recurring contribution from Lenovo pushed our Q3 annualized recurring revenue from CE and IoT to $62 million per year. As Liren mentioned, this license demonstrates the quality of our HEVC video compression technology, its relevance for devices beyond smartphones, and looking forward, highlights what we believe is a Greenfield opportunity to license video streaming and cloud services. Cash flow was extremely strong in Q3 with cash flow from operations and free cash flow, both in excess of $300 million.

As we’ve noted in the past, due to the timing of customer payments, our free cash flow can fluctuate quarter-to-quarter, which is why we also publish adjusted EBITDA. Our adjusted EBITDA for the quarter of $83 million increased 48% year-over-year, while our adjusted EBITDA margin increased 11 points year-over-year to 60%, in line with our long-term goal. We continue to return cash to shareholders in Q3, first by increasing our regular dividend by 14%, and second, by repurchasing almost 700,000 shares for $57 million in the quarter, plus another 300,000 shares for $22 million in the month of October. That brings our year-to-date return of capital through October 31 to over $360 million, including a reduction of almost 13% of the outstanding shares from the beginning of this year.

Over the past decade, we’ve been responsible stewards by returning over $1.5 billion in cash to shareholders. Looking forward to Q4, I’ll remind you that our Q4 revenue guidance is based off of contracts signed to-date. Since the timing of license agreements is inherently uncertain. On that basis, we expect Q4 recurring revenues will be around $104 million, with operating expenses of about $78 million, driving an adjusted EBITDA margin of about 49%. Furthermore, we expect to continue to repurchase stock, and finally, we expect GAAP diluted earnings per share of $0.70 to $0.80. Longer term, our goal remains to achieve and sustain a 60% adjusted EBITDA margin on $650 million of annual recurring revenue from device licenses, with additional upside from licensing new products and services.

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]. And for your first question, it comes from the line of Scott Searle from ROTH MKM. Scott, your line is open. Please ask your question.

Scott Searle: Hey, good morning. Thanks for taking my questions, guys. Hey, nice job on the quarter. Rich, quickly, I’m not sure if I heard a mix between fixed fee and royalty on the recurring side. I’d love to have a little bit of visibility there. I wanted to clarify Lenovo now, everything has been settled, Liren. I know there were some outstanding issues and concerns related to ongoing royalty rates in smartphones, but it sounds like that’s been wrapped up now with the HEVC latest agreement with them on that front. And also to clarify as well, on the Samsung front for arbitration, while the timeline for final determination sounds like it’s the end of next year, I’m interpreting this that there are no issues in terms of the baseline amount of ongoing payments that you would receive, which was consistent with the prior agreement. Is that correct?

Rich Brezski: Yeah. So, Scott, let me start on your first question. You asked about fixed fee revenue, and we do disclose in our metrics, I’ll remind you that, and I’ll tell you what the figure is for Q3, fixed fee revenue as a percentage of recurring revenue is 88%.

Scott Searle : Perfect.

Liren Chen : Yeah, hey Scott, it’s Liren. Let me take on the Lenovo question. And the new deal we have announced today is covering the HEVC technology that’s applied to both our PC and our smartphone. As you remember, we have the court decision from UK court covering the cellular technology, that’s 3G, 4G and 5G. That agreement, as by the court decision, goes until end of this year, December 31, 2023. In the meantime, we are also pursuing values that they have benefited from other technologies in our portfolio, such as Wi-Fi patents, as well as valuable implementation patent technology. So those are quite a few moving parts, but we are really pleased by the new deal we have signed with them. So on the Samsung arbitration, what we have disclosed here – frankly, we touched on this issue in the last learning call also.

We have the three panel arbitrators already assembled, and they had their case management meeting. So therefore, the hearing has already been set for summer of next year, 2024. And both parties will be working producing quite a few documents to the panel arbitrators and they will consider. So after the hearing, we do expect a decision before end of next year. So we are absolutely on pace, and I’ll let Rich comment on the revenue recognition just a little bit.

Rich Brezski: Yeah, and I’m sorry, Scott, could you just repeat that, the last part of your question on the rev-rec?

Scott Searle: No, I think you answered all three parts of that. Then I would add maybe the following, and then I’ll get back in the queue. It looks like CE is starting to accelerate. You had good results this quarter. You’ve been continuing to build some momentum. And Liren, I wonder if you could qualitatively talk about how that pipeline is ramping up. I know you’ve talked about a bigger number of where Technicolor was bought that was $150 million or so. We’re now at a $60 million plus run rate. Is this the point where we start to see that accelerating? And also a clarification. On the streaming opportunity for you guys, using your HEVC patents and otherwise, on the video services model. I’m not sure if you made any comments on that earlier.

I thought one of the license agreements referred to cloud. And I’m not sure if you’re referring kind of indirectly to that opportunity in licensing agreement or opportunity going forward with streaming providers or if you could provide some color and timeline related to that. Thanks.