InterDigital Inc (IDCC) 2024 Q1 法說會逐字稿

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.

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 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 sections 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.

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 opportunities that we have identified and expect to achieve through the rest of the year. Today, I'm pleased to share that we have made significant headway in achieving our goal and reconfirm our 2024 annual guidance.

Revenues 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 IoT licensing program.

Through the quarter, we have made great progress on multiple fronts of our business. We signed seven 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 court 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's TV business. The agreement covers patents under our joint licensing program with Sony and InterDigital's own patents across our range of video and WiFi technologies. Samsung is the market leader in TV, and this agreement highlights both the value of our video and WiFi innovation and the growth we continue to build in licensing the consumer electronics sector.

I want to emphasize that this new agreement is separate to the Samsung smartphone license. We announced at the start of 2023 that Samsung and InterDigital have agreed to renew the licenses for their smartphones to our portfolio. The final terms of the smartphone license, including how much Samsung must pay us, atre still the subject of an arbitration hearing, which is on track to be held this summer with a final resolution expected by end of this year.

The seven new agreements that we signed in the first quarter reflect the momentum that we continue to see across all of our licensing programs, and our strength in consumer electronics and IoT, in particular. Our revenue and recurring revenue in Q1 from our CE and IoT 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 three years to almost $2.7 billion, giving us an incredibly strong base from which to drive new long-term agreements and pursue additional growth opportunities.

Staying on licensing, we are making significant progress in our efforts to ensure that we receive fair 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 infringes one of our 4G and 5G standard essential patents, that InterDigital had acted in a FRAND manner, and that Lenovo is an unwilling licensee who engaged in hold-out and should therefore be enjoined in the German market. This injunction means that Lenovo will be prohibited from selling 4G- and 5G-compatible devices in Germany.

Also, as part of our dispute with Oppo, a German court also ruled that Oppo infringed InterDigital's 4G and 5G standard essential patent-in-suit, that InterDigital has acted in a FRAND manner, and that Oppo is an unwilling licensee. The court also awarded an injunction against Oppo.

In India, in another trial against Oppo, we received yet another positive decision as 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 its delay tactics during our negotiations and ordered that the trial be concluded before end of the year.

We are encouraged by these recent developments 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 a long-term license through amicable negotiations, but we are ready to enforce our patent rights if necessary.

Our strength as a foundational innovator in critical technologies continues to underpin our progress. Our research teams have long been recognized as world leaders in the development of wireless and video technologies, and increasingly, our leadership in AI is coming to the forefront.

In Q1, one of our senior engineers was appointed to head the AI and machine learning standing committee of IEEE, the standards development organization which leads the evolution of WiFi.

At this year's Mobile World Congress in Barcelona, we showcased two demonstrations which had AI at their heart. One was in partnership with Keysight which used a neural network developed by our engineers to demonstrate the application of AI in a 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 haptics technologies in a specific use case of e-sports and showed our increasing leadership in integrated sensing and communication, an emerging technology which will be a pillar of 6G.

Our research successes 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 patent applications with the 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 our innovation and patent footprint gives us an excellent platform from which to drive further growth in our existing licensing programs and in greenfield opportunities such as cloud-based video services. And with our track record of delivering new license agreements with leading manufacturers, such as Samsung, we believe we're in an excellent position to reach our financial targets for the year.

With that, I will hand it over to Rich to talk you through the numbers in more detail.

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 two years. When combined with catch-up revenue of $160 million, CE and IoT total revenue 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 re-use 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 paid our first dividend in 2011, we have now returned approximately $1.8 billion to shareholders through share buybacks and dividends. In that time, we have 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 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 4th, the William Blair Growth Stock Conference in Chicago on June 4th, the IDEAS Investor Conference in New York on June 12th, and the Roth 10th Annual London Conference on June 26th and 27th. 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.

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

Thank you. (Operator Instructions) Arjun Bhatia, William Blair.

All right. 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? And is there a possibility that prices are going up? And maybe how do you -- or your royalty rate is going 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 recurring -- 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.

Hey. Good morning, Arjun. Thanks for the question. So on the Samsung smartphone arbitration, as we have discussed in the prior call, Samsung has been a customer for the smartphone side for actually a long time since 1995 and before they released the very first Galaxy phone.

The last contract was a 10-year agreement, which powered, 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 expired December 31, 2022. And both parties have 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. And we are, frankly, well into the process. The panel has been assembled and a hearing has been confirmed this summer and will be decided before end of the year as our current projection.

So regarding valuation, for multiple reasons, we feel very confident that the value of our portfolio has gone up, that Samsung has 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.

Yeah. Thanks, Liren. Yeah, 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're just estimating what the ultimate outcome will be on a conservative basis. But because of the conservative nature of the GAAP requirement, we're certainly hopeful that we'll 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. And of course, we're working to to renew.

Yeah, perfect. All right. Thank you. One more, if I can.

It was interesting to hear the injunction against Lenovo and Oppo. And I'm curious, in the past, Liren, to the extent you have experience with this injunction. How do you think they -- or how have they maybe changed the behavior of some of these manufacturers in the past?

I mean, is that enough of an incentive to bring them to the negotiation table and say, hey, we want to strike a deal? How punitive can those injunctions be for these companies to get them to strike a deal with you?

Yeah. Hey, Arjun. As we announced in a separate press this morning, the Court in Munich has issued that decision. In that decision,

Basically the court decided that InterDigital has consistently acted in good faith under the FRAND obligation at all times. The court also said Lenovo had systematically acted in holdout and frankly is not in compliance of their FRAND obligations.

So as a result, the court has issued the injunction of a patent that's standard essential for both 4G and 5G. And unless something happens, Lenovo will be prohibited from selling devices with those features in the German market.

Regarding how the company may behave, I don't want to speculate on Samsung -- Lenovo, how they will proceed from here. All I can say is Germany is obviously a very major market, and this injunction applies to a pretty wide range of devices actually beyond just cellphones.

So I hope, with this decision, that Lenovo will come back and, frankly, take a license under FRAND and fair terms from us. And I'm definitely hopeful.

All right. I appreciate the color. Thank you.

Thank you Anja Soderstrom, Sidoti.

Hi. Thanks 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.

Yeah. Hey. Good morning, Anja. This is Liren. So we have multiple paths. On the smartphone side just for example, we have Oppo negotiation. We have Vivo, as Rich just mentioned here, Huawei has expired, which we are bringing a renewal discussion with them. And then Lenovo was licensed through the UK court decision for the cellular side until end of last year. Now they are unlicensed.

As we announced this morning, we recevied court injunction 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 the TV space. We are working diligently on the next multiple layers of TV vendors, including 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, there will be a positive true-up.

Okay. Thank you. And in terms of Huawei, how constructive are those discussions, given you fairly recently, signed an agreement with them?

Yeah. Our Huawei negotiations are proceeding according to plan. And our last agreement expired at the end of the year. And frankly, Huawei's business has gone through a certain amount of ups and downs. So we are currently in negotiation with them, and we are hopeful that we'll get a long-term deal done with them.

Okay. Thank you. That was all for me.

Scott Searle, Roth MKM.

Good morning. Thanks for taking the questions. I apologize in advance. I was on the call late, so if you've 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 could you walk us through the milestones, the time line, and the cost element?

Yes. Hey, Scott. Good morning. So we have -- I'm not certain you were on the call when we were describing it earlier. So basically, the court has decided that we have acted in FRAND manner consistently, all the time; that Lenovo has systematically conducted in hold-out and they are not in FRAND obligation; and they are frankly an unwilling licensee. So as a result, the court has issued an injunction against them that covers devices with 4G and 5G features built-in.

So there will be some procedure, Scott, which we are frankly working through. And our intention is to enforce this injunction as quickly as we can. And you also correct that this is what they call a first instance decision, which is automatically appealable. So I don't want to speculate on Lenovo's legal strategy, but that's frankly up to them.

Got you. 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?

Yeah, Scott. This is a case that -- this is a German patent and it's a German court. So the decision will be limited to the German market. As you are aware, Scott, we do have other cases, including our case in ITC in the US against them in different technology areas. But this particular decision is Germany only.

Got you. 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, time lines, in terms of how that's evolving and the impact in '24 and '25?

Yeah. Hey, Scott. We do view the video cloud service licensing as a very, very good greenfield opportunity. We are proceeding according to plan. We believe they're very valuable IP assets and, frankly, very strong technology leadership.

Regarding a 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.

Got you. And lastly, if I could, you've maintained the guidance range for the year of $620 million to $670 million. I'm wondering if some things have moved around in terms of higher probability versus lower probability? I'm not sure if you can address it, but just -- 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.

Yeah. Hey, Scott. As I said in our 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 paths to reach that result.

And now, we have delivered, frankly, a resounding strong quarter in Q1 for both the top line but also adjusted EBITDA and EPS and especially in the record-breaking CE and IoT space. So we feel very good about where we are, and we are on track to deliver the result. And as of now, we are not able to predict the rest of the quarters and we -- other than we feel very confident about our ability to deliver for the year.

Great. Thank you.

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

Thank you, operator. Before we close, I'd like to thank all our employees for their dedication and contributions to InterDigital as well as our many partners and licensees for our outstanding start to 2024. Thank you to everyone who joined today's call, and we look forward to updating you on our progress next quarter.

This concludes today's conference call. Thank you for participating, and you may now disconnect.