InterDigital Inc (IDCC) 2021 Q1 法說會逐字稿

Good day, and welcome to the InterDigital First Quarter 2021 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Tiziana Figliolia. Please go ahead.

Good morning to everyone, and welcome to InterDigital's First Quarter 2021 Earnings Conference Call. I'm Tiziana Figliolia, Vice President of Finance and Investor Relations. And with me today's meeting are Liren Chen, our President and CEO; and Rich Brezski, our CFO. Consistent with last quarter's call, we will offer some highlights about the 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 section of our 2020 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.

Thanks, Tiziana. Good morning, everyone, and thank you for joining us today. I hope everyone is doing well despite of the pandemic. This is my first earnings call as InterDigital's CEO, and I'm very excited to be here. I have had the pleasure to meet some investors and analysts, and I look forward to meeting as many of you as possible in the coming months.

Before I get into a company update, I want to take a moment to acknowledge the contributions of my predecessor, Bill Merritt, who drove incredible value creation during his 25 years with InterDigital. Bill continues to be very helpful during my transition. I owe him a debt of gratitude for his leadership over the years as well as the smoothness of the CEO transition. I want to thank Bill for his contribution and wish him the best of luck for a well-deserved retirement.

I've been with the company now for 1 month, and the on-boarding has been proceeding very well. My focus for the past month has been getting up to speed, reviewing our organization's capabilities and beginning to work with our executive teams on the company's top priorities.

Prior to joining InterDigital, I was impressed by the company's ability to conduct fundamental research in critical area of wireless communication, multimedia and AI machine learning. So as I come up to speed with the various working streams, I'm even more impressed with the dedication of the employees, the breadth and depth of our patent portfolio for 3G, 4G, 5G, multimedia and AI machine learning space and our position as a thought leader in the licensing industry. Our efforts to provide transparency into our rate structure and patent portfolio are industry-leading. Our ability to influence regulatory and legal changes that could significantly improve the licensing environment is quite remarkable.

Let me begin with R&D. R&D is the foundation of everything at InterDigital. More than 60% of InterDigital's employees are engineers and more than 90% of our engineers are inventors, which is truly amazing. Our performance over the past year, despite of COVID, has been very strong. To give you just one example, in 2020, a year where we moved to remote working as early as March, our inventors has created about 25% more inventions related to 3GPP wireless standard compared to the year before.

In the past quarter, we have demonstrated a 100 gigabit per second encoder/decoder technology, which is a huge achievement that we believe will open the door to 6G as part of the EPIC Consortium. We were also selected by ETSI to launch and continue to improve their multi-access edge computing sandbox, which is a great validation for our R&D capability and the tremendous relationship we have built with that very important organization.

On the video side, our success with standard-focused R&D is increasing with each new generation of standards and provide a great platform for value creation in smartphone, consumer electronics and other assortment of our technologies. That includes the completion of VVC standard in December of 2020, which was ratified by ISO in January of this year.

InterDigital has played a pivotal role in the VVC standardization project since its inception and held leadership position in multiple working groups. VVC improved over current generation codec performance by 50% and support enhanced features to enable 8K video in TV, smartphones and new applications like cloud gaming, immersive and 360 video content distribution. In summary, it's proceeding very well in R&D area.

Now let me turn to licensing and litigation. We concluded 3 new license agreements since the end of Q4, including our recently announced renewal with Sharp, a company that had been a licensee for more than 20 years. We continue to make progress with other current unlicensed companies. I'm impressed with the experience and tenacity of our licensing team that they engage with these customers. I believe the combination of our strong IP position, our dedicated licensing team, business relationships and, where needed, litigation will drive our licensing success over time.

On the litigation front, we have provided detailed updates in our 10-Q filing, so I would refer you to that document for any specifics. I want to briefly draw your attention to our cases in India and Germany, where courts are emerging as pragmatic and logic defenders of IP right. In India, the Delhi High Court recently made its interim anti-anti-suit injunction against Xiaomi permanent and in doing so ordered Xiaomi to deposit with the court for our benefit any fines that may be levied by the Wuhan Court related to its anti-suit injunction.

In Germany, with the Munich Court recently also affirmed its anti-anti-suit injunction against Xiaomi, it included positive statements that Xiaomi has acted as a unwilling licensee. Following that decision, we filed 3 patent infringement case in Germany against Xiaomi related to 3G and 4G cellular handset. It is important to note that even where we have resorted to litigation to help conquer the license, we remain committed to maintaining a continued dialogue with our potential licensees.

Finally, I'm happy to report that we have taken enormous strides with our ESG program. Three weeks ago, we published our first sustainability report, which documents our aspirations and our commitment to all our stakeholders to continue to progress over time. We are conscious of our responsibility to create value for the shareholders and to act in the best interests of our employees, communities and customers.

As a company, we have a proven track record of acting to stay current with good governance practices. And with our technology, we strive to solve complex challenges that will help build a more equitable and sustainable world.

With that, let me turn it to Rich.

Thanks, Liren. I'm pleased to report our first quarter results improved in almost all aspects from the first quarter of last year. In comparison to first quarter 2020, our revenue is up more than $6 million. Our expenses are lower by more than $1 million. And we reported diluted EPS of $0.18 per share in the first quarter 2021, compared to break-even performance last year.

More importantly, the results continue to validate the operating leverage in our model as an 8% increase in revenue, coupled with reduced expenses, drove operating income to more than double the Q1 2020 level. We believe this general relationship can hold, even with the significant top line growth we are working to achieve.

As Liren mentioned, our progress on the licensing front included 3 new license agreements since the beginning of this year, including a new CE license. This new license contributed to more than $7 million of CE revenue in the quarter, including almost $4 million of recurring revenue. This, again, is progress and has pushed our total CE revenue since we acquired the Technicolor licensing business to more than $50 million.

I'll note that, over the last 8 quarters, we have now signed 5 CE licenses and another 4 mobile licenses that included related HEVC patents. In addition, we have included 3 of the acquired HEVC patents in our litigation with Xiaomi.

Liren also spoke to progress in our litigations. I'll add to his comments by noting that we've been able to move these cases along while maintaining litigation costs at a reasonable level. Of course, as I always say, litigation is an investment, and we remain prepared to invest what is necessary. We look forward to continued progress in these cases and currently expect some increase from our current litigation expense levels as the year progresses.

We ended the quarter with a very strong balance sheet, including $470 million of net cash. Let me take a moment to explain the change in this figure since year-end. As has been typical, we use cash in our first quarter operations. In addition, we paid our normally quarterly dividend, and we resumed some share repurchase activity toward the end of the quarter.

But the biggest sequential change in our net cash balance was the increase in debt we recognized as a result of our early adoption of new accounting pronouncement for convertible debt. You can find the details in the 10-Q we filed this morning. But at a high level, this does not represent new financing, but we now carry the debt at roughly par value, and we no longer report a noncash charge to accrete the debt up to par for the conversion feature.

In closing, we believe our solid results and strong balance sheet have us well positioned to make further progress on our goals over the balance of the year.

With that, I'll turn it back to Tiziana.

Thank you, Rich, and thank you, Liren. We will now open the call for questions.

(Operator Instructions) We'll take our first question from Ian Zaffino with Oppenheimer.

Good comments on the CE side. I just want to ask, as far as the CE, were they all part of a packaged renewal on the mobile side with CE? Or were these independent? Or maybe what was the mix? Just trying to figure out how you're going to market on the CE side.

Yes. So Ian, I talked about 2 kinds of contributions from the acquired Technicolor assets. One, first, I mentioned the CE licenses where we're licensing consumer electronics products. So that's -- now we can bring some of our legacy assets to bear in those licenses as well, but that's primarily driven by the acquired portfolio.

On the mobile side, there was a couple of deals I mentioned since we -- I think the number was 4 -- since we -- over the last 8 quarters, where they're mobile deals, but included video coding assets we acquired from Technicolor because that video coding is relevant through the mobile devices.

Okay. Got you. And then just a few others here. I know there's a rate setting case going on in China for Xiaomi. Where are we with that? And how do we think about that vis-à-vis the case in India right now?

Ian, this is Liren. So you are correct, there's a case in Wuhan in China where Xiaomi has requested the court for global FRAND redetermination. That case is still in fairly early stage. And so it's -- we don't want to speculate on what the court may or may not do in what time frame. But it is important to note that we have a very comprehensive global strategy. So if you look at the case in India, as I covered, and I was also summarizing detail in our 10-Q filing, so it's proceeding really, really well.

And we also have a case in Germany, actually multiple cases in Germany, where the court has found Xiaomi to be an unwilling licensee, and we have followed by 3 individual patent cases after that. So it's important to look at everything in the global context. And if we have more updates from the case in China, we'll obviously provide timely updates.

Okay. And then the final question would be on buybacks. I think you have like $70 million or something, at least at the beginning of the quarter. You bought back some stock. I take it maybe be a little bit more aggressive, but was that just because the stock started to move up? And is that why you kind of didn't really put the pedal to the metal on buybacks? Or is there something else going on?

Yes. I think, Ian, we're always looking to balance the strategic benefit of a strong balance sheet and the optionality that provides with disciplined and responsible return of cash to shareholders. So that's always been the case. That remains the case.

We picked up some activity towards the end of the quarter there. But beyond that, I'll let our history on this topic speak for itself rather than get into specific details about the programs.

(Operator Instructions) We'll take our next question from Scott Searle with ROTH Capital.

Liren, congratulations, and welcome to your first conference call. Rich, I'm not sure if I heard the number, but did you give a CE number or a Technicolor number for first quarter contribution?

Yes. I said our total CE revenue was about $7 million, with about $4 million of that being recurring.

Got you. Okay. So we had some catch-up licenses in there in terms of some of the new licensees?

Yes. Yes, if you look at our financial metrics, you'll see that we had some past sales. I think that's discussed in the Q as well.

Got you. And Rich, in terms of OpEx, I know it varies from quarter-to-quarter given the patent administration cost, but how should we be thinking about that over the course of this year? I know you've been looking at tightening things up. And maybe coupling that, Liren, you're having been in now for a relatively short period of time, but how are you thinking about the current expense structure? Are there things that you're looking at in terms of optimizing that as we go forward.

Yes. So I'll start, and then allow Liren to comment afterwards. So on the first part of your question, I mentioned on the call or in my script that we saw some pretty reasonable expenses levels in litigation in the first quarter. But with the cases that Liren are already referenced, we do expect that to go up a bit as the year progresses. Don't have any more specific comments at this point. But certainly, we'll provide some updates there as we move along.

And we have been working for a long time, as you know, to kind of bring expenses and the portfolio cost down following Technicolor acquisition. We think that we got through most of that work last year. And really now, it's just the ongoing process to make sure that the portfolio and our operations in general are operating efficiently.

Scott, this is Liren. So regarding the overall strategy as well as the cost structure goes, so as I said earlier, this is my month 1 of joining InterDigital. I have done a lot of internal reviews as well as look at various different aspects of the high-priority issues, organizational capabilities. I'm overall very impressed by what we are doing on the R&D side as well as the licensing area and the depth and breadth our patent portfolio is obviously quite impressive. So at this moment, and I think we are in very good shape strategy-wise, execution-wise.

And then -- but in the meantime, though, I do want to point out I'm a strong believer in continuous improvement. So as I learn more of the company, where it's different aspects, I'm sure we'll find this to do better in probably a number of different areas, and then I'll work very closely with our exec team to improve and to add further things and where it's appropriate.

Okay. Great. And Liren, if I could, I know you had some comments as related to Xiaomi both in India and Germany, but I've not gone through the full filing online. Could you take us through the highlights and time lines? What we should be expecting in the near to intermediate term in terms of how those cases progress? And kind of what the ultimate time line here is to get some of those through?

Because it sounds like, from an India standpoint, there's an injunction potentially on the table in the not-too-distant future. What are the milestones really to get to that and enforce that? And then the time line as it relates to the -- and the key milestones for the German proceedings?

Yes. So Scott, so basically, what I was pointing out in our early discussions as well as in our 10-Q filing here, we had pretty major good outcomes from the India case that was really ruled verbally 2, 3 days ago. So where the judge has determined the interim anti-anti-suit injunction that was awarded to us earlier, now it's turning to permanent injunction against -- permanent anti-anti-suit injunction against Xiaomi while the case is pending the court review in India.

In addition, Xiaomi is also ordered to restrain from enforcing the ASI in Wuhan. And if the Wuhan Court fine InterDigital, then Xiaomi is required to deposit whatever fine amount the Wuhan case court issued against us into the India court, where we will essentially be able to access the same fine transfer to InterDigital. So that's the essence of the caseload in a nutshell.

So regarding time line here, it's very difficult to predict the precise time line. And in China, or in India or in Germany. And the German case, let me touch on it a little bit more here. Essentially, the court has determined Xiaomi to be an unwilling licensee in the prior decision and then we followed it by filing 3 new patent cases. Those cases will go through its patent trial. If they are found to be valid and infringed, then we expect the court to issue its decision regarding to the injunction and other things. But it's really difficult to predict the exact precise timing for those cases.

Very helpful. If I could just a quick follow-up on the India proceeding then. Given -- so if you're moving to a permanent injunction and they're required then to basically, I guess, sounds like place fines in escrow, what are they basing that fine amount on? I'm kind of curious in terms of how they set that rate. And do you know how many units Xiaomi shipped into India in 2020?

Okay. Scott, I want to make it very clear. Maybe there's a little bit of confusion on this. So when we saw make it permanent, we mean the anti-anti-suit injunction order. And while the case is pending and the previous decision was made in interim. Now the court has made that anti-anti-suit injunction against Xiaomi to be permanent while our case is pending review at the India court. So that's why I want to make sure it's clear.

Second thing is this discussion about deposit finance into the account. It's also specific really to the Wuhan Court's earlier decision against InterDigital, where the court has threatened certain amount of fine to us. And -- but that Wuhan Court really has not enforced that fine. And in this context, the Indian court basically decided, if the court in Wuhan enforcing a fine against InterDigital regarding to its anti-suit injunction decision, then Xiaomi is required to deposit fine into the India court very essentially to make it whole for InterDigital. I hope that's clear.

That is. And lastly, if I could, I'd be curious as to your thoughts in terms of the strategy on the IoT front. There currently are a couple of joint ventures where the company is pursuing into certain markets like metering and auto. I was wondering your thoughts from a high level in terms of the opportunity for IoT and how you approach that market going forward.

Yes. So as you pointed out here, InterDigital has a couple of participations in various different platforms for IoT plays. That covers automobile and smart meters. And we are still going through internal on-boarding process here. I currently do not have any updates on the strategy and everything is going well with the current platform. As I'm forming my strategy, as I learn more, if there's any updates, we'll update you in the future discussions.

Next question from Matthew Galinko with Sidoti.

I'm on for Anja this morning. I think you called out 4 wireless renewals that included Technicolor assets to date. How did the economics play out in general relative to the uplift you had anticipated when you acquired Technicolor?

Yes. So a number of those deals were fixed-priced agreements. So at the end of the day, you're negotiating for a sum. What I would tell you is that all the deals were consistent with our rate schedule. So -- and that includes all aspects of technology that we bring to the deal. So I'm packing it and saying it's this much for that or that's -- it's not calling out that way. It's essentially a negotiation for a total fixed amount.

Got it. All right. And I guess an accounting question here. I guess I'm thinking through it on the fly, but in terms of the new accounting policy around the convertible debt, was there a material impact to the P&L quarter-to-quarter on the interest line?

Yes. So the way that you book the convertible debt beforehand was the -- you try to estimate the value of the conversion feature that's embedded within the instrument. That's what enables you to pay a lower coupon. So that is treated as a no ID and then you accrete it up to par over the life of the debt.

So under the new rules, which we early adopted January 1, you no longer do that. So you're basically carrying the debt par, so you'll see it beginning of the year adjustment to retain earnings to bring that up. And you see that, as I mentioned, the value of the debt on the balance sheet is obviously higher as well. So that noncash accretion, in effect, the noncash interest expense goes away, which was somewhere in the neighborhood of $3.5 million to $4 million impact on the quarter. But those details you can see in the -- I think, in the footnote.

Perfect. All right. And then last question, just around the CE licensing strategy. I think you called out about $50 million generated since the Technicolor deal closed. Where do you think we are? What inning are we in there? And do you see that accelerating as we move through '21 into '22? Or kind of what are the factors that are influencing that pace?

Yes. So I think the encouraging thing is that we're signing deals there, further validating the rates that we charge within that market. And maybe Liren has other comments on that. But in terms of what inning we're in, I mentioned there's $4 million roughly of recurring revenue in the quarter.

Now mind you, the CE business is a little bit more volatile quarter-to-quarter. But that implies $60 million annualized. That's a little more than 10% of the overall goal there. So it's still early innings. And most of the larger vendors are unlicensed at this point. So the important thing is to transition from getting these smaller deals done to getting the medium and larger deals done. That's what's really going to move the needle there.

Yes. So this Liren. The only thing I would add is through the Technicolor acquisition, we have acquired very valuable assets related to HEVC as well as the next-generation VVC, and we believe those assets will be really valuable, not just for the CE market as well as the smartphone mobile use case. So we believe those assets will come in play for the core licensing side as well.

Our next question comes from Derek Soderberg with Colliers Securities.

I'm sort of piggyback off an earlier question on pricing, but maybe a bit more high level. Is there anything having an impact on the rates you're charging today for new agreements, just given some of the price increases we're seeing broadly? Do you have any plans to change the royalty rates generally, that might be abnormal compared to years in the past? Any thoughts on the pricing environment would be helpful.

Yes, Derek. So what I want to go back to is, as Liren mentioned in his remarks, we have among, if not the most transparent rate structure in the industry. And we came out with that and published that a little more than a year ago, and there really hasn't been any changes to it. We feel good about that. And that's what we're going to market with.

Got it. And Liren, congrats on the new role. I'm just sort of curious if you could share some of your top priorities. I know it's still kind of early in the game for you. Just anything you're targeting this year, if that differs at all from your predecessor, maybe as it relates to targeting various handset OEMs, fixed versus variable agreements. And then if you could just share any of your -- some of the key opportunities that you're targeting this year, that would be great.

Yes. Derek, this is Liren. Thank you. So as I mentioned earlier here, we are executing exceptionally well despite also it's a very difficult environment for R&D, and we have very, very valuable patents cover a super important area of technology, of 5G, video and AI machine learning. And those technology has become increasingly more important with the pandemic, with potentially post-pandemic remote working, remote learning, remote education opportunities here. So we feel very good about what we have.

And we also have a very, very capable licensing team who are driving really hard. We obviously still have some pretty major opportunities in terms of unlicensed account. So it's obviously an opportunity and a priority for us to approach those account and through either business negotiations or when -- if we have to, through the ongoing litigations, to drive closure to those accounts. So those are some of the top priorities.

As I'm going through my review for the company-level priorities, I'm sure there will be new opportunities, new area for improvement. And this also will be important thing for us to keep on driving the operational efficiencies, all these different areas.

That concludes today's question-and-answer session. Ms. Tiziana, at this time, I will turn the conference back to you for any additional or closing remarks.

Thank you, Victoria. Liren, would you like to make any final remarks?

Yes. I just want to say thank you to all the employees for their dedication and also keep on executing in a very, very difficult time. I'm honored and excited and definitely humbled by the opportunity to lead the company into the next chapter. Thank you.

Thank you, Liren, and thanks to everybody for joining us today. We look forward to giving you an update next quarter.

This concludes today's call. Thank you for your participation. You may now disconnect.