InterDigital, Inc. Q1 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the InterDigital First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's prepared remarks, there will be a question-and-answer session. 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 2023 Earnings Conference Call. I am Raiford Garrabrant, and I recently joined the company as Head of Investor Relations. With me on today's call are Liren Chen, our President and CEO; and Rich Brezski, our CFO. With this being my first earnings call with the company, I would like to express how excited I am to be part of the team and for the opportunity to work with all of you in the investment community going forward. 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 now turn the call over to Liren.

Thank you, Raiford. Good morning everyone, and thanks for joining us today. Despite challenging market conditions, this was another excellent quarter as we continue to make good progress on licensing with key customers. We achieved our best quarter ever in terms of new invention disclosures and maintained our trend of returning capital to shareholders. On our last call, I expressed our belief that the company was in a strong position and our first quarter results reinforce this. We doubled our revenue to $202 million and nearly tripled our adjusted EBITDA to $155 million. I'll let Rich discuss the details, but I want to emphasize that these results are a reflection of our outstanding performance across the business. On the licensing front, our agreement with Samsung, announced in January, is progressing on schedule. Samsung has agreed to license our portfolio beginning January 1, 2023, with the arbitration process determining the monetary terms. We are optimistic that this new license with Samsung will reflect the value of our portfolio and strengthen our long-term partnership that has lasted over 25 years. Additionally, I want to update you on our KCS with Lenovo. This litigation involves multiple trials in the UK and has shown Lenovo's infringement of our patents, underscoring the importance of our innovations to the mobile industry. In three trials, including two heard by the UK's Court of Appeal, our patents were confirmed as valid and essential, and infringed by Lenovo. Recently, the UK High Court ruled that Lenovo must pay almost $140 million for a license to our cellular patents through the end of 2023, including full payment for all past cellular-enabled device sales. The court’s ruling is designed to deter licensees from delaying or resisting upfront licenses. We recently had a hearing on issues such as interest and costs, and we await the judge's final decision regarding our next steps. The favorable outcome in our Lenovo case has positively influenced our litigation with OPPO as well. A US judge has expedited our dispute, focusing on the licensing payments OPPO owes us, given that our patents have already been validated and found to be essential to various wireless standards. We are pleased that we are demonstrating the strength of our portfolio in both the Lenovo and OPPO cases. As mentioned earlier, we are committed to defending our intellectual property and ensuring a fair return on our investment in globally adopted innovations. Our recent licensing success puts us in a strong position and enables us to continue returning capital to shareholders through buybacks and dividends. Rich will share more on our recent share repurchases, but since 2019, we have returned over $700 million to shareholders. Our licensing achievements are based on the quality and scope of our innovations, and we believe our innovation pipeline is stronger than ever. In Q1, we filed our highest number of invention disclosures in a single quarter, indicating how our engineers are converting foundational research into new breakthroughs. We also recorded a high number of new 5G-related filings, highlighting the ongoing progression of our advanced 5G research and standardization globally. Our success in patenting our innovations was recognized in a recent European Patent Office report, where we ranked among the top 50 recipients of European patents in 2022. This showcases the global reach of our portfolio, now totaling around 30,000 granted patents and applications. Our innovations were also highlighted at Mobile World Congress in Barcelona, where we engaged various stakeholders to discuss our research, including how AI and machine learning can enhance 5G networks and the role of video innovation in creating a more immersive connected experience. Our presence at MWC illustrated how our innovations are redefining connectivity and potentially opening new licensing opportunities. Last month, we welcomed Skip Maloney as our Chief People Officer. With 25 years of industry experience, he will aid in developing our workforce to meet our strategic goals. I am also pleased to announce the nomination of former TiVo and Xperi executive, Samir Armaly, to our Board of Directors. If elected, his significant licensing experience and insights into the video space will help us expand our licensing programs into new products and services. Before I turn it over to Rich, I want to reflect on significant milestones for the wireless industry. Last month marked the 50th anniversary of the first mobile phone call, shortly after InterDigital was founded. Since then, our inventors have been crucial in developing foundational innovations that support each mobile technology generation for connected devices and services. We are proud of our role over the past 50 years and look forward to continuing to provide value to the industry and consumers in the future. Now, I'll hand it over to Rich.

Thanks Liren. Our exceptional first quarter financial results were driven by Samsung and Lenovo. As we discussed during our last call for Samsung, we are recording revenue at a level consistent with the revenue we have recognized from our patent license agreement that expired on December 31, 2022, which we believe is a conservative estimate. This is consistent with Generally Accepted Accounting Principles and reflects the fact that the binding arbitration with Samsung will define a patent license agreement that is effective beginning January 1, 2023. We believe it is likely that the arbitration award will exceed the conservative revenue we are recognizing and require a catch-up at that time. As a reminder, we expect to receive the arbitration award around mid-2024. Catch-up revenue from Lenovo brought total revenue for the quarter to $200 million, doubling our top line from Q1 2022. Together with our operating leverage this more than tripled our non-GAAP EPS. Our adjusted EBITDA for the quarter of $155 million equates to a tremendous 76% adjusted EBITDA margin. This is a 21-point improvement from the 55% adjusted EBITDA margin we delivered in the first quarter of 2022. As discussed in the last few calls, we believe adjusted EBITDA is a great metric to measure the ability of our business to generate cash over time because it adjusts for timing differences in cash collections under our fixed fee agreements. 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 expands our margins and drives our cash flow. Our recent success has driven our cash balance to $950 million as of March 31. In addition, thanks to the significant agreements reached over the last few quarters, we expect an additional $1.4 billion of cash receipts under current agreements. In the first quarter of this year, we continued our long-standing practice of returning cash to shareholders. We started out the year by announcing an increase to our share repurchase authorization to a total of $400 million. We then executed a $200 million Dutch tender and repurchased a total of 2.7 million shares. After a brief cooling-off period, we got back in the market and through the end of April, we have repurchased roughly another 350,000 shares for $25 million. In all, since I spoke to you in February, we have reduced our outstanding share count by more than 10%. And with $175 million left on the current buyback authorization, we're not done yet. We look forward to additional share repurchases and another strong quarter in Q2. We expect Q2 recurring revenues will once again be around $100 million. We expect a sequential decrease in operating expenses. And finally, we expect an adjusted EBITDA margin of about 50%. Longer term, our goal remains to achieve and sustain a 60% adjusted EBITDA margin on $650 million of recurring revenue from device licenses with additional upside from licensing new products and services. With that, I'll turn it back to Liren.

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

Our first question comes from Tal Liani with Bank of America.

Hi guys. Good morning. How do I think about the nonrecurring part? There was a positive surprise of nonrecurring income? What are the earnings? Did you calculate, or can you tell us, what are the earnings without the nonrecurring part? And how should we think about the nonrecurring part going forward?

Yes. So, Tal, the nonrecurring part is driven by the catch-up on Lenovo, coming from the judgment this quarter. So we've clearly disclosed the recurring portion of the revenue at $101 million and the nonrecurring portion being the difference. As far as I don't have offhand bottom line impacts off of that. But the way to think of it, as is the case with other nonrecurring items, is that it's not scheduled to recur next quarter, as is often the case when we have nonrecurring revenue related to prior infringement of our technology. So, if you look forward to Q2, we guided to $100 million to $104 million of revenue, of which I said about $100 million is expected to be recurring.

Got it. And when you look at this quarter, also the recurring revenues were better than expected, about $5 million better than expected. I know there is no correlation, but I still want to ask the question. Qualcomm reported just last night and they're talking about major issues, with handsets still declining, still China not recovering. On the other hand, you have good numbers. I know your contracts by and large are not hitting tight, and they're more fixed. But can you talk to us about the environment? And how could it impact your recurring revenues?

Yes. Let me first address where our recurring revenues landed this quarter compared to our guidance, and then I will allow Liren to discuss the environment. As you mentioned, a significant portion of our revenue, approximately 90%, is derived from fixed-fee agreements, primarily on the mobile side. This means we are not particularly affected by market fluctuations due to the nature of our agreements. However, we do have a variable component based on units, and there were some adjustments made this quarter. We estimate the variable portion each quarter and make true-ups once we receive the report, usually within 45 days after the quarter ends. This contributed to some of the positive variance from our guidance. The other factor was the recurring revenue from Lenovo.

Yes. This is Liren. Good morning. So, regarding the macro environment, there's clearly some macroeconomic headwinds that I think every vendor in the industry is facing. Back to Rich's point, due to our fixed license agreements for the existing licensees, there's really no impact. For the renewal discussions, there's some impact regarding the timing and some near-term headwinds. But keep in mind, when we negotiate for our renewal agreements, generally those are longer term, roughly five years. So, we are factoring in the projected recovery as well as future growth for various vendors. So I will say, there is some impact, but it's not very significant.

Got it. Thank you.

Our next question comes from Scott Searle with Roth.

Hi, good morning. Thanks for taking my questions. Nice job on the quarter guys. Also, I appreciate the restatements in terms of taking a pro forma look at the company. I apologize, I did get on the call late, but I wanted to go back to Lenovo. I know there's revenue recognition related to the UK litigation, but there's an appeal ongoing on that front. So, two questions. Has the cash been received on that front? I would assume not, and that's something that's pending, given the appeal process. And then in terms of the guidance for the $100 million to $104 million, is that including a recurring element from Lenovo going forward? And then, I have a couple of follow-ups.

Yes. Regarding the revenue from Lenovo, the decision was made this quarter and is subject to appeal. I discussed the revenue recognition analysis for Samsung, which has similarities to this situation under the rules established in 2018. This approach is very principle-based and focuses on the level of revenue you expect to recognize while considering the likelihood of any significant reversals. Therefore, it supports a conservative perspective, and revenue was recognized accordingly. The anticipated agreement with Lenovo aims to secure their licensing through the end of the year, so we did include a recurring element in our guidance for Q2.

Got you. But Rich, the cash has not been received. Is that correct?

Yes. It was a fairly recent judgment. So, I'll just let it stand there. And then there's some disclosure about future cash receipts in our 10-Q. And we noted that that includes anticipated amounts from both Samsung and Lenovo.

Got you. Okay. So, the same question in Samsung. Samsung then you guys had put out the guidance of expecting basically at a minimum where you had been in the past, but you're not necessarily receiving the cash at the current timeline until the arbitration is complete. Is that correct?

Yes, what I'll kind of go back to what I said without commenting on what we have or haven't received, we did include in our expectations for cash receipts any amounts that we expect from Lenovo and Samsung.

Okay. Fair enough. And then lastly, if I could go into the video and IoT side of the equation. It continues to ramp up. You had a run rate of almost $60 million a year now. Historically, you had talked about getting the old Technicolor back to $150 million plus. Is there any timeline that you would associate with that that we should be thinking about? I know it's really started to accelerate over the course of 2022. And also as part of that, the video services model I know you guys have been incubating a model and a plan on that front. How is that progressing? What should we be thinking about in terms of timeline that we would get more details and actually see that impact the P&L? Thanks.

Hey Scott. This is Liren. So, regarding our current run rate for video and IoT as you commented here, we feel we are doing very well. Referring to the $100 million to $150 million recurring target here, our public stated timeline is three to five years to reach that. On the service side, we have made a substantial amount of progress. The program is underway. We don't have any deals announced yet, but we are proceeding really well. In my prepared remarks, I did make a comment regarding the recent appointment of Samir Armaly, one of the most experienced executives at TiVo and Xperi, who has been nominated to our Board. If he's confirmed in our upcoming shareholder meetings, we believe he will add a lot of value to our Board, which will help us further expand the business in this field.

Great. Thank you.

Thanks Scott.

Our next question comes from Anja Soderstrom with Sidoti.

Hi, thank you for taking my question. So, yes, the recurring revenue growth. How should we think about that? What's going to be driving that the most? Is it going to be in the near term? Is that going to be the addition of the Chinese OEMs? Sorry that longer out in the future and we're going to think about the driving that recurring revenue.

Hey, good morning. This is Liren. Let me take the question and maybe Rich has something to add. So, on the recurring revenue portion in the near term, it will be primarily driven by our market. As you suspected, we have essentially two major customers. In addition to Lenovo, we've got OPPO and VIVO. We are making progress on those accounts. And we also have the growth of the IoT and CE business. Over a longer period of time, we do expect the OTC as well as the service revenue to kick in by longer term, I mean in three years plus.

Okay. Thank you. And in terms of the operating expenses, you've done some cuts and if I back out those one-time expenses, it seems like you did very well on that line. How should we think about the operating expenses going forward?

Yes, you're right. Anja if you back out the one-time expenses, we came in kind of at the low end of our guidance for Q1 and I did using that as a basis, okay? We expect a little bit of an increase when you back out the Q1 expenses, right? And that's driven by litigation. We have our arbitration kicking up with Samsung and then additional proceedings with Lenovo, and, of course, we have the cases with OPPO as well.

Okay. Thank you. That was all from me.

Thanks Anja.

That concludes today's question-and-answer session. I'd like to turn the call back to Raiford Garrabrant for closing remarks.

Thank you, Liz. I'll now turn it back to Liren for his closing remarks.

Thank you, Raiford. Before we close, I would like to thank all our employees for their dedication and contribution to InterDigital as well as our many partners and licensees. Thank you to everyone who joined us today and we look forward to updating you on our progress next quarter.

This does conclude today’s conference. Thank you for your participation. You may now disconnect.