Earnings Call Transcript - IDCC Q1 2022

Richard Lloyd, Communications Director

Good morning to everyone, and welcome to InterDigital’s first quarter 2022 earnings conference call. I am Richard Lloyd, Communications Director. And with me in 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 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 2021 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, President and CEO

Thanks, Richard. This was another strong quarter underlying our success in converting our current technology footprint into a strong recurring revenue base and in managing our cost base in a disciplined manner. Total revenue increased by 23% year-over-year to $101.3 million, while net income increased to $18 million, up more than three times from $5.6 million in the first quarter of last year. Rich will provide more details in his section. Through the course of this quarter, we demonstrated our strength as a leading technology innovator in wireless and video, expanded our patent portfolio, and several of our engineers moved into leadership positions within standard and industry bodies, and once again, added to our 5G licensees. I would like to start with 5G to focus on where we stand, closer to the company and in the wider context of the wireless industry. As you might be aware, sales of 5G smartphones have continued to gain momentum. And in January, the market reached a notable milestone with new 5G smartphone shipments surpassing 4G shipments for the first time, nearly three years after the commercial launch of 5G devices. We hit this milestone two years ahead of schedule compared to the 4G device adoption. This is a remarkable achievement for everyone involved. At InterDigital, we are proud of our foundational contributions to this latest generation that is proving such a success with consumers. While we have been working on 5G for many years, our engineers continue to contribute to the ongoing development of this exciting technology. In fact, in the first quarter, our 5G-related invention disclosures were the highest they have been in several years. In total, our cellular standard essential patent footprint for 5G compatible devices has reached nearly 10,000 patents and applications. This reflects not only the consumer investment we make in each generation of cellular technology but also our extensive work to create one of the largest and most valuable patent portfolios in the industry. This is an exciting time for those of us contributing to the development of 5G; not only are we seeing the commercial success of the initial releases of 5G, but we are also about to reach notable milestones next month. In 5G evolution, with the standard latest technology specification known as Release 17. I will not go into all the details here, but it is worth noting that Release 17 has been designed to broaden the rate of commercial adoption of 5G with features such as low latency communication for industrial IoT, and improved backhaul to better support the new radio using 5G. This and other innovations will further expand the federal communication beyond commercial smartphones, taking enhanced connectivity into new sectors and industries. InterDigital engineers made a wide range of key contributions to Release 17, such as features that improved communications in higher frequency ranges, using advanced MIMO and beam-forming. We also continue to add key technologies in multiple areas, including increased support for new verticals like automotive with V2X technologies. We expect to continue to be at the forefront of technology evolution, and I’m delighted to announce that in the first quarter, two of our engineers were appointed to leadership roles for the next release of 5G, Release 18, which is coming in 2023 and will be the first release known as 5G advanced. On the topic of industry leadership, in March, two of InterDigital engineers were elected to a senior leadership position on an advisory group within the International Telecommunication Union. The ITU is a highly influential body that helps develop technology standards across the communication industry to ensure that consumers can connect seamlessly. The selection of engineers to leadership roles like this not only reflects the high regard in which our innovators are held, but also the central role InterDigital plays within the industry. As much as I appreciate the external recognition our engineers receive, we feel it is important that we as a company also recognize innovation from our own outstanding inventors. In February, we announced our Inventor of the Year, rewarding a pair of innovators for their critical blend of research contributions, standard leadership and innovation impact in 5G wireless and video. Between them, they have developed more than 250 inventions in areas like dynamic bandwidth and beam switching for 5G and in the VVC standard in radio. It is because of the countless hours of work from engineers like them, and the deep investment we make to cultivate our foundational research that we are determined to ensure we receive a fair and reasonable return on our significant R&D investments. Our strength is increasingly being recognized, as evidenced by our new agreement with Sharp to cover our 5G patents. The agreement expands our previous agreement with Sharp that covers our 3G and 4G assets, and is the latest example of our increasing momentum to translate our compelling 5G innovation into new license agreements. As I have said many times before, the cellular, Wi-Fi, and video innovations that we have heavily invested in are some of the most important horizontal technologies. The great thing about our business model is a result of patented innovations integral to products and services across a number of verticals beyond just smartphones. This past quarter, we had one of our strongest quarters yet in consumer electronic licensing. And we expect additional success in automotive and IoT in the second quarter through both our direct and platform licensing efforts. Both have noted in the past calls, when companies using our technology and I’m waiting to sign license offer terms after licensing negotiations insist on continuing to infringe our IP, we are fully prepared to enforce our rights as a patent holder. Let me provide an update on two instances in which we have done so. In February, our trial to establish FRAND term for a global license with Lenovo concluded in London. We are very happy with the case we presented and are currently awaiting a decision. We remain confident in the strength of our technology, the quality of our IP portfolio, and the merits of our case. Moving on to the second instance. On the last call, I mentioned we filed a series of lawsuits against Oppo, which together with the Realme and OnePlus brands is a top five smartphone manufacturer. It is worth remembering that where we have had to litigate in the past, we have always concluded a license agreement on FRAND terms. Before I hand it over to Rich, I’d like to thank all our employees for their hard work. I’m consistently impressed by the dedication and expertise of all the InterDigital team and feel extremely confident that together, we can continue to execute on our strategy.

Richard Brezski, CFO

Thanks, Liren, and good morning, everyone. We continue the momentum we established in 2021 with another quarter of strong financial performance, including our third consecutive quarter with revenue exceeding $100 million, another sequential reduction in expenses and overall strong profitability. We closed our license renewal with Sharp late in the quarter, pushing our total revenue above our guided range, which topped out at $100 million. Recurring revenue alone was just shy of $100 million and benefited not only from our Sharp renewal, but also from more than $8 million of recurring CE revenue. Importantly, our CE recurring revenue has more than doubled from the first quarter of last year as a result of signing seven agreements covering the CE space over the last 12 months and strong underlying per-unit sales. Moving on to expenses, we reported a $15 million sequential decrease in operating expenses. Of this, $7 million was related to lower restructuring charges, with an $8 million sequential decrease across the balance of our expenses. On a year-over-year basis, our total operating expenses were relatively flat, but when you adjust for litigation and share-based compensation, our operating expenses in Q1 of this year were down by $7 million from the prior year. On the whole, we are pleased to see our efforts to reduce our expense base manifest in our latest results. Strong revenue and cost management leads to strong profit, and we are pleased to report $0.58 of GAAP EPS in the quarter, an increase of $0.40 from the prior year. We talked a lot about our strong business and financial performance in 2021. And looking at our year-over-year results for the first quarter of 2022 really shows how far we’ve come in this last year. Looking forward to Q2, we currently expect total revenue to come in between $114 million and $120 million, including recurring revenue of $97 million to $101 million. This expectation is based on license agreements in place at the end of Q1, and license agreements that we currently expect to be executed in Q2. We will provide additional details on these new agreements, which cover automotive, IoT and other products at a later date. But for now, I will note that we don’t expect any incremental expenses from the new agreements. We do have or expect a slight unrelated increase in recurring expenses going into Q2, plus an additional $3 million to $4 million of restructuring charges. For the most part, the restructuring charges are driven by facility realignment and represent the final step of our previously disclosed restructuring plan. As a final note, you will see in our press release and financial metrics that we have reported an adjusted EBITDA figure, which is a non-GAAP measure that adds back stock-based compensation and eliminates certain non-recurring expenses. We believe this metric is a useful measure of the progress and health of our business, and plan to continue to report on it in future periods. As this is the first quarter we have reported on this metric, we have presented it for each of the eight quarters reported in our financial metrics, including in each case, a reconciliation of GAAP figures. With that, I’ll turn it back to Richard.

Richard Lloyd, Communications Director

Thank you Rich and Liren. Operator, we will just take a pause for questions.

Operator, Operator

Thank you. Our first question will come from Scott Searle with ROTH Capital.

Scott Searle, Analyst

Hey, good morning. Thanks for taking my questions. Nice job on the quarter, guys. Maybe start to dive right in on auto and IoT, it sounds like you’re getting more excited on that front as well as we’ll want to see in there. I was wondering if there were some revenue figures that you could attach to that in terms of the size of CE contribution right now, what video is kind of looking at? Or how we should be thinking about that? And then, specifically, I think you’ve called out this quarter, we’ll start to see an acceleration in auto and IoT. And it sounds like it’s going to be both direct as well as through the advanced units. Just wonder if you could flush that out a little bit maybe the magnitude of the impact.

Richard Brezski, CFO

Yeah, Scott, this is Rich. So I did mention in the script that we have about $8 million in recurring CE revenue in Q1. So that’s one of the stronger quarters we had in CE and double from a year ago. Now, of course, CE does have a lot of per unit, a lot of – overall, we're 90% fixed-fee; it’s almost the inverse with close to 90% per unit in the CE space. So that is dependent on quarter-to-quarter shipments. But we’re really pleased that we’ve been able to sign agreements in 2021 and you see some of those results in Q1. On auto and IoT, we alluded to new agreements already signed in Q2, we expect to close. So I have more details there. Through the platform license, we participate; GM was announced as a recent addition there. So we expect that to contribute in Q2.

Scott Searle, Analyst

Great. And Rich – sorry. Liren?

Liren Chen, President and CEO

Yeah, Scott, the only thing I would add is, as I mentioned, in my portion of the script, Release 17 will expect to come on in June of this year. Release 17 has very specific features that we believe will enable IoT use cases as well as automobile use cases from the standard development perspective.

Scott Searle, Analyst

Okay. Very helpful. And Rich, one other cost question, OpEx being down in the March quarter, particularly R&D and development was down. Is that a sustainable level that we should think about going forward? Or is there some one-time element going on in there?

Richard Brezski, CFO

Yeah, there’s, I mean, you have a little bit of seasonality, where sometimes some fringe and so forth is higher in Q1. But then there’s also some – we’ve benefited from some things that may not recur in Q2. So, I did note in the guidance reflects a little bit of an increase in recurring expense going into Q2. So we think we’re at a pretty good level overall, but it always is going to move around just a little bit.

Scott Searle, Analyst

Got you. And Liren, if I could, there are a couple of big customers that have expiring relationships this year. I was wondering if you have any updated thoughts on that progress. Is there opportunity where those could actually be larger contracts than they’ve been in the past? I mean, how should we be thinking about that?

Liren Chen, President and CEO

Yeah, Hey, Scott. As you’re mentioning here, we do have the Oppo agreement expiring by end of Q3 and Samsung agreement in final this year, here. We are in active negotiation. And so we believe strongly that our technology has been more important than ever. And both of those vendors tend to compete in the higher end of the product offering that frankly benefit even more from 5G and have the high-level features. So we are feeling comfortable about where we are, and we are actively negotiating, trying to get them done, obviously, by the time they are expiring.

Scott Searle, Analyst

Helpful. And lastly, if I could, and then, I’ll hop back in the queue. Some of the relationships with the unlicensed China-based OEMs. More and more, it seems like they’re relying on exports, I think, for Vivo and Oppo, 50% to 55% of their units in the first quarter continue to be from exports. Given the current global geopolitical landscape, what are your current thoughts on that front, is they’re creating more of a sense of urgency, given what we’re seeing in terms of 5G adoption, particularly in markets like Europe where they’re trying to gain share, that it’s driving them closer. Is there active discussions? Or are they better? How is that all kind of playing out in terms of the macro landscape? Thanks so much and congrats on the quarter again.

Liren Chen, President and CEO

Yeah. Thanks, Scott. So, yes, you’re absolutely right that large vendors including Oppo, Vivo, and also Lenovo are exporting a lot more than half their sales outside China, and they are targeting Europe as well as India, which is one of our major markets. So we are definitely seeing that trend continue. And our discussions, we are as we disclosed indeed using with Oppo and Lenovo; so (the) using strategy damping factor though seen, we are also currently in active discussion with Vivo. So I see those as helpful trends in our negotiation dynamic. But the most important thing is we really drive value through our R&D, and our patent portfolio is globally based. And we have a very established licensing program with more than 80 current licensees that we can point to that’s very, very favorable comps. So I think all those parameters are helpful.

Anja Soderstrom, Analyst

Hi, thank you for taking my questions, and congratulations on the good performance in the first quarter. A lot of good questions have been asked already. I’m just curious, whether consumer electronics you said that that has shown pretty good growth in the first quarter, should we expect that trajectory to continue? Or was this something special that happened in the first quarter?

Richard Brezski, CFO

Yeah, thanks for your question. We talked about CE kind of closing out the end of 2021, we noted that we added a number of significant agreements that year, including a top 10 TV manufacturer, and we kind of do it at a – call it a $25 million run rate; obviously, at $8 million for Q1, that’s running above that. So I don’t want to say it’s going to be $8 million every quarter without additional deals, which we’re working on. It’s going to depend in this business on per unit sales and what those reports look like. But, in the last couple of quarters, they’ve been strong.

Anja Soderstrom, Analyst

Okay. And those unit sales must have been affected then by the supply chain issues, right? So put it down the road, that’s very helpful to those units?

Richard Brezski, CFO

Yeah. So I think particularly strong given supply chain issues. But there also can be a little bit more seasonality in that business than we sometimes see in the cellphone business. So you’re looking at, you said this that plays into it as well, when you look at the last couple of quarters.

Anja Soderstrom, Analyst

Okay. Got it. And then I’m just curious. The fixed-fee royalty declined in the first quarter. Is there anything to call out there?

Richard Brezski, CFO

I think I’d point to is, we had disclosures in our 10-K for 2021, leading – a year ago, leading into the 2021 calendar year about what was going to expire and then updated that in our most recent 10-K. So you’ll note that there were a couple of fixed-fee expirations in that disclosure.

Anja Soderstrom, Analyst

Okay. Great. That’s all for me. Thank you.

Richard Brezski, CFO

Great. Thanks, Anja.

Operator, Operator

There are no further questions at this time. I’ll now turn the conference back over to you.

Richard Lloyd, Communications Director

Thank you, operator. I’d like to turn it back to Liren for some final remarks.

Liren Chen, President and CEO

Yeah, thank you all for joining the call. I just want to say thank you to our employees, to our customers as well to our shareholders for the past quarter. We appreciate your support and also still hope everyone to stay safe as we continue to navigate the COVID pandemic. Thank you.

Operator, Operator

Thank you. And that does conclude today’s conference. We do thank you for your participation. Have an excellent day.