Q3 2019 Earnings Call
Say it wasn't a third quarter 2019 earnings conference call.
She is being recorded.
I would like to turn the call over to Patrick vendor.
Books, Travis good morning, everyone and welcome to New digital third quarter 2019 earnings Conference call with me. This morning, Meritor, President and CEO tire storm or see old enriched brzeski our CFO .
Consistent with last quarter's call will offer some highlights about a quarter and the company and then open the call for questions.
When we begin my remarks, we need to remind you that in this call.
Will make forward looking statements regarding her current beliefs plans and expectations, which are not guarantees of future performance and are subject to risks and uncertainties. The could cause actual results and events to differ materially from results and events contemplated by such forward looking statements.
These risks and uncertainties in Q4.
Earnings release and annual report on Form 10-K for the year ended December 31st 2018, and from time to time in other filings with the Securities and Exchange Commission.
These forward looking statements were made only as of todays euros.
Except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information future events or otherwise.
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.
There are still 2019 financial metric Stryker, which can be accessed on our home page www Dot digital dot com.
Clicking on the link on the right sort of the home page that shows financial metrics tracker for Q3 2019.
With that they can cheerful during the call easily do.
Thanks, Patrick as everyone can see from this mornings press release for the quarter as well as the subsequent information we provided involving new patent license agreements with both Ziggy and Google The company is well along in executing on its growth strategy.
In a nutshell that strategy is to drive our core terminally imminent licensing business now enhanced by our strong ATDC patent and resource protection.
Expand or licensing business into the broader consumer electronic space.
All the while holding the economic cost of running the business essentially flat to 2017.
As rich Chi and rich will explain why there's certainly more work to do we are now executing well on all fronts I'll, let just a few highlights.
First as regards the licensing landscape in general we continue to see growing stability across the space in terms of an overall willingness of manufacturers to engage in discussions.
Pretty much gone are the days when manufacturers, particularly many Chinese manufacturers simply refused to meet instead, what we see now is a war is more frequent discussions with all of our perspective customers.
With the dialogue centered mostly around pricing.
Not surprisingly the price discussion in China has been the most challenging but as evidenced by the completion of our deal with C.G.. We believe we have found a good pricing formula that responds to some unique aspects of the Chinese market, but also comports with our long history of licensing as well [laughter]. This bodes well for our future discussions in China. It also sets a solid fran.
Benchmark for current and future litigations.
Another aspect of the licensing I wanted to highlight was the approach we use with Google which was to combined with a number of other license stores and provide a more complete solution. [laughter]. This approach has benefits for both license or end customer and that is more efficient and also provides a solid benchmark for both sides to use and subsequent discussions with other companies, whether licensee or license or.
I think take it also demonstrates a strong connections we have within the licensing community connections, we intend to continue to leverage as necessary to get deals signed.
Next just briefly on R&D the strength of what we have put together in terms of technology capabilities now beginning to jail as I've mentioned before we brought together the two research seems not to have them work individually, but to work collectively since the two technology platforms wireless and video or amazingly complimentary and the magic occurs when they sing in harmony well.
Now entering the point in the year when the new projects are being defined and it's a first time are getting to witness the teams operating as a single unit. The blending of these technologies in the Sparks at its creating it's great to watch and also a nice indicator of what's to come.
[laughter] last which will touch on expenses in more detail, but the highlight here is that we are right on target if not a bit ahead of our goal to return the ongoing economic cost of the business to the 2017 expense levels. As you all know our business is all about the operating leverage we intend to make sure that remains the case with that let me turn call over to Guy.
Thank you Bill.
I mentioned last quarter that all licensing teams working working very hard to move negotiations ahead last week. We were happy to report that we have concluded a license would see which we viewed very positive from number of perspectives. While Gulfport will go forward license was 80 is smaller in revenue given.
Reduced market share.
I remain an important Chinese company, so having them as a reference point to other Chinese customers is helpful. Also.
The rate captured in overall agreement reflects as Bill mentioned, our long history of licensing Haswell us unique aspects of the Chinese market.
We think that the so it is solely benchmark for gold <unk> Gulf <unk> go forward discussions with others further.
The agreement includes license to both our wife I know ACVC portfolios in additional facilities.
This is a second license we signed with that's there that the specifically addresses wisely.
And of course, it is very gratifying to see a first license in the mobile handset space that reflects the impact of video portfolios that we acquired acquired from Technicolor.
We continue to develop so all in all we think there's just a very very solid results.
We also ask Bill mentioned signed a second license this time with school.
Importantly, Google agreement was signed so what patent licensing platform that involve a number of license source.
Well our insight there is limited to our own result, we were pleased to meet with both the rate, which we consider affair and he said she got it essentially frictionless way in which they license was finalized.
That sounds like this may indeed, sebesta important additional avenue for licensing to compliment to complement the by Dr. Rolla approach that has told me they didn't immobilized TV licensing today.
[noise] beyond those two agreements.
Efforts with other ending see little licensees continue.
Last quarter, we've been able to meet face to face with the majority of major unlicensed companies and we see continued progress as a result.
On a cost of my electronic side, we've told investors that we would like to sign a couple of smaller deals in the near term that would enable us to sites that size up the market for the investment community and that remains our approach.
[noise] on research side, our teams are continuing their strong efforts both in wireless Nvidia.
On the wireless side. It Fiveg research continues but beyond that we are currently beginning our first efforts individually and with research platform. Some partners to explore what some are calling beyond five GE or be five Gi and what others are beginning to call six G.
Just a partnership with it Finland Sixtyv flagship program in September .
Meanwhile, our five GFS I've gained tremendous recognition.
An example, the fiveg coral projects, where interdigital he's a technical lead snow has been nominate needed for a prestigious global telecoms telecom.
Sure.
At the window, which will be announced weak the same cogent was finalized for adult Fiveg Innovation Award at the CSRI Awards, which were given out the IVC fun for us in September .
On the video side, how work in advanced video standards continues with the individual stepping directly into the shoes that technical used to fill in efforts like PVC point cloud compression VR and other visual technology standards.
Our advanced solutions outside of standards are also gaining strong recognition a great example of about digital is our digital doubled technology, which enables users to generate digital avatars in 30 minutes that previously would have taken days or even weeks go custom development and live.
Good leverage is technology that was used to FY <unk> feature movies like fly in game.
Dumbo.
That's technology was named best in show.
See tremendous result, given the ibcs the premier showcase for video broadcasting industry.
So to summarize our Q3 licensing progress continued and has already liver at new agreements in Q4.
We continue to pursue all licensing efforts on <unk> on both wireless and of course from electronic side and our research continues to deliver a tremendous results.
Let me hand over to rich.
Thanks Guy.
Today I'll review a few highlights from our third quarter results and then I will communicate preliminary expectations for the fourth quarter, which include the impact of the new license agreements with GE and Google.
Our revenue for third quarter 2019 came in at roughly the midpoint of the range we expected.
This included a late true up of a prior quarter estimate of revenue from a per unit license agreement, which had a slightly negative impact.
As a reminder, with the adoption of the S. C. Six so six accounting rules in January 2018.
We now have to estimate the revenue we were record associated with our licensees sales of underlying license product in the quarter on which those sales occur.
And true up in the next quarter.
It makes correct forecasting in the quarter more challenging although over time, there's obviously no difference.
More importantly, these trucks are not drivers of our topline goals, which includes significant gains through increased market penetration.
Of course, we recently reported some progress on that front and I'll come back to that and just a few minutes.
Our expenses also came in below expectation.
Based on anticipated increases in litigation and the impact of having the newly acquired video research team on the books for a full quarter.
We expected a sequential increase in operating expenses of $8 million to $10 million.
In fact, the sequential increase was just $2 million.
This favorable variance was driven by our ongoing careful management of recurring costs.
As well as lower litigation cost lower integration costs and increased estimates for 2019 research tax credits.
The important takeaway is that we're completely on track to bring our ongoing economic cost metric back in line with 2017 levels by the end of next year.
Looking forward to fourth quarter, we will provide more formal guidance. After we have received a substantial portion of the outstanding Q3 royalty reports.
And further evaluate the accounting for a new agreements with C.G. and Google.
Based on what we know today.
And as always excluding the impact if any new deals that may be signed over the balance of the quarter.
We expect total revenue for fourth quarter to rise to the range of 83 million to $95 million, including recurring revenue in the range of $74 million to $78 million and nonrecurring revenue in the range of tend to $18 million.
Of the nonrecurring revenue range, we expect $8 million to $11 million of the nonrecurring revenue to be related to the first nine months of 2019.
On the expense side, we're working through revised expectations around litigation falling to resolution of outstanding disputes with Ziggy.
Overall, I expect to see some of the expense growth we anticipated in Q3 to materialize in Q4.
Finally, I'd like to briefly touched on stock buybacks.
We typically don't comment on our status, but as you know we've always been aggressive buyers of our stock when we think conditions are right.
However, the progress of our two not new license agreements meant that we were locked out of stock.
Repurchases throughout the quarter.
As a result, so far this year, we've repurchased two and a half million shares and the remains approximately $97 million on our authorization.
I'll now turn it back over to Patrick Thanks, very much rich travel. So if we can open the call for questions. Thank you. If you like that's a question. Please signal by pressing star one well your telephone keypad, if you're using it.
To your mute function is turned off to allow your soon.
Richard <unk> per store.
Yeah.
[noise].
First question comes from Eric.
Huh.
Thank you good morning, guys.
If you questions I guess, one rich you train understand the.
Yeah, the kind of what happened from when you gave me the operating expense guidance you know in early October two now and the unique million Delta.
Is obviously, great, but fairly significant give me the quarter was already over was it just you know you feel concerning the estimates you gave her and I told or was it the tax credit and I guess, you mean anything that kind of shifted into Q4 is this kind of the base from which you will.
Steve Productions.
Yeah, Yeah totally fair question, that's why I tried to address that somewhat in my opening remarks, Eric So yeah, we did provide guidance.
Yeah, it's really towards the ended the quarter, but of course, there's some lag in you know actually telling the results. So as best as time based on the best available information that we had I think that you know in the end as I said, you know ongoing expense management.
You know continue to provide traction there.
Maybe even more so than we anticipated at the time.
There was a you know the litigation expense came in lower than we estimated and that's really something we don't have a lot of visibility to on a month to month basis.
Because we rely on a a lot of outside counsel there.
And then what kinda you know do you check in with him at the ended the month and see what the billings were for that period.
So they were two of the items.
And then there you know there's we just to operate in a quarterly cycle. So you know things like reviewing tax credits and so forth or are things are typically done around to the quarter close and we increase those estimates as well.
Which was a benefit can offset somebody expense.
Yes.
Tax credit benefit.
And ongoing quarterly benefit for you or is it with it.
Just just in Q3 yeah.
Yeah, it's an ongoing benefit but if you if for instance in Q3 increase the.
Estimate of the rate of that or credit the effective rate for the year. It can have a little bit of a catch up impacting the quarter. So show.
Is that that's maybe part of the reason that and part of your question was around what do we expect for Q4.
Yeah, I did say I I think that on one hand, we have GT litigation going away. So that's a benefit.
But on the other hand, you know there was some at some of that are expected increase in Q3, I do expect to see in Q4 at this point.
Okay and then.
Tell them on the GE comment.
Yes in the past one of the you've noted with the.
The outstanding Chinese Oems getting them or license has been kind of them.
The multi year isn't going to significant pass payments and it's not just kind of continually building up as it is you kind of moved on I guess, maybe help us it is and how.
It comes to begin the call where that he is still early small contributor now given their current market share how that jives with kind of multiple years and catch up payments plus now getting access to you know patterns beyond just just cellular.
Sure. So you yeah. When you look at it situation like the team where you have a significant amount of pass sales right and you had a customer that isn't it.
His position in the market has declined almost the.
Did pass sales can almost become an impediment.
You're getting a deal done so we've had this before and.
Wave.
Approach it is sort of in if this pragmatic way so we.
As we as we mentioned in the 8-K, we did not give a fully leased from pass sales, we only give a partial release and the idea is.
Yeah with.
Situations like this that we had passed as you want to get the customer to be a long term customer and you want to create an incentive for them to be a long term customer and and as long as they continue down that path then you chip away at those pass sales so.
And if they don't go down that path then you'll have the full ability to go. After this past sale. So it's that balancing of interest that we try to do to get a they get people on board Yeah, I think yeah that was very.
The thing that were very positive about the deal is I would say everybody big or small negotiate very hard with respect to the royalty rates are and so the.
The deal we were able to construct with D. is as we've mentioned is a really solid benchmark.
For others, including manufacturers in China. It was very solid net it'd be reflected an added contribution from the EGPC portfolio, which we think is very a powerful statement about that acquisition as well so again, while not a big revenue driver because their sales are so much smaller I think both the structure and the rate and.
And the race in the deal are very.
They're really good benchmarks for us to apply to others.
Perfect and then just final question for me Rich is make sure I understand city.
Got it sooner guidance for Q4, 80 to 95, including said before to 78 million or recurring the 74 to 70 million recurring that will be comparable G. 68 million you reported for Q3 and that kind of assumes a.
Full quarter going forward run rate.
Google in there.
Oh, yes.
Looking for my sheet on that.
So.
Yeah that that's.
Barely one second.
The 68 would be the current patent royalties.
But the recurring revenue would also include the current technology solutions revenue.
So, it's it's basically everything but the noncurrent.
Okay, and 74 to seven years more comparable to.
64, plus three seven so 70 to one.
Yeah.
Okay.
And now includes a full quarter I'm kind of ongoing.
And.
Yes.
Assuming your fixed deal with an ongoing from BG Google.
Yes, so yeah typically in the period in which we signed new deals irrespective of what date within that period that quarter, we signed a deal we treat big I get it gets back to the quarterly cycle, we treat that quarter as recurring revenue.
Thank you guys.
Hi, sorry, you got it.
Our next question comes from Charlie Anderson Dougherty <unk> company.
Yeah. Thanks for taking my questions, maybe I wanted to focus a little bit first on the is the new licensees. So you know it's not every year. We see you signed somewhat out of China, and then given the geopolitical backdrop it was sort of.
Interesting to see that happened now so I wonder if you maybe ability can give a little bit more color on sort of why is the t. why now and then as it pertains to Google. The this approach that you guys took I wonder.
If you could give us a little bit of background, there and I think you did mentioned you feel like it's applicable to the future licensees. So when it's maybe could tie that together with the fact that you've got a lot in China to go do it could that same framework work for.
Hello, licensees with what you did with Google Thanks.
So look I think ZT. He was you know the result of obviously a lot of hard work by the company. We've we we also we're reaching out to.
To the U.S. government we were.
Focus by trunk on electro property was very important and continues to be very important. So I think there's a lot of factors that came into play there, but I think also yeah reflected.
Credit the C D. A they know they they stepped up and they did the right thing and also as we talked about and Charlie you and I had.
Analysts had to conversations we needed to.
Think about our rate structure in China, and make some tweaks to get it to work.
Better and I think that we were successful there.
And I think its so I think all those things came together.
And I think they all bode well for other discussions with with Chinese customers. It's always good when you're talking with Schaumayer Ah Tcl or.
Whoever to say Hey, we just did a deal with the D. and people will be able to figure out what those rates are and therefore they'll know what we're asking for them is no different than what we are getting paid a busy t. So all good on that front you know googles you know a different.
Type of arrangement I think.
You know this idea of partnering together with other license sources or something that.
We began to explore more.
First with the Avanci platform, we have more exposure to that on the CE side, where people get together and pools are things I think it's becoming a way to do deals on a a less friction filled basis, because you know there's a greater package. It's made available to licensee and so they can see you don't get into what's the value.
For this portfolio, what's that value for that portfolio, it's kinda like what's the value for the whole and use it and they don't really care how it gets allocated during the day. So so it's definitely a an approach that we will leverage in the future when it makes sense to do that and frankly, the more tools, we have at our disposal to get license agreements done.
Better be any I think I'd mention that Google, obviously, a very strong company in there in terms of their ability to evaluate intellectual property deals I think they've they've always had a very strong voice on on patents and I think this is a statement by them in terms of terms of what they think the you know.
Yeah. The overall stacks it looked like so I think it's all all good.
Great and then just as a follow up are baked those deals gonna be fixed fee and then I would also curious on the Google deal does a cover your whole portfolio and then what end devices what to cover on their side. Thanks.
Oh, yes, so, but the GE has a fixed element to it.
Okay and Google.
[laughter] no no I'm, sorry, I'm, sorry, I was going to say, though so [laughter] <unk> I was from say the ZZ has a fixed element to it.
Also has a very yes, yes, I'm sorry, that's correct.
And you know generally with respect to deals that are done with through platforms. We can't talk about specific event. This platform, but when you think about pools and platforms they tend not to beef.
Hi, Sealy tend more to be a running royalty type deals.
Okay, and then continues to be took coverage event devices side Bill.
[noise] I don't know if we actually disclosed that so ah so whatever we have in a in the K anti India, India, Kate ER and in 10-Q actually take you on this one.
I would be all we can say.
Okay fair enough. Thanks, so much.
Yep.
Your next question comes from Scott Silly.
Okay.
Hey, good morning, Thanks for taking my question Congrats on getting some of these licensees across the goal line.
Rich just a quick we follow up on some of the cost front I just wanted to clarify the tax credits ends up being a contra R&D item is is that correct in terms of how was reflected in the third quarter and then I just want to normalize you know some of the onetime items I think you called out 6.2 million in onetime items is that correct is that fully go away.
Way in terms of normalizing the opex for the fourth quarter.
Yes, so on the tax credits, let's start there.
There are different kinds of tax credits the particular kind that we're referring to here are treated as a contra expense.
And it largely goes to how you can utilize those credits I'm. So so in this case. It read you know that this benefit by increasing the expected or tax credits reduces expense.
With respect to the onetime items, yeah, we called them out we do expect some level of onetime items to continue still you know a certainly component that is integration cost and are having just a close on the acquisition of the research team from Technicolor in June .
That integration is still ongoing.
Got you, but overall opex will be up sequentially into the fourth quarter adjusted for all of that we just don't know the magnitude at the current done.
Hi, right now my expectation is that just see an overall increase.
Okay Gotcha, and then then moving over just a couple of other quick follow ups rich on per unit royalty was was down sequentially in the quarter. I was wondering if you guys could provide a little bit of color on that and then just to clarify deferred revenue was up big in the quarter I think Google and G. T. He closed post the quarter. So I'm assuming that is just the normal payments.
Cycle of one of your larger customers is that correct.
Yeah, I think if you if you look through the cash flow detail and so forth. Your you'll see that we did have some payments collected in the quarter and of course, we burn cash in other quarters earlier this year and it all kind of speaks to a you know we don't necessarily collect cash evenly across the year. So so that's that that addresses I think the last part.
To your question I'm on the per units.
You know what we're seeing in probably the most variability there throughout the year has been one the consumer electronic side and frankly.
A lot of that being per unit, where we're estimating a we don't have the same.
The same history, there as we do in our legacy business. So worse comparatively disadvantaged in our ability to forecast, perhaps there is a little bit more seasonality there.
Then then we'd give credit to in our estimates a and that's it that's caused a couple of different true ups. So I think that that'll probably smoothed out over time, but but for for the time being that's where we're at Gotcha and then just on the Google front I'm not sure. If I missed it was it both for wireless and EGPC. So on the video front as well across both.
And then just stick to clarify in terms of the platform kind of Avanci approach is it actually a formal JV in terms of how you're going to I'm just trying to understand how Rev. Rec is going to work on that front.
So again on Google I think we've we've disclosed what we can disclose Oh go and.
The second question around Avanci, Yes, no I'm sorry in terms of purchase was was Google the approach to Google sounds like you used to concerted effort with with other potential a license horse but.
But that is there any formal GE v. that that has been established go after that okay.
No you can do it different ways right. So you can have tools and sometimes it pools actually its own little separate corporate structure right. You could have platforms, which is a may just be an association of companies, but it's a fixed association. The companies you can have sort of ad hoc.
Partnerships that go to customer that yeah, and you know the.
You know, what we've been doing and what we see others doing now is that.
You know this flexibility in licensing approach office sort of us very static bilateral model is actually.
Getting some some traction in the market for the reasons I gave us sometimes it's always more efficient sometimes a it allows.
Folks to avoid again individual allocate a individual valuations of individual portfolios could you just look at it as you know a large portfolio. It can it can create a lot of benefits and sometimes it's possible nature of it is better because you know you go to any particular licensee will they may already be license with comes.
Any a b and C and therefore, a partnership between companies D E and F is the best way to approach them. So I do think it.
It's a it's a new style of licensing, but I think it's a one that.
Like others like and hopefully we can use it more often.
Got you and lastly, just shifting gears to de for a second I just want to clarify it sounds like there's there's some catch up payments that we will see I'm in the current quarter, but also sensors lot of flexibility in terms of how you approach the negotiations with the T. So for starters is we'll we'll all of those catch up payments be paid in the fourth quarter or is there going to.
To be somewhat of an extended period in terms of where they're paying catch up.
Yes, so I I think what I'd say there is we can't get into details on the specific payment structure a in terms of when things will be paid but Ah I did provide some guidance one overall nonrecurring revenue expectations for the for the fourth quarter. So at least on the revenue side of things you haven't I'd.
Good where we'd expect Atlanta got you, but you also get a benefit as well in reduce litigation with <unk> have you quantified that rich.
No I work that was part of my remarks in terms of the Q4 that we're trying to figure out exactly where we expect to be on the litigation front just being one of the the more important changes Q3 in Q4, and just lastly, NZ Tee. It you know you license both on the mobile portfolio as well as a video portfolio I'm kinda.
Kind of curious in terms of the relative value. If you could comment on that and if there's video expected to be entailed from smartphones or was that other consumer electronics areas and wondering if there was any difference in terms of.
The royalty component domestic versus exports. Thanks.
So we do so we've done so so first of all that far though on relative importance on wireless vis a vis a CPC.
Wireless dust dominate than we expected told me that going forward, but it's it's a important addition, and think about it that way from from HSBC.
Clearly not insignificant.
Increase [noise].
And then or in terms of as the scope again, we can't really kind of a comment more than what we what we said on on the scope of the deal.
But what it covers and what it doesn't cover.
And then.
Lastly.
On the on the kind of rate and we.
We can't again comment specifically on on on the on the rates itself, but it does cover like the payments cover both domestic Chinese and any international sales Gotcha, and just maybe if I could one last.
Sounds like you've set a nice template in terms of the flexibility with ZT have you had any inbound towards the dialogue change since you've disclosed dizzy to your relationship. Thanks.
That's a early days I mean, it's it's kind of it's about a little bit owe a week.
Since we disclose so we continue to have five since then we haven't had multiple im just kind of interactions with with the way that with a different companies, but it will be two there too early to actually coming from in on that.
Thank you and Scott Scott I, just want to mention a when we are discussing the past sales and the revenue expectations for Q4, I just wanted to get emphasize bill's comments from earlier that Oh Gee release on past sales was limited.
Got it thank you.
That's correct.
Just a reminder, if you'd like to ask your question. Please press star one now.
In the Star one.
Our next question and just soda.
Hi, everyone I think if the picking my question.
Sure. So I'm not a lot of good question, just asked not ready and I just wanted to get somebody I learned that private mi licensee that that's kind of made unbearable bulky and lower for the third quarter. If that's something that's kind of continuing I wasn't something [laughter] quota for the quarter.
Yeah, I think a again as I said before I think felt the larger poor proportion of the changes over the year or on the consumer electronic side. Yeah. There is some variability in Taiwan as well.
I think you know probably you saw that come down a little bit over the course of the year and you know that's really all I can say at this point.
Okay. Thank you for me.
Thanks Rhonda.
[laughter].
No further questions in the queue at this time.
Well, thanks, very much Travis and thanks, everybody for joining us this quarter, we'll look forward to updating your again with the Q4 results since your months, Thanks and have good day.
Ladies and gentlemen conclude todays teleconference. You may now disconnect.
[noise].
[noise].
[noise].
[noise] [noise].
[noise].
[noise].
[noise].
[noise].
[noise].