Q1 2021 InterDigital Inc Earnings Call

[music].

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 feeling Elliott. Please go ahead.

Good morning to everyone and welcome to the Interdigital, Inc. First quarter 2021 earnings conference call and P. Tenner Philia, Vice President of Finance and Investor Relations and with me today is meeting our Alere and Chen our president and CEO and Richard <unk> Our CFO.

And same 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 and 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 and the risk factors section of our 2020 and we'll report on form 10-K and in our <unk>.

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.

Liam.

Yeah.

Good morning, everyone and thank you for joining us today.

I hope everyone's doing well despite of the pandemic.

He said my first earning call.

And I'm very excited to be here.

I have had the pleasure to meet some of you might have sort of an analyst and I look forward to meeting.

And what's possible and the coming months.

Before I get into our company update I want to take a moment to acknowledge the contributions of my predecessor, Dr. Mary.

Reed, who drove incredible value creation during his 25 years, we've seen interdigital.

<unk> continues to be borrowed households here on my transition I owe him a dead on with gratitude for his leadership over the years as what else gets us well, it's well, it's a smooth and yourself the CEO transition.

I want to thank bill for his contribution and wish him the best of luck for a well deserved retirement.

I'll begin with a company and novel one loans and the Onboarding has been proceeding very well.

My focus for the past month has been getting up to speed.

And our organizational capabilities and beginning to work with our exact teams on the company's top priorities.

Prior to joining at the Interdigital I was impressed by the company's ability to contact who conduct fundamental research Inc.

Critical area of wireless communication multimedia and AI and machine learning.

So as I come up to speed with the various working streams.

And I'm, even more impressed with the dedication of all of the employees the breadth and depth of our patent portfolio for three D. <unk> five G multimedia and AI and machine learning space and our position on to assort salted either in the licensing industry.

And our efforts to provide transparency into our REIT structure and patent portfolio, our industry and eating out.

Our ability to influence regulatory and legal changes that.

Could significantly improve the licensing environment, it's quite remarkable.

Let me begin with its R&D.

R&D is a foundational for everything and I think interdigital.

More than 60% of interdigital as employees and juniors and.

More than 90 personal friend Juniors winters, which is truly amazing.

Our performance over the past year despite of COVID-19 has been very strong.

To give you adjusted one example.

In 2020, a year, where we moved to remote working was early on March <unk>.

And your investors has created about 25% more you mentioned related to three D. P. P widest standard compared to the year before.

In the past quarter, we have demonstrated 800 gigabit per second and encoder decoder technology, which is a huge achievement that we believe will open the door to 60 as part of the I pick a consortium.

We were also selected by IC, two launch and continue to improve their multi access edge computing sandbox, which is a great validation of our R&D capability.

And the tremendous relationship we have built with that very important organization.

On the video side.

Our success with standard focus R&D is increasing with each new January shelf standards and provide a great platform for value creation and smartphone consumer electronics and other assortment of our technologies.

And that include the completion of V C Standard Inc.

December of 'twenty, and 'twenty, which was ratified by ISO in January of this year.

Interdigital has played a pivotal role in the BBC standardization project since its inception and held leadership positions in multiple working groups.

Will you be seeing proof, where current standard recent Kodak performance by 50% and.

And support and enhanced features to enable 8-K, redoing and TV smartphones and new applications like cloud gaming immersive and 360 video content distribution and use.

Summary, since a preceding birdie bogey R&D.

Area.

Now, let me turn to a licensee on litigation.

Concluded three new license agreements since the end of Q4, including a recently announced renew always sharp a company that had been a licensee for more than 20 years.

We continue to make progress with other current on license companies.

I'm impressed with like appearance and tenacity of our licensing team, but they engage with these customers.

I believe the combination of our strong IP position.

Dedicated licensing team business relationships and where it needed the irrigation will drive our licensing success overtime.

On the day to Houston front, we have provided a detailed updates in our 10-Q fatih. So I would refer you to that document and for any specifics.

I want to briefly each all your attention to our cases, and India and Germany.

The courts are emerging as a pragmatic and logic defenders of IP right.

And in India.

The Daddy High Court recently, and Mitigates, Inc, and anti anti sway injunction against you on me permanent and in doing so I'll just hit on me two deposit with a cord for our benefit any funds and maybe elaborate by the one court relate with and history injunction.

In Germany.

And the Munich Court recently also from its anti Antistory injunction against you on me and it included policy statements that Xiaomi has acted on bleeding and licensee.

Following that decision we filed three patent infringement case, and Germany against you on me relate to three D and 40 cellular handset.

It is important to note that you been wherever you have resorted to day to Houston to help Concord, a license we remain committed to maintaining a continued dialogue with our potential licensees.

Finally, I'm happy to report that'd be 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 overtime.

We are conscious of our responsibility to create value for the shareholders and.

And to act in the bathroom to yourself already employee.

Communities and customers.

But as a company we have a proven track record on acting to stay current with good governance practices.

And with our technology, we strive to solve complex challenges that will help you on a more equitable and sustainable world.

With that let me turn it to rich.

Thanks Liana.

I'm pleased to report our first quarter results improved and almost all aspects from the first quarter of last year.

And 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 <unk> 18 per share and first quarter 2021 compared to breakeven performance last year.

More importantly, the results continue to validate the operating leverage and our model as an 8% increase and revenue.

Coupled with reduced expenses drove operating income to more than double the Q1 2021.

We believe this general relationship can hold.

Even with the significant top line growth, we are working to achieve.

And we were mentioned our progress on the licensing from including three new license agreements since the beginning of this year and.

Including a new CE license.

This new license contributed to more than $7 million of CE revenue and the quarter Inc.

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 eight quarters, we have now on five CE licenses and another for mobile licenses that included related <unk> patents.

In addition, we have included three of the acquired <unk> patents and our litigation with Xiaomi.

We are and also spoke to progress and on litigation.

I'll add to his comments by noting that we have been able to move these cases, along while maintaining litigation cost at a reasonable level.

Of course, as I always say litigation is and investment.

And we remain prepared to invest what is necessary.

We look forward to continued progress on these cases and currently expect some increase from our current litigation expense levels as the year progresses.

We ended the quarter with very strong balance sheet and.

<unk> $470 million of net cash.

Let me take a moment to explain the change and this figure since year end.

As has been typical we used cash and our first quarter operations.

In addition, we paid our normally quarterly dividend and we resumed some share repurchase activity towards the end of the quarter.

But the biggest sequential change and our net cash balance.

Was the increase and that we recognized as a result of our early adoption of new accounting pronouncement for convertible debt.

You can find the details and the 10-Q, we filed this morning, but on a high level. This does not represent a new financing.

We now carry the debt and roughly par value and we no longer reported a noncash charge to increase 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 zone.

Thank you rich and thank you Lee ran well and we'll now open the call for questions.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to retire Clinton and again press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.

Okay, we'll take our first question from Ian Zaffino with Oppenheimer.

Hi, great. Thank you very much.

Good comments on the CE side I, just wanted to ask as far as let's see where they all part of a package renewal on the mobile side would see E or you know what these independent or maybe what was the mix I'm just trying to figure out how you're going to market on the <unk>.

Syed.

Yes, so and I talked about two kinds of contributions from the acquired Technicolor assets.

First I mentioned, the CE licenses where were.

Licensing and consumer electronics products.

And so that's it.

Yeah.

We can bring some of our legacy assets to bear on those licenses as well.

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 for.

Since we.

Over the last eight quarters, where their mobile deals but included video coding assets we acquired.

And from Technicolor because that video coding is as relevant to their mobile devices.

Okay Gotcha.

And then and then just a few others here you know I know different rates and in case going on and China for our Xiaomi.

Xiaomi.

Where are we with that and and how do we think about that you know vs.

And.

The case and in India right now.

So hey decent learn so you are correct, there's a case of gaining Y and China, where I see on me has requested the court for global friend Redetermination.

And that Casey stealing and Friday early stage and.

So it's a I don't want to speculate on what the court may only and not doing and what timeframe on.

It is important to note that we have a very comprehensive global strategy. So if you look at the KC and India as I covered and it's also summarizing detailed on our 10-Q filing so it's preceding and really really well and.

And we also have a casing, Germany actually mothball cases in Germany, where the court has fallen and tell me to be a homebuilding and licensee and we have followed up by you know three individual patent cases after that.

So it's important to look at everything and the global context, and if we have more updates from to the casing tie and I'll be your obviously provide timely updates.

Okay. Thank you and then and then the final question would be on on buybacks.

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

Yeah, I think and we're always looking to balance the strategic benefit of a strong balance sheet and.

And the Optionality and that provides.

Disciplined and responsible return of cash.

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 and I'll, let our history and on this topic speaks for itself, rather and get into specific details.

About the programs.

Okay. Thank you very much guys I appreciate the color.

Yeah.

Once again and if he would like to ask a question. Please press star one we'll take our next question from Scott Searle with Roth capital.

Hey, good morning, Thanks for taking my questions on Alere and congratulations and welcome to your first conference call.

Hey, rich.

I'm not sure if I heard the number but did you give a C E number or Technicolor number for our first quarter contribution.

Yeah, I I said on total <unk> revenue was about $7 million with about four of that being recurring.

Gotcha, Okay. So we had some catch up licenses and there in terms of some of the new licensees.

Yeah, Yeah. If you look at on our financial metrics, you'll see that we had some on pass sales I think that's discussed and Youtube as well gotcha and and rich in terms of Opex I know it varies from quarter to quarter, given the patent administration costs, 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 and maybe maybe.

Coupling that leer and your.

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 youre looking at in terms of optimizing that as we go forward.

Yeah, So I'll start and then allow there and the comment.

Afterwards.

And so on on the first part of your question.

Mentioned on the call or and.

On my script that we.

We saw some pretty reasonable expenses level.

Levels in litigation and the first quarter.

But with the cases that we are on the already referenced we do expect that to go off a bit as the year progresses.

Don't have any more specific comments at this point, but certainly we'll provide some some updates there as we move along.

And we have been working for a long time as you know.

And to kind of.

Bringing expenses and the portfolio cost down and falling Technicolor acquisition.

And 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 and general are operating efficiently.

Okay, Yeah, Hey, Scott Hudler, and so regarding the overall strategy as well as a cost structure that goes on so as I said earlier you know they said my months' Wang of joining interdigital ifr down on all the internal reviews are supposed to look at you know gross 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 taps on price our patent portfolio is obviously quite impressive.

So at this moment and I think they are you are you could shape strategy wise execution wise.

And then but in the meantime, though I do want to point out and I'm, a strong believer and continuous improvement so as I learn more of the company and you know, whereas different aspects I'm sure, we'll find ways to do Patrick and probably on number of different areas and they all work very closely be sorry, because I came to tweak and poop and to add further things and where it's appropriate.

Okay, great and.

And if I could on I know you had some comments as it related to Xiaomi, both in India, and Germany, but I've not gone through the full filing on line could you could you take us through the highlights and and timelines you know what we should be expecting in the near to intermediate term in terms of how those cases progress and kind of what the ultimate timeline here is to get some of them.

Sure because it sounds like from and India standpoint, there's an injunction potentially on the table and then not too distant future.

What are what are the milestones really to get to that and enforce that and then the timeline as it relates to the or the and the key milestones for the German proceedings.

Yeah, So hey, Scott So basically what I was pointing out a hangover on yours early discussion and that's where all the wells in our 10-Q filing here, we had pretty major you know good outcomes from the India case that what's a really on wood.

And what would a two three days ago, So where the judge has determined the interim and he and his three injunction that was awarded to US earlier and now it's turning to permanent injunction against a prime and anti anti suit injunction.

And see all me while the case is pending the court to review again, India and.

In addition, she told me he's also order to restrain from you know enforcing.

ESI and wine and if the wind called Fine Interdigital and you see on waste required to deposit whatever Fi amount and the wind case on court issued against us into the India Court.

And we essentially be able to access the same fly and transport to interdigital, So without ceased and should the case loading a nutshell. So regarding timeline here, it's very difficult to predict a precise timeline on.

And in China or India.

Oh in Germany, and the German case, let me touch on and a little bit more here.

The court has determined and the xiaomi to be on waiting licensee and the prior decision and then we followed it by fighting and three new patent cases, those cases, we'll go through and you know its patent trial and if they are found to be bought it and infringed and you get back the court to issue its decision regarding too on the injunction and the other.

Things, but it's really difficult to predict the exact precise timing and for those cases.

Very very helpful. If I could just a quick follow up on the India proceeding there and given so if if you're moving to a permanent injunction and Theyre required then to basically I guess sounds like place finds and escrow on what are they basically that find them out on kind of curious in terms of how they set that right and do you know how many units xiaomi shipped into India, and 2020.

Okay.

And I don't want to make it very clear maybe there's a little bit of confusion on this so when you see make it permanent lead means of anti <unk> anti suiting Jong solitaire.

And while the cases pending and the.

On the previous decision that was making the interim.

And now the court has made that and he and his theory injunction against you on me to be permanent and why our case is pending review other India Court. So that's why I want to make sure it's clear.

Second thing and this discussion about deposit financing to the account. It's also specific really to the Wuhan course earlier decision against Interdigital.

The court has you know a threat and start on them on a fine to us and.

And but that Wuhan court Rudy has not enforced that fine and they eat and these contacts the India and car basically decided.

The core team hanging enforcing on fire I can see into digital and regarding toys anti suit injunction decision then.

And then.

And then shall meet its required to deposit fine into the India card right essentially to make it a hole for interdigital.

And I hope that's clear that day.

Thank you and and lastly, if I could.

Would be curious as to your thoughts in terms of the day strategy on the Iot front.

You know the currently are a couple of joint ventures.

Where the company is pursuing into certain markets like metering and auto.

And I was wondering your thoughts from a high level in terms of the opportunity for Iot and how you approach that market going forward. Thanks.

Yeah.

Hey, so so lets you pointed out here and interdigital has a couple of thumb on.

Participations and you know on.

Various different platform and for how to place that towers automobile and smart meters and.

And we are still going through your internal my on boarding process here I currently and do not have any updates on the strategy and everything is going well with the current platform.

And for me and my strategy as I learn more if there's any updates we'll update you on the future discussions.

Great. Thank you.

Got you.

Thank you once again, if you would like to ask a question. Please press star one we'll take our next question from Matthew <unk> with Sidoti.

Hey, good morning, everybody I'm on for on and this morning.

Hey, Matt good to hear from you.

Hi has to talk to you I think you called out for wireless renewals that included Technicolor assets today.

How did the economics play out and general relative to the uplift you had anticipated when you acquired Technicolor.

Yeah. So a number of those deals were fixed price agreements.

So at the end of the day you are negotiating for a sum.

What I would tell you is that all the deals were consistent with our rate schedule.

And that includes.

All aspects of our technology that we bring to the deal.

So on packing it and saying this much for that or.

It's not caught out that way.

Essentially a negotiation for a total fixed and now.

Got it alright, and I guess on accounting question here, I guess I'm thinking through and 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.

Yeah. So.

The way that you booked the convertible debt beforehand was the.

And I tried to estimate the value of the conversion feature that's embedded within the instrument.

And that's what.

Enables you to pay a lower coupon.

So that is treated as and OID and then you accreted up to par over the life of the debt.

And under the new rules, which we early adopted Jan one.

You no longer.

No longer do that so you are basically carrying the debt at par so youll see it.

Beginning of the year adjustment to retained earnings to bring that up and you see that as I mentioned that the value that they are on the balance sheet is obviously higher as well so that non cash accretion.

And in fact, the noncash interest expense goes away.

Which was somewhere in the neighborhood of three and $5 million to $4 million.

Impact on the quarter.

But those details you can see on the I think and the equipment.

Perfect all right. Thanks, and then last question just around the CE licensing strategy.

I think you called out about 50 million generated since the Technicolor deal close and where do you think we are Oh, what inning are we on that there and do you see that accelerating as we move through 'twenty one into 'twenty, two or kind of what are the factors that are.

That are influencing that pace.

Yeah, So I.

And the encouraging thing is that we are signing deals there are further validating the rates that we charge within that market.

And.

And maybe Larry and has other comments on that but.

In terms of what inning, we're in I mentioned, there is $4 million roughly of recurring revenue and the quarter now.

Now mind, you the CE business is a little bit more volatile quarter to quarter.

But.

On slide 60 million annualized.

A little more than 10%.

The overall goal there so it's still early innings.

And most of the larger vendors or unlicensed at this point. So the important thing is to transition from debt and smaller deals done to get in the medium and larger deals done and that's what's really going on.

Moving the needle there.

Yeah. So so these are there and the only thing I would add it's a sort of attacking and cut our acquisition and we have acquired a very valuable assets relate to a T V C.

Well, it's a next generation on B V C.

We believe those assets will be very valuable and not just for the CE.

Market, there's lots of smartphone and mobile use case.

So we believe those assets will come in play for the core license and side as well.

Great Alright, Thank you guys.

Thank you. Our next question comes from Derek Cedarburg with call your Securities.

Hi, guys. Thanks for taking my questions sort.

And sort of picking back up and earlier question on pricing, but maybe a bit more high level and was 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 your royalty rates generally that you know might be abnormal.

Compared to yours, and the past any thoughts on on.

On the pricing environment would be helpful.

Yes, they work so.

And I'll go back to us.

And I mentioned in his remarks.

We have.

Among if not the most transparent rate structure and the industry.

And we came out with that and publish that.

More than a year ago and.

And there really haven't been any changes to it we feel good about that and.

And that's it.

And that's what we're going to market with it.

Got it and.

And congrats on the new role I'm, just sort of curious.

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.

You know if that differs at all from your predecessor.

And maybe as it relates to targeting various handset Oems fixed first variable agreements.

And then if you could just share any any of your you know some of the key opportunities that you're targeting this year that'd be great.

Yeah, Hey, dark they said hey, thank you.

And so as I mentioned earlier here and we are executing exceptionally well and despite all sorts of low very difficult environment for R&D and we have very very valuable patents cover are super important and a real technology on five T redo and AI and machine learning and those technology has becoming increasingly and.

More important and with the pandemic, it's a potentially post patent on remote working remote learning every day.

Application of opportunities here. So we feel very good about what do we have and.

And we also have laguardia by our capable licensing team driving.

And really hard on.

We obviously you still have some you know pretty major opportunities and come on on license that count.

So, it's obviously on opportunities and a priority for us to approach those head count and so either business and negotiations all win win if we have to sort of the ongoing and <unk> to drive close you are to do cell count those.

So those are some of the top priorities.

Glossary on my review for you know the company and level of priorities I'm sure there will be new opportunities new area for improvement and there was also will be important and painful for us to keep on driving and to all appreciate your efficiencies and all of these on different areas.

Perfect. Thanks, guys.

That concludes today's question and answer session. Mr. Xie on at this time I will turn the conference back to you for any additional or closing remarks.

Thank you Victoria, we are in and would you like to make any final remarks, yes, Hey, I just wanted to say thank you to all the employees for their dedication and also keeping on executing on a very very difficult time.

And I'm honored and excited and definitely humbled by the opportunity to day at the company until the next Hector. Thank you.

Thank you Lee Ryan 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.

Yeah.

Yeah.

Yeah.