Q3 2021 InterDigital Inc Earnings Call
Good day and welcome to the enter digital ink third quarter of 2021 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Richard Lloyd. Please go ahead Sir.
Good morning to everyone and welcome to Interdigital third quarter 2021 earnings Conference call.
Hi, I'm, Richard Lloyd Communications Director and with me in today's call I'll learn Chen a president and C E O and rich Briski our C E. S. C S O.
Consistent with last quarter's cool, we will offer some highlights about a quarter and the company and then open to 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 guarantee of future performance and all made only as of the date her off.
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 or 2020 annual report on Form 10-K, and I'll set quota 2021 quarterly report on Form 10-Q, and an hour of the 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 got financial measures are included in our financial metrics Trucker, which is available on the Investor Relations section of our website.
With that taken care of.
I will turn the call over to learn.
Thank you for <unk> good.
Good morning, and thank you for joining us today.
<unk> was a highly successful quarter floating to digital with revenue growing by 64 person, you're allergic to mold $140 million too.
<unk> bye excellent blend of strong reoccurring revenues and royalty payments fault <unk> sales.
Outperformance, let's see what by licensing deals signed with several major device manufacturers, including a mood board license with Y'all me and consumer electronic license with want the top Pink Global T V manufacturers.
I would let me just give you more details on the numbers, but I want to emphasize that these kind of reality, it's only made possible when the business. It's closely aligned with our strategies you goes and when we execute superbly a coffee company are a key initiatives.
Since the beginning of 2020, we have sin 16, you agreement, including 10, so far in 2021.
It's worth remembering that most of these deals have been signed during the Kobe pandemic.
The meetings with prospective licensees had taken place virtually.
This is a remarkable achievement and damacy adapt Peter P to expertise and the tenacity of our our whole team.
Decently or use a weirdo conferencing inducing negotiations highlights the importance of the connectivity and we do technologies, we have created.
During the third quarter, we closed our new license with Y'all me, which had reason to become <unk> off the top of three smartphone manufacturing in the world in 2021.
This agreement provide consistent.
Angel reoccurring revenue for years to come and underscore somebody off or set up a portfolio, particularly in your five G as well as the importance of a pattern coverage in <unk> and Wifi.
Yeah do you send to this y'all medial b also sign a new license. If we moved with a top 10 global T V manufacturing I'd be nude our license agreements C code.
Together these agreement underline both the quality and the breath out of our research and our patent portfolio.
It also applies to our excellent recent progress in closing deals in the C E sector.
Uhm performance highlight the strong momentum, we continue to be old and cement our stature our status as a leading you know we take your mobile and video technologies.
Increasing adoption of five G and we do services, our technology has never be more important.
However.
I'll steal major manufacturers that continue to benefit from the you know we've seen digital has created but have yet to pay a licensing fee like many of their peers.
We remain actively engaged on multiple fronts, we those manufacturers and while we would prefer to reach agreement. We have commercial negotiations we are prepared to enforce our I P rights when necessary should we be unable to come to agreement with them.
Groundbreaking research at the foundation of everything we do and our I I engineers are consistently recognized for the quality of their research and their dealership of the industry.
Recently, Ralph R. C nine juniors with a pundit, but the chair of a P working group with European Tiny communication standards Institute.
Which is working on technology that could dramatically improve they use case for wireless connectivity.
On the <unk> side, the head of our regional standard team has been giving the highest technicolor owner by the advanced television standards Committee focus yourself working on the cutting edge of redo technology.
Work in Wifi has also received further recognition with our research team being commended for the contributions empower receiving technology, which significantly aches and battery life and also you high frequency Wifi, which dramatically increase network speeds.
While we are always delighted to see in the digital engineers receive well deserved industry at least a highlight health research. It's hall hour 19 country abuse cross aboard car what cloth patent portfolio.
More than 90% of our engineers are you mentors and almost 60% of argue mentors have at least some patterns.
Despite all the impact of a pandemic, we mean focused on developing T Y artists and video technologies and are on pace to grub, our contribution to the five your standard by well over 50% you're over a year and the number of five G invention disclosures by more than 30 person you're over.
A year.
You sure be believe our five year story has never be more compatible.
Asking to do so we pride ourselves in being at the forefront of development of the natural and you should all be innovation in connectivity, which is why I'm, particularly pleased with some of the work we are doing in the early stages of 60.
For example, we are a founding member of the University.
Texas at Austin, 60 Research Center.
How long has fallow thunders H N T M media Qualcomm and Samsung.
We will work with a university eating area that will form the core of 60, such as a I M machine learning advanced anything technology and more.
In September we also co hosting the <unk> Symposium fall at two day works, all you've and that'd be held in partnership with northeastern University and the next Ah lines.
So you've been attracted over 2000 participants and brought together over 60 speakers from industry government academia and beyond.
To discuss some to priorities opportunities and challenges for 16.
On the litigation frowned, our new license agreement with Y'all me means all pending cases between the parties will cease.
We still have ongoing proceedings with Lenovo in the U K U S and China.
In August we want a complete week fee from the UK High Court E. R first technical trial, which phone or patting, even suit to be valid essential to four G. L E standard any French by Lenovo.
We are now preparing for our friend <unk>, which will take place in January of 2022 and.
And we are determined the terms that will be applicable to a worldwide license with Lenovo.
Moving on to some internal changes at the company, but we first announced in June we have taken steps in 2021 to restructure our research and innovation group with a focus in France.
We recently expanded that effort to look at to talk cost structure of R. G. N a functions largely centered in the U S which.
Which will result in significant I knew cost saving beginning in 2022.
But decently as we announced two weeks ago be appointing just Smith, Arthur a new Chief Meagre officer and corporate Secretary.
Josh was previously Deputy General counsel at Interdigital, where he managed a wide range of matters, including public company reporting.
Corporate governance.
<unk>.
Employment R&D collaboration agreements and our yes G initiatives.
After six years to be seen the digital he has in that sense ending of the company.
And it's a superb a decent to our exactly would either ship team.
Josh is taken away from Rick Greenough with retiring after several years of excellent service as our chief speak Officer.
Rick has agreed to stay on board with a strategic otherwise.
Until December to ensure a smooth transition.
I like the sounds rig for his contribution to into digital and two weeks can well for his retirement.
And with that I would add reached provide you with more details or third quarter business performance.
Thanks learn.
I'm really pleased to provide details on what has been our strongest quarter and almost four years.
With increased adoption of both the five G cellular standard and Hgv's video standard the combination of our wireless and video technologies has never been more important.
This is evident in our strong financial results headlined by $144 million of revenue, including $93 million a recurring revenue.
Both the increase in recurring revenue and the past sales were driven by new license agreements, including Xiaomi on the mobile side and with a top 10 global television manufacturer on the C E site.
Jeremy is this excuse me Jeremy is the third major smartphone manufacturer, who has taken a license to a wireless and video technologies and the last two years.
Led by our five G wireless and Hgv's video technologies the aggregate value of these three contracts is expected to be more than half a billion dollars.
We now have roughly 55% of the smartphone market under license.
And expect to be paid on about 800 million smartphones shipped during this year.
Given the increased concentration within the market.
We believe we have an opportunity to increase our licence market share to about 80% by adding a few customers.
At the same time, we are increasing our penetration and see markets, where the latest licenses have raised a recurring revenue to roughly $20 million on an annualized basis.
Given our substantial operating leverage.
The 64% increase in total revenue we reported.
Led to a 138% increase in operating income.
This occurred despite reporting one time expenses.
Of $26 million.
The remaining sequential increase in operating expense was driven by a 3 million dollar increase in litigation costs.
As we move toward our scheduled January 2022, Fran trial with Lenovo.
Even including the one time expenses, we reported gap EPS of 83 per share.
Which was our best quarterly Mark since first quarter 2018.
Moving on to cash we reported $87 million of free cash flow in the quarter.
Driving or quarter and cash balance to $900 million.
We also reported that are year to date share repurchases have reached approximately $30 million as of November 3rd.
Looking forward to Q4, we expect total revenue to be in the range of 98 to 100, <unk> excuse me $105 million, including an expected increase in recurring revenue to $97 million to $100 million.
As always these.
These figures do not include any new agreements, we might sign over the balance of the quarter.
As for fourth quarter expenses.
We are in already noted we expanded our restructuring program early in queue for.
We now expect to recognize another $5 million to $6 million of related restructuring expenses in the fourth quarter.
On top of our expert recurring expense base of just over $80 million from the third quarter.
We believe these actions will better position us for growth by.
By providing the space to make additional investments to further expand our leadership in key areas.
While driving higher profit margins and better returns to our shareholders.
We will provide additional updates on the long term net savings from these actions as we evaluate our levels of reinvestment.
In connection with developing or 2022 plan.
With that I'll turn it back over to Richard.
Thank you rich. Thank you Laura and we will now open the call for questions.
Thank you if you would like to ask a question. Please signal bypassing star one on your telephone keypad.
You're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Press Star one to ask a question will pause for just a brief moment to allow everyone an opportunity to signal for questions.
Okay.
And once again that is star one if you would like to ask a question.
And we'll take our first question from and stuff on it.
Hey man.
Just wanted to get the little detail on what's going on on the smaller video players you know I I know you talked about doing some patent pools.
<unk> <unk>.
What's the progress down and help us understand how that is going to proceed. Thanks.
And we missed the beginning of your question I think you were asking what the status is with smaller video players and how we plan to proceed there individual licensing versus Bulls yeah.
Yeah. It gives you a call could I get that ran into video there. Yeah. So wanted maybe to go back to the next here and get a little color on that thanks.
Yeah, So and we we announced I think it <unk> I mentioned in a script then the number of licenses we signed over the last year, which is was you know quite a few particularly if you compare that to historical patterns and and part of that is by you know, making progress with some of the smaller video players.
Of course, the Big news for the quarter is on video side is signing a top 10 global television manufacturer you know that's the the most significant C. E. D O that we sign since closing the Technicolor acquisition, but of course, you know that that's still that acquisition still plays into the Zalmay deal.
Which as I mentioned includes H a V C technology.
That answer your question Yep. Thank you very much it that's all I had.
Okay great.
And our next question comes from Derek Satterberg call.
Call your security.
Hey, guys. Congrats on the very strong results incorrect, you're rich on the retirement on the commentary that you guys put could potentially license 80% of the handset market wondering what the timeline you envision for potentially getting to that 80% number.
You know, what what sort of needs to happen as well and can you guys benefit you know as you see that concentration sort of go up from the key players in the industry or sort of do you need to wait until those existing deals that you have with those guys. You know you know you have to wait until you resign those deals.
Hey, Hey, darkness learn good morning, yes regarding the 80% market concentration question, we do see we can catch with that number by simply signing another few winders that has significant market share and Ah regarding the exact timing of the final those agreement each E.
We don't discussion has a some sort of discussion dynamic as we described earlier, we always prefer a commercial negotiation and most of our ideas to get them through a commercial negotiation, Ohio, where if we help reinforce our right with our track record as indicated we are able to successfully enforcer right every single time.
M D to a license agreement that supports our valuation <unk>.
Regarding the key player market increase of the agreement that has already in place Alas a majority of our agreement are fixed dollar amount.
Amount of agreement so unite contacts we got a substantial reoccurring, but atheist, the same payment throughout the course of the the agreement and we do have some bearable agreement, but they are smaller portion of all the licensing program. However, as you have pointed out here our agreement they all have surf.
In terms so when the agreement ice fires when we do we negotiate with them for the next agreement that are you increase logging as well as the future projections. Some 30 indicated that will cause theater.
Got it that's helpful. And then on non current royalties came in higher looks like due to the T V agreement.
I think that brought in close to 21 million that seems a bit a typical for a consumer electronics agreement could you provide any additional color as to why that that was the case this time.
Yeah, I think what I'll just say there is there was a period of infringement you know prior to signing the agreement. So that was the the result of covering some of that prior infringement.
Got it got it and then just another quick one on recurring revenue it looks like that T. V deal contributed a one and a half to 2 million. This quarter Bud guidance, you know sort of implies a decent step up.
Just curious if you can sort of parse out the upside and recurring revenue guidance as it relates to new deals you know timing of some of the the you know you guys receiving the revenue Tech solutions.
Any color on that sequential growth side and recurring revenue would be helpful.
Yeah sure so uhm.
I guess, the first thing I'd say relative to the T. V deal, we had been reporting roughly 15 million annualized a recurring revenue and see and now I've kind of talked about that C. E recurring revenue being 20 million on an annualized basis I'll note that that does move around a little bit more then the mobile <unk>.
<unk>, because there's a greater proportion of much greater proportion of variable deals on C. E. So you know that's going to really move up and down based on shipments in a given quarter, where on the mobile side. We have you know, particularly on a dollar way to basis much more revenue coming from fixed.
Just agreements, which you know we're gonna be this generally the same quarter after quarter.
That's 5 million dollar increase if if if you think about it if if you just take one and a half you annualize that's about 6 million.
Yeah. So so that's kind of in that zone and again, we don't Wanna be overly precise because of the variability quarter to quarter.
So so hopefully that addresses the question if there was another aspect I Miss Derek Please let me know.
No no that was that was very helpful. Thanks, guys.
Okay, and then let me just clarify Derek there's a plethora of Richard's I got you know in addition to myself, we have Richard Lloyd here today. It was rector Leno are cheap legal officer that I'd retire itself.
Yeah.
Graduation.
Nowhere else I'd, just rather just wanted it at our files.
And our next question comes from Scott's Tara with rock capital.
Hey, good morning, Thanks for taking my questions. He just to follow up on the prior question in terms of the the the the T V relationship that was signed I Wanna make sure that there was a recurring element to that that was recognized uhm in the quarter also wondering kind of with the pipeline looks like that in the near.
[noise] term and if there was any I O T contribution during the quarter, if that's starting to ramp up and where that stance.
Yeah. So Scott there there was a recurring element to the television deal signed during the quarter, So I'll start with that and.
As to I O T. Yeah. There continues to be a revenue recognition from contributions from the Avanti platform I I I don't think there's anything material to call out in terms of the change there, but certainly we'll we'll keep you updated as as that does evolve.
Great. Thanks, and I Wonder if you could give a quick update in terms of the relationship in discussions with L. G. Alright in terms of their their potential exit from the handset market and sell that business what that means for any sort of potential licensee opportunities going forward. So any update on that front.
Yeah, Hey, Scottish learn so what's the point in Alec you had decided who acted thus far from licensing program. So let's I'll read out the light the mobile licence and cruel then no longer.
Please so.
<unk> allergy eighth at Y significantly R. E T V market Ah. So as we are expanding the C E market costume my electronic market. We are engaging accurate discussion regarding you know getting paid the C. E side I don't have you know more precise dies for report other now we are having accident.
When you need them.
And lastly, if I could learn you know now that you've been in forbid you guys are certainly generating some significant meant a casual you start to return some of that to the shareholders in in terms of buybacks and otherwise, but I'm wondering how you're starting to think about an organic opportunities. You know are you actively looking on that front or do you have enough on your plate in terms of X.
<unk> with unlicensed mobile providers as well as the the video opportunity that's.
Yeah. He's got so regarding yes, we do have a substantial amount of cash on our balance sheet reaches the icons at all very strong strange for the company and we have a wide stoneking Superstorm patent portfolio and a very impactful tag for authority enforcing our right when we have to we.
We are always looking at new opportunities. So if there's a dried off turning coming in that makes sense for us to call today to emerge as a nation. We we all are eternally we are very very strong when he got into the all license opportunities does he appointing out to here as I mentioned earlier, we always prefer tomasso negotiation and we are having negotiations with multiple windows <unk>.
France and as I mentioned also earlier, we are ready to enforce our ride if necessary. So and we have already did a tough try turning that space awesome.
Great. Thank you.
And once again, if you would like to ask a question that is star one we'll take our next question from Joseph Colosky with upstream investment partners.
Good morning.
Morning, right.
On a great quarter and a great beginning to the new management team I've been a shareholder since the early 1980 S.
And I have about 100 clients for shareholders as well and you really answered my questions, but I did want to make two brief comments you know bill Merritt was a great litigator.
But I think it showed in his management style and I'm really happy to see indications at the new management is more collaborative approach.
And and I appreciate that very much. The other comment is that interdigital was known for years, where it's good relations with its shareholders, who acted frequently as a free public relations or resource.
And at some point in the not too distant past.
There seems to be more of a circling of the wagons and I'm I'm grateful to see that the company is working to renew good relations with the shareholders that I think could again be a very good resource for the company and an example, being simply taking questions to comment on this call.
And it really it encourages me and I think that the entire movement of the company in the last several months has been just in the absolute right direction I really wanted to thank you very much for all of that.
Thank you Joe I appreciate your comments.
So as of day to learn I also appreciate all comments also wanted to thank you for being a long term shareholder flowing into digital and we classroom date for the new management Daphne wanting to be automobiles legacy, which he has built a very strong company and a marlboro great for what we have and we obviously wanted to work with shareholders for the next level of success.
Thank you Sir.
And once again that is star one if you would like to ask a question.
And at this time I am showing no questions and keys I would like to hand, it back over to our speaker for any additional are closing remarks.
Thank you Amy <unk> do you have any final remarks, yeah, hey, Thank you for everyone for joining us today I'll close by saying. Thank you all to all the employees for your dedication I strikes Goosen I also hope hourglass stay safe and healthy as we continue to navigate through the pandemic.
Hi, Sarah I mean, we can hand, it back to you.
Thank you at this concludes today's call. Thank you for your participation you may now disconnect.
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