Q2 2022 InterDigital Inc Earnings Call
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Yeah.
Good morning, and thank you for standing by welcome to the second quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today Richard Lloyd. Please go ahead.
Good morning to everyone and welcome to <unk> Digital's second quarter 2022 earnings Conference call.
I am Richard Lloyd Communications director and with.
With me on today's call I'll learn Chen, our president and CEO and rich spread ski our CFO .
Consistent with last quarter's call.
So 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 sections of our 2021 annual report on Form 10-K.
Our second quarter 2022 quarterly report on Form 10-Q, 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 measures tracker, which is available on the Investor Relations section of our website.
With that taken care of I will turn the call over to Larry.
Thank you Richard.
Good morning, everyone.
In the second quarter, we continued to make excellent progress across all parts of the business and I'm, particularly pleased that the strong momentum. We built in 2021 has continued into the first half of this year.
In Q2, we significantly increased revenue and net income.
On a sequential and year over year basis.
We entered into a multi year worldwide now.
All inclusive fee bearing license with Amazon.
Covering a range of Amazon's consumer electronic devices and are you going to do those patents.
They made a major addition to our leadership team.
We strengthened our balance sheet.
We saw significant growth in revenue outside of core smartphone market.
In the second quarter, our total revenue increased 42% year over year to $125 million.
We also delivered a substantial improvement to our profitability more than doubling our adjusted EBITDA to $78 million.
Lee Joe.
14 fold increase in earnings per share to <unk> <unk> per share.
I will let rich talk you through our financial performance in more detail why I cover some other notable highlights from the quarter.
Starting with our recent announcement that Doctor Rodriguez Pankaj has joined interdigital.
New CTO.
<unk> was previously a senior vice President and head of corporate R&D at Qualcomm.
Romney spent 25 years in research and senior leadership roles.
His pad one instead of the wireless, including both <unk> and the application of AI to connectivity.
It's a perfect fit with our technology footprint.
And with the long term direction of our innovation.
He is a named Investor in 230 patents worldwide and he has a strong track record of translating technical breakthroughs into patented innovations.
Im delighted that <unk> has joined us and I'm confident that he will lead our team to even greater heights, and we have built on the leadership of his predecessor Henry Terry.
Along with our ability to attract world class talent.
The keys to our recent success has been the value that we continue to drive that.
Leading innovator across a range of critical technologies.
Our research on it.
Foundational horizontal technology.
Cellular Wi Fi <unk>, and AI and machine learning.
We license the IP that <unk> horizontal technologies across many verticals that utilize them.
Smartphone use all of these technologies and continue to be our core market.
Meanwhile, CE devices as well as a growing array of Iot product.
If I use marred what has <unk>, such as Wi Fi and <unk>.
In short yes.
We are in excellent position to drive growth from both existing relationships and new opportunities.
In recent years, our strength in video has become even more valuable because we have built a formidable innovation pipeline.
Florida opportunities in building more immersive consumer experience and continue as a leading contributor to both the H E B C and <unk> standard.
We have also achieved impressive growth in our <unk> portfolio.
It's now numbers approximately 7000 patents and applications.
In wireless our portfolio of cellular <unk> for <unk> multimode device.
Continue to group in the second quarter and now stand at more than 10000 patents and applications.
You may all have incredible strong base.
Generation of mobile that's what defined connectivity for the rest of this decade.
This foundation has been enabled by our team of superb engineers.
The second quarter, the institute of electrical and.
And electronic engineers.
<unk> recognized wildfires senior wireless engineer for his work in <unk>.
Awarding him a prestigious Benjamin Franklin Key award spy.
Specifically he was recognized for his groundbreaking contribution to millimeter wave.
Which is a foundational technology that enables both sides. These incredible speed.
And is ultra low latency.
Staying on the ICI Bowie another interdigital engineer was recently appointed the chairperson of our topic interest group that is responsible for identifying and exploring use cases for artificial intelligence and machine learning in Wi Fi.
While we continue to reap the rewards while innovation being implemented in todays devices.
Many of our research effort are firmly focused on the technology that will shape connectivity and content consumption in the years to come.
Im, especially excited by the new partnership we announced in June with India.
<unk>, leading institute for research in digital Science and technology.
This new innovation, we are not only supported innovation. This new initiative, we are not only support innovations across France, but also enable engineers to pursue cutting edge scientific research.
And to explore technologies that will define media occurrence in the future in areas, such as ISR and <unk>.
On the licensing front, we believe strength of our innovation, the increasing value of our patent portfolio and our licensing track record well position us to renew key agreements and sign new ones.
In the second quarter. In addition to the Amazon deal I mentioned earlier, we also closed additional agreement with industry device manufacturers Zebra technology co.
During our <unk> and Wi Fi technology.
These devices are used in retail healthcare banking manufacturing transportation and other industries.
This license agreement demonstrate the broad applicability of interdigital foundational innovation and our patent portfolio beyond smartphones.
We also enjoy a significant progress in licensing our innovation to auto sector with new deals signed with GM and Ford through our licensing platform partner.
Almost half of the connected cars on the market and now licensed <unk> <unk> and <unk> standard essential patents.
In summary, our licensing platform performance this quarter and our lines of opportunity that we see our core market and in your area.
<unk> is helping creating considerable value.
This is an exciting time to be an innovator in connectivity technologies.
And I am pleased with how our strong foundational innovation translates into new licensing agreements.
In term of litigation activity, we continue to look forward to the upcoming decision from the UK High Court.
Brand trial against Lenovo and.
And I will reiterate my message from our last earnings call that we remain confident in the strength of our technology the quality of our IP portfolio and the merits of our case.
On the policy front.
I want to highlight that the Doj niece and U S. PTO recent leads all of our 2019 policy statement, our ICP licensing and frame remedy is a positive development.
We are not getting into all the details here, but the announcement has moved the ACC policy in U S.
<unk> balance and more predictable to action and confirmed our belief that while our dispute over ICP licence do arrive factors such as the value of the Andi innovation sort of guide the course decision making.
The second quarter also saw progress in our ESG program with a reduced our second annual corporate sustainability report.
Interdigital, we passionately believe that our technology contributes to building, a better and more sustainable world.
And this year's report details not only how we mitigate our environmental footprint, but also how we maximize our social impact.
Sure our governance meets best practices and.
And how we strive to help our employee to excel.
Our encourage you all to read the report which can be found on our website.
With that I will turn it over to rich.
Thanks Lauren.
As Larry noted, we delivered another strong quarter with significant increases in revenue and profitability on both a sequential and year over year basis.
We grew total revenue, 42% over second quarter, 2000, $21 million to $125 million, including $100 million of recurring revenue.
While mobile agreements such as Xiaomi have driven a large part of our growth. We have also begin just begun to see meaningful growth in the CE auto and Iot markets.
In second quarter 2022, we had over $35 million and combined revenue from the CE auto and Iot markets include.
Including almost $12 million on a recurring basis.
Both the total and recurring revenue from these markets represent record levels.
For the first half of 2022, we recognized about $23 million of recurring revenue from these markets, representing a 70% increase from the comparable period in 2021.
While we are pleased to report such strong revenue from these markets, we remain committed to driving continued growth.
Moving on to expenses you can see the benefits from the cost management actions, we initiated a year ago and our first half 2022 results.
On an annualized basis, excluding litigation and stock based compensation, we have reduced our operating expenses by almost $35 million.
This savings is net of the reinvestment we have already made and we believe that we have improved our capabilities, while lowering our cost base.
Moving on to capital allocation, we made the decision to refinance our convertible debt during the second quarter as it became clear we were heading into a volatile period marked by inflation and rising interest rates.
Similar to our prior financings, we entered into an option structure that increases the per share price at which we experienced dilution from our new debt to $106.
The net proceeds from our new debt were primarily used for two purposes.
First to buyback approximately two thirds of our old debt and second to concurrently buyback $75 million of our common stock.
Looking forward to the third quarter. We currently expect revenue to come in between 96 and $100 million.
At this point our revenue guidance is based only on existing contracts. So the entire range is comprised of recurring revenue.
On the expense side, we expect additional investments in research and development and an uptick in litigation costs related to ongoing proceedings, we will drive operating expenses to the range of $76 million to $80 million.
Finally, we expect non operating expenses comprised of interest and other expenses to be in the range of $6 million to $8 million and an effective tax rate in the range of 25% to 27%.
With that I'll turn it back over to Richard.
Thank you rich thank you Lauren.
Operator, we can now open the call for questions.
Thank you at this time, we will conduct a question and answer session and as a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Hugh.
Okay.
Okay.
Okay.
Okay.
Okay.
Andrea <unk> from Sidoti.
Go ahead your line is open.
Alright, Thank you for taking my question.
Congrats on good progress.
Thanks, Jonathan a little bit about.
And maybe if at all the sentiments among among your counterparts have have changed given the economic environment and geopolitical.
Jason.
Is that affecting at all in your discussions.
Okay.
Yes, Tony this is learning so I understand the geopolitical situation in part of our assay in particular, its <unk> sensitive and then the economic has been in turmoil in the last couple of years, partially due to COVID-19.
But our current.
Revenues, primarily supported by our fixed.
Revenue contract. So we are largely very solid from the near term turmoil and some that downturn may play a role in our renewal discussion, but the major contract. We are currently negotiating they're not being that much impacted by some of the issues. So we are well positioned.
On the geopolitical side here, we are a global player. So we have been watching the global environment very very carefully.
And so far we have been demonstrating a very strong track record so striking ferity deals across multiple windows.
Given continent, so, but we are watching very carefully.
Okay. Thank you and rich as you mentioned.
Operating expenses were reduced by $5 million net of Reinvestments, not really made what kind of remaining the investments they have.
Yes, so we've been reinvesting primarily in R&R.
And we expect that to continue for the moment I will stick to the guidance.
Provided for the next quarter, where we mentioned an uptick.
Led by Rmi, Reinvestments, but also a little bit from the litigation.
Associated with ongoing matters.
So that uptick is.
An isolated to the third quarter.
Yes that relates to the third quarter guidance.
The uptake of being on a sequential basis versus Q2.
Okay. Thank you that was all for me.
Thank you.
Thanks Anna.
Our next question comes from Jonathan <unk>.
<unk>.
Bank of America. Your line is open go ahead.
Hey, guys. Thanks.
Thanks for the.
Thanks for taking my question. The first thing I want to touch on is if you have any visibility for your opex guidance.
Given that the implied operating margin seem to decline sequentially. So would appreciate any color. There and then I also just wanted to ask if you have any updates on the Apple and Samsung deals. Thanks.
Okay.
Sure Jonathan I'll take the first part so.
Theres not a close association between our revenue in a given period and our operating expenses.
Period.
The R&R, but I was just referring to relates to the last question.
That we are investing in today is to drive revenue that we would see years down the road, because we make such long term investments and fundamental research.
So.
It's not so much that we really have a.
Effectively 100% gross margin on new business, because theres not variable cost associated with it when we license we're granting permission to use technology that we've already invented in the past.
So that.
This uptick in R&R is really to drive future growth not related to that.
Coming third quarter.
So hopefully that answers that part of the question I'll, let <unk> answer the second part, yes, Hey, Jonathan.
For the Apple Samsung negotiation, obviously, our relationship with Apple and Samsung is very very important to us and we have been focusing on the renewing their contracts both auto Ohio.
<unk>.
I think the airlines are where the Apple contract expires end of Q3 of this year and Samsung contract expires end of Q.
Q4 of this year.
It's always worth reminding that heat those licensing agreement with US it's really represents very long term relationship.
<unk> has been our licensee things 2007 before the shape the very first iPhone.
<unk> has been our licensee for actually more than 25 years before the strip the very first got equity from those.
So through the.
Thus our long term relationship here have been module renewals happening and we feel confident about the current negotiation based on how much our technology has advanced Frankie.
Even more important.
The connected world Wisdom is on.
Auto multi video content being.
Consume on the device.
Obviously, its five year adoption.
We will be a pretty major driver you arent negotiation.
And also it's worth noting that both alpine and Samsung has a.
Higher concentration of the premium devices.
In their worldwide sales, so those devices actually make more and.
Better use of our high end technology, so to that degree it's worthwhile, obviously for us to remind them how much they have benefited from everything we have delivered.
Got it thank you.
Yeah.
Yes.
Okay.
Okay. Thank you Jonathan.
Our next question comes from Liana <unk> from Bank of America. Your line is open go ahead.
Okay.
Your line is open.
Perhaps that was an inadvertent Henry's.
Sure.
Okay talent that you have a question.
I'm, sorry, I was on mute and I was talking to myself. So can you hear me now.
All right.
Really good question for you I have to repeat that.
So you get.
We get that.
You get two for one today from Bofa so.
And I apologize if my questions are are green, because I'm new to cover the stock so.
Last year, you grew sequentially in <unk>.
63%.
This year, you're guiding for a decline both on a sequential basis and year over year basis.
Can you talk about the seasonality can you talk about if I if I get it right you are guiding for $98 million, which will be down year over year and will be down sequentially. So can you talk about seasonality what drives these fluctuations in growth and.
Any color any color on.
Kind of what to expect later on and they've been even if we don't there's no explicit guidance can we talk about kind of what drives the ups and downs. These these.
Quarterly fluctuations thanks.
Yeah, Yeah, no no. It's a good question town happy to address it.
Couple of things I'd point to the first regarding seasonality, there's not a lot of seasonality in our revenue.
If you and you can find this on our financial metrics that we publish on our website.
We show the percentage of revenue that comes from variable agreements.
Per unit, where customers are reporting the volume they shift and the associated revenue are royalties they pay us for the quarter.
And then also fixed fee revenue where.
There is a fixed price over the term of the agreement and we typically amortize that that total quantum over the term on a straight line basis with maybe some some sometimes exceptions.
But 92% of our revenue in.
In the quarter and year to date is coming from those fixed price agreements. So therefore, that's a really stable base quarter to quarter.
And there is only a small amount that's coming from the variable less than 10% that may be subject to any seasonality that does exist.
The majority of the fixed fee and the majority of the total revenues on the mobile side.
Definitely leans towards.
The fixed fee on the consumer electronics side, that's where it's more tends to be more variable and.
Maybe there is a little bit more seasonality, but overall a small component so what's driving some of these changes on a sequential basis.
We also break out I'll mentioned recurring revenue from past sales and with some of the new agreements that we signed this quarter. When you think about Amazon and then through our licensing partner GM and Ford.
As well as others. There is some pass sales, where they're basically catching up for the use of our technology our prior to entering into these agreements.
So we recognize that pass them out.
We try to delineate so it's clear to everybody what that impact on the quarter was and in the current quarter was roughly $25 million. The recurring number of $100 million. Therefore is kind of what to think about going from quarter to quarter.
And at the midpoint, we're maybe down 2%, it's a relatively small number and that again can be driven by expectations around the variable side.
And then the final aspect to all of this and so where are the meaningful changes.
And that's.
If you look year over year, we had.
Some licenses that expired last year renewed a bunch of them.
Not all of them some customers had left the business.
And then in terms of growth, it's the step function changes from from adding significant new agreements and a great example of that is third quarter of last year, when we signed Xiaomi.
<unk> third quarter of last year, signing Xiaomi Theres a lot of pass sales there as well so on a year over year basis that drives some of that decline.
Got it.
Now the industry's weakening if you look at Corvo and.
What they reported and Qualcomm what they reported everyone is talking about slowdown of devices devices still make the majority vast majority of your revenues.
And I know you have a different business model with a lot of it being fixed fixed.
Revenue rather than.
Alright device revenues and the question is what happens when the industry's weakening what's the history.
You have customers coming back to you and say Hey, we want to renegotiate our historical agreement because now we're selling 15% or less.
Or not or is there what's the variable portion of your revenues that is tied to the weakening headset market smartphone market.
Yes, Hey, Tavis learn so.
<unk>.
Earlier, so a vast majority of our smartphone license agreement is fixed fixed fee agreement what that means.
And our contractors vendor pay us the same dollar amount year after year during the term of the contract.
I mean, all our customers honor their contracts too. So we do get paid regardless of whether the market goes up or down if you would.
And that dynamic does come in play when we have to re negotiate for the next contract right.
They have lost significant market share and those factors will be frankly factored in but it's worth noting that for the next contract. We are trying to negotiate it also a long term contract we actually try to frankly look at third party projections tied to both Hardie make certain amount of forward looking.
That piece and projection does in the next five years or longer how much the volume will be sourced under shorter term up and downs will be hopefully factored in but not exactly driving the long term numbers, but more importantly for us, though it's worth noting that we currently have roughly 55% coverage.
The market, 50%, maybe higher of the smartphone market. So we see over a relatively short period of time. After we resolve lesser handfuls windows relationship here, we still be able to grow into about 80 to 85 market penetration person market penetration. So.
I think gaining more vendors and our coverage will IPP in my opinion, a much bigger driver.
In the short term you certain amount of winter, losing some market share.
And these these missing vendors are mostly Chinese vendors as much as I understand.
In the current environment, where China market is weakening.
Does it help you to get the contract.
Could it injects delays in the contract in signing the contract whats the timing aspect of getting this extra vendors that are currently not paying.
Yes.
All three major vendors we are we.
We have identified our main.
Lenders being signed up for.
The largest one is <unk>.
Amongst rebrand <unk> underground path.
Ships over 200 million devices per year.
And then the next vendor's label, which is.
Smaller than <unk>, but still very very large vendors.
And then the third one which is lenovo.
Again through the purchase of multiple a brand they are a major player.
A number of different markets, including U S.
So currently we are in DDD soon with Lenovo and <unk>.
Lenovo litigation is accretive in year three now.
We are as I mentioned earlier, we are waiting for a major court decision out of the UK.
The court will decide global base, how much our worldwide patent cohort. It's worse. There is so called frame rate determination case and that trial also.
Onset of past damages and how much money the supposed to us for all the party infringing.
Our patents against our worldwide scope.
The <unk>, we are also in litigation with <unk>.
Interdigital has filed.
A series of honesty was.
Last December Newmark, all jurisdictions against them.
But we don't have a progress to report yet because that those cases are relatively new.
So backlog earlier question to see how much the China weakening impact those negotiations all safety have somewhat impact by not significant.
The reason being all of the three vendors, we are talking about the Alberta global Windows.
Like Lenovo and <unk> and vivo T cell very significant market.
Outside China.
The case of Lenovo, a vast majority of their phone talk we sold outside of China.
So.
It's really everything is determined on a global basis here.
Okay.
The last question.
You know my education is in finance, but I became almost a lawyer covering qualcomm with the history in the Qualcomm case.
It always goes to court, but in the last second there is an agreement.
Once someone loses aside the court rarely decides it's I've been following Qualcomm since the Ninety's and it's always settle out of court eventually.
What's the what's the history of your negotiations is it is it based on court decisions or do you typically negotiate once you win a major milestone or you lose a major milestone in the courts.
Yeah, Hey, Joe.
So you are correct that frankly, our vast majority of the cases negotiated all settled before two trial that frankly has been to our digital experience also.
So we like like Qualcomm B prefer bilateral negotiation and most of the deals to get them through bilateral negotiations. So just try to give you a data point here.
Since the beginning of last year, we have signed 16 new agreement.
To the end of Q2 here so.
That's a very large number and it will be frankly added retro breaking year last year, signing 13 loss.
Starting new agreement last year, so last summer.
<unk> signed through bilateral negotiation without lawsuits.
But one thing and while we do have to file a lawsuit January .
Generally those are after a very lengthy negotiation.
Other side simply refused to pay.
Offered term that many other vendors are paying.
So when we goof all those <unk> and sometimes frankly, he's get settled before goes call sometimes to go to trial and get a court decision it's hard to see.
It's really case by case.
But it's worth noting that through the history of interdigital.
However, we have filed lawsuit we enforce our pattern right our IP right every single time.
And up.
License agreement.
The franc terms so our track record in this is a required strong.
Got it great. Thank you. Thanks, so much.
Okay.
Yes.
Thank you for your question Tom.
As a reminder to ask a question you will just need to press star one on your phone and then wait for your name to be announced.
Our next question is from Scott Searle with Roth.
All right go ahead your line is open.
Hey, good morning, Thanks for taking the questions, Larry and Richard I apologize I got on the call late so I won't rehash, probably some of the stuff you covered in your opening monologue, but was wondering on a couple of fronts.
Samsung recently renewed with Qualcomm Im wondering if theres anything to be read in that in terms of read through for you guys in there.
Ability or willingness to negotiate before an exploration of a renewal agreement.
Okay.
Yes, Hey, Scott this is Warner so.
Did you read the same news about renewing that agreement. They have continued their existing agreement added seven more years to it I think it's a great development for Samsung is also a great development for Qualcomm and I do not really know fall through a hall that will impact our negotiation.
So, but we are definitely see that as an encouraging sign that licensees enlightened <unk> continued our long term relationship.
As I mentioned earlier.
Has very long term relation with Samsung and I think thats encouraging sign okay. Good and on the technical front I'm not sure did you quantify.
CE or video contribution to the current quarter and I guess as part of that <unk> been building some momentum on that front now with the macroeconomic overhang. If you will is that changing the discussion in the dialogue and opportunity with any of the customers in the near term or are things kind of progressing as they were before.
Sure.
Yes, Hey, Scott I'll take the first part of that question, Yes, We mentioned, we didn't break it out but in combination, we said that CE auto and Iot.
<unk> contributed $35 million of total revenue in the quarter and $12 million of recurring revenue in the quarter.
So we're pleased by the traction across those markets.
And both of that total and recurring figure represent records for us.
Gotcha.
And <unk> is there any impact in terms of the discussions going forward. When you look at what's going on from a macroeconomic standpoint, particularly some of the end markets and slowdown in Tvs or smartphones or other larger video display types of opportunities.
Yes, Scott.
Policy in general, we do not the impact to our existing agreement because they are fixed fee agreement, but for the new license agreement here, It's really a case by case base.
No.
Near term focus is on pipeline Samsung and they are major player in the premium tier and based on all of the report VC DRP less impacted than some of the players who are competing in the low to mid tier devices.
Regarding the TV and others, it's really Scott, it's hard to see dinar, Italy, but you probably have our focus on getting the some of the leading brand television window deal signed and those agreements are long term agreement also and frankly the results Friday significant Pos sales components to it so it is.
Really the near term impact.
Relevant, but it is not necessarily a deciding factor.
Got you and lastly, if I could I'm not sure. If you had any comments in terms of other video monetization opportunities I'd love to hear your thoughts on that front, if not we can take it offline. Thanks so much.
Yes, we didn't comment specifically, Scott, but one thing I was describing earlier is we come.
Combining these are Technicolor acquisition, we really beyond ourselves throughout the past several decades I agree.
<unk>, the leading technology developed and frankly, leading patent holders in <unk> space, we are increasingly becoming relevant for many many devices.
Smartphones and many other connected devices here.
Did identify.
Different layers of technology involved and Sandoz services layer also been increasing from Arbor, redo technology and we are actively looking into this space and we are hopefully provide more updates in the future.
Yes.
Great. Thanks, so much.
Thanks Scott.
Okay. Thank you Scott.
I'd now like to turn the call back to Larry King for closing remarks.
Yes, hey, thanks, everyone before we sign off I, just like to thank all of our shareholders for their continued support and our employees for their contribution to another outstanding quarter. Thank you all for joining us today and I hope everybody enjoyed the rest of the summer.
And thank you for your participation in today's conference. This concludes the program and you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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