Q3 2022 InterDigital Inc Earnings Call
Yeah.
Good day, and thank you for standing by.
Welcome to the Interdigital incorporated third quarter earnings call 2022.
At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is Reyes. Please.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Richard Boyd. Please go ahead.
Good morning to everyone and welcome to <unk> third quarter 2022 earnings Conference call.
I am Richard Lloyd Communications Director and with me on today's call Laren, Chen, our president and CEO and rich <unk> our CFO .
Consistent with last quarter's call, we'll offer some highlights about the quarter and the company and then open the call up to 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 effects 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 SEC filings.
In addition to.
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 Larry.
Thank you Richard and good morning, everyone.
In the third quarter, we once again demonstrate our innovation is becoming more valuable.
Increasingly connected world.
We grew our innovation pipeline with a record quarter for new inventions.
And our recurring revenue base with 8% growth year over year <unk>.
We increased recurring revenue in consumer electronics.
Automobile for the sixth consecutive quarter.
<unk> entered into a new seven year license agreement with Apple that goes all the way to 2029.
Our new deal with Apple is a huge validation of both the quality of our innovation and the strength of our patent portfolio.
And does the term of the deal into digital we are recognized.
$134 million annually for seven years.
This represents a 15% increase.
Through our previous Apolo deal.
Apple is one of our longest licensee dating back to before the first iPhone when wholesale.
Im delighted that we are able to agree to a new mutually beneficial deal before our previous agreement came to mind.
I would also add that Apple is a clear leader in the rollout of <unk>, particularly in the premium tier of the smartphone market.
So this deal serves as a resounding endorsement of the strength of our portfolio, which now consists of more than 10000 cellular standard essential patent assets.
<unk> 6000 video related patents.
And a significant number of highly valuable implementation patents for <unk> Martin about handset.
The asphalt license also came at a time of increasing momentum in our licensing programs.
Over the last 18 months, we have signed new agreements and renewals.
Aggregate value of more than $1 $5 billion.
Including <unk> agreements and additional agreements executed through partner licensing platforms.
While we still see plenty of growth in our core smartphone business, we have built placebo of traction in the consumer electronics and our key automobile market.
In the first three quarters of this year, we are seeing a 37% increase year over year.
Our total revenue.
And Ah 60, 60% year over year increase in recurring revenue in these markets.
Together those vertical are on track to deliver annual revenue of almost $100 million.
By the end of the year.
This is excellent progress and underlines our belief that our innovation are only become more critical across a growing number of industries.
In the third quarter automobile was particularly strong with several manufacturers, including Toyota Honda and Nissan.
I'll talk a license to our portfolio of <unk> patents through our licensing partner.
Agreements means that more than 100 million connected vehicles are now licensed to our <unk> technology.
Another 30 to 40 meter and forecasted to be licensed in the next year.
With the industry analysts are projecting double digit growth in connected cars through 2026, and five projects to ramp up by much of the auto industry.
Automobile to remain a sector with significant upside for the foreseeable future.
I should emphasize however that we are only at the beginning of our licensing journey in the router out in market and I am excited by the potential use cases that we have yet to see in <unk>.
Third I have answered in the past closing a licensing deal without aid of Giessen is always our preference.
But we remain committed to enforce our IP rights magnetics.
With $1 5 billion of new contract revenue.
<unk> Apple deal.
Reinforcing the strength of our balance sheet.
We remain in excellent position to renew as far as smartphone contracts and licensed new sectors.
At the same time, ensuring that we keep on making investments to grow in <unk> footprint.
Thanks to the outstanding all part of our engineered this footprint continues to grow.
Recently, we announced a new partnership with Philips.
Work on a more immersive video technology that will benefit <unk> driving experience.
We continue to see considerable upside from our strength in video technology, such as the BBC and all work related to more E. Murphy big firms should ensure that our redo innovation pipeline remains strong for years to come.
Overall, our <unk> engine is more robust than it has ever been.
In Q3, we can rate the highest number of new England states quarter in our company history.
During the first three quarters of 2022.
Total number of new patent family filed was about 10% higher than the whole year of 2021.
Recent business wins.
We rely on our ability to invest in cutting edge horizontal technologies.
Translate them into high quality patents and make our innovation available by licensing to a growing universe of device manufacturers caused multiple verticals.
Our Apple agreement is yet another endorsement of holiday cycle continued to deliver significant financial results and our success in consumer electronics.
And our key autos.
Demonstrate that exciting opportunity we have in device outside smartphones.
We also see a growing number of opportunities.
Our service providers.
Including our innovation, which all for us another area of growth.
Overall.
Eight with how we continue to execute against our goals across the company.
On the litigation front, we are still waiting for the decision from the UK High Court.
<unk> filed against Lenovo and we remain confident in the strength of our case.
Before I hand, it over to rich.
Want to mention that these months at interdigital.
Sally burden, our 15th anniversary.
And I want to offer my personal thanks to current and former employees our shareholders our.
Our licensees and partners and all of those who are supporting our journey to become a leading innovator in connected technologies.
With that I'll, let rich give you more detail on our financial performance.
Thanks Lauren.
As Larry described this past quarter, we made two very important steps toward our stated goal of achieving $650 million or more in annual recurring revenue from device licensing.
First.
We renewed Apple to a seven year agreement valued at more than $930 million.
Since we have no variable cost under this agreement. This is essentially 100% gross margin, making the Apple renewal. The most valuable contract we have ever signed in our 50 year history.
As Larry noted beginning in Q4, we expect to recognize about $134 million a year under this renewal, which represents a 15% increase over the average annual recurring revenue from our prior agreement with Apple.
Second we.
We reported our sixth consecutive quarter of growth in recurring revenue from the consumer electronics and Iot automotive markets.
During that time, we have signed license agreements with Vizio, Sony and Amazon among others and through our participation in an automotive licensing platform.
We now have approximately 80% of the connected three G <unk> car market under license.
Our aggregate annual recurring revenue for consumer electronics, and Iot auto has grown approximately 140% from $23 million in first quarter 2021 to over $54 million in the third quarter of this year.
When you include catch up payments from past infringement, we've reported approximately $75 million of total revenue from these markets in just the last nine months.
We have updated our revenue tables, and our 10-Q press release and provides financial metrics clearly breakout recurring revenue from each of these two important vectors for growth in device licensing.
Moving on to expenses, our operating expenses came in lower than our expectations driven by our final tallies for litigation and also aided by the strong U S dollar.
Overall, the combination of our revenue growth and cost management resulted in almost $190 million of adjusted EBITDA through nine months at a healthy 56% adjusted EBITDA margin.
With continued progress towards our annual recurring revenue go from device licensing of $650 million or more.
And continued cost management plan, we believe we can increase our adjusted EBITDA margin to about 60% or more.
Achieving both our revenue and margin target would equate to roughly $400 million of adjusted EBITDA on an annual basis.
We believe adjusted EBITDA is a great metric for us as we essentially have a subscription business.
We tend to sign long term contracts, often time five years or more and we tend to recognize revenue smoothly over the terms of those contracts.
Adjusted EBITDA adjusts for the timing of payments and better depicts the ongoing cash generation power of the business.
For example, you can see our accounts receivable increased to over $400 million at the end of Q3 due to the partly frontloaded payment structure of one of our recent agreements.
We expect the collection of this receivable in the fourth quarter will drive record free cash flow in the quarter, but will be moderated and our fourth quarter adjusted EBITDA.
With that I'll turn it back to Richard.
Thank you rich and thank you Laura.
Operator, now open it up for questions.
Good day, and thank you for standing by.
At this time, we will conduct a question and answer session. 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.
Okay.
Thank you we're now ready for the first question.
Our first question comes from the line of Scott.
Zero.
From Roth capital partners.
Your line is now open hey.
Good morning, Thanks for taking the questions.
Good morning, Larry.
To quickly dive in the historically you've reported the revenue figures a little bit differently. I was wondering if you could recalibrate us on that front in terms of fixed fee in the third quarter.
And also trying to get my hands around.
The operating expense structure I know this is a particularly active time period from a legal and litigation standpoint, with Apple just concluded potentially Samsung whats going on with Chinese Oems and Lenovo.
I'm wondering if you could help us understand what a more normalized kind of operating expense structure would look like I know you gave guidance for the fourth quarter, but as we get out into 2023, how should we be thinking about what that structure looks like and then I had a couple of follow up questions.
Yes, Hey, Scott I'll take those questions.
Starting with the first part on the way that we're reporting revenue.
We're just talking about for some time and the breakout between fixed and variable just doesn't seem as useful.
We'll provide that information in the metrics that you can access on our Investor Relations section of our website.
So it's available to folks, but for a long time, we've been around 90% or a little bit more fixed revenue.
And we see just a lot of growth outside of smartphones and the consumer electronics Iot auto.
Sector and I think we mentioned, it's our sixth consecutive quarter of growth there, 140% compared to first quarter of 2021.
And we think it is important to show that we are growing both within smartphones as well in these other areas.
The second part of the question on Opex.
I think the important thing to look at there.
You can again see this in our financial metrics is looking at our overall operating expense.
We did note that.
With success this quarter, we had some adjustment in some of our performance compensation accruals. So it's a little bit elevated and we've guided for that to come back down in Q4 closer to the levels. We originally guided for Q3.
And that does include a healthy amount of litigation.
You can see right on our financial metrics, where we've been running there.
About $11 million in Q3, so I think excluding litigation.
Without putting too fine a point on it we're generally in the ZIP code, we're going to continue to invest in the business.
And then the bigger more volatile thing is where litigation goes as we continue to.
No.
Operate in our litigations with Lenovo and auto and then we still have important renewals coming up.
That's helpful.
Lauren if I could jump in on the Iot and auto segment been having some success now starting to see some momentum building behind that and I think you mentioned that 80% of connected vehicles are now under the Avanti licensing partnership deal.
That's around <unk> and <unk> I'm wondering how you're thinking about <unk> is that going to be contributed to.
A larger.
Industry patent pool are you guys going to go it alone how do you approach that market going forward.
Yes, Hey, Scott Good morning, Yes.
Yes, Youre absolutely correct, we are seeing a lot of momentum in the Iot, which include the overall auto sector here and you also said I'll start with the <unk> coverage under the license in partnership with anti <unk>, we ought to be ready for either approach. We are absolutely variety for duet licensing as we see.
A lot of incremental value of <unk> enabled connected cars on top of the <unk>.
In the meantime, we are also opening for exploration of a potential partnership in those areas. So regardless with either approach, but as I said in my prepared material, we see a lot of growth in this space because of connected cars over all wheel grew.
In terms of market adoption and <unk> just on top of it regarding the value added.
Okay.
And lastly, if I could just on the on the video front.
You started to talk a little bit about streaming opportunities I'm wondering if you could flush that out a little bit. What's your latest thoughts are in terms of the opportunity to monetize your video patents into other I'll call them non traditional areas and maybe throw on top of that as well look I know you've got a lot on your plate right now, but inorganic opportunities are they starting to crop up for you as well.
Or there is enough going on in terms of driving.
Our growing recurring revenue stream and Iot CE and auto.
Really not part of the near term focus.
Okay.
So far the radio space through our inter dealer development as well as our acquisition with Technicolor we offer.
We have one the strongest R&D pipeline as well while the strongest.
Lee do patent portfolio in the industry.
Our main focus has been and will continue to be monetizing that device licensing, which we are projecting at $650 million.
Near to mid term opportunity here.
I think it's very clearly shown in the industry are technology that are our patent portfolio is very much relevant for the service delivery by a number of wireless that vessel service providers in the industry is a large industry is a green industry. So we have done a lot of work.
Designing our licensing program in that space.
Optimistic about the opportunity.
But it will take time to grow.
Regarding the.
Acquisition in organic growth with organic growth as I said earlier, we have an incredible strong <unk> engine that frankly, creating innovation faster than we ever have been thus demonstrating our latest quarter.
Patent filings, we are happy with where we are but we are always look at third party opportunities. We started to any portfolio any business opportunity available we would definitely look at all of those.
Great. Thank you.
Thanks Scott.
Thank you already up our next question.
Okay.
Thanks, a lot price if we can take the second question now.
Sure.
I was just getting them ready in the queue. Thank you Richard.
Thank you. Our next question comes from the line.
Anya.
<unk>.
From Sidoti your.
Your line is now opened.
Hi, and thank you for taking my questions.
So.
Yes.
Yeah.
Well.
We confirm that.
Consumer electronics.
<unk> been going after the smaller contract.
<unk>.
And we should see that growth maybe accelerate that.
Sure.
Targeting larger opportunities within that how should we think about that growth.
Yes, yes, certainly.
Certainly when you think about consumer electronics versus.
Which is part of that line <unk> Iot and auto.
The biggest opportunity there is televisions and then within televisions.
Number one and number two players Samsung and LG, respectively or ablation. So.
There's still a lot of room for growth there.
And across a lot of different segments, but especially TV and especially within the top players in the market.
Okay. Thank you.
With the revenue there.
Also.
Include the C. A R.
Is that running parallel to the smartphone.
Conversation.
This is Larry so far a Samsung negotiation, we have been negotiating mobile opportunity renewal as well as consumer electronics, primarily.
TV side in parallel this is primarily due to our CE program with a partnership with Sony So those negotiation historically has been done separately.
Okay got it and that's where the Apple.
When you then congratulations on that.
Did that affect us.
Mike.
Is that also for Florida other consumer.
That's correct.
Yes.
Deep learning so due to confidentiality, we won't be able to get into the scope of the license with Apple beyond what we have already disclosed in the 8-K filing.
But the right way to think about our relationship with Apple is a long term relationship that frankly, both parties are very happy with the overall result that we feel are mutually beneficial.
Okay. Thank you.
If you could.
Talk about capital allocation priorities.
In terms of them.
Buybacks and dividends and so forth.
Yes.
Happy to.
I think the first thing I'll note is as I alluded to on the prepared remarks.
We do expect a large payment coming in in Q4.
So.
It's always a big topic for us and will remain so.
But our priorities remain to keep a strong balance.
Balance sheet.
With.
The large payment coming in will only get stronger and with Apple now renewed.
At least comparatively.
Lesson necessity, but still still a priority for us to maintain a strong balance sheet and then we want to make sure. We can invest in organic opportunities and talked about the growth that we have in R&D and we've demonstrated the success in.
Deploying that in the market and getting paid for it.
And to.
The extent that we're choosing not to the extent they are inorganic opportunities, we'll consider them as well.
And then finally, we.
Want to make sure we're returning capital to shareholders as appropriate and we always feel like we do a good job of that over any appropriately license time.
Okay. Thank you that was tough for me.
Great. Thanks Alan.
Yes. Thank you. Our next question comes from the line.
Of Tau Liana.
Your line is now open.
Hey can you hear me.
We can yes. Your line is now okay awesome.
This is John from Bank of America. Thanks, guys.
Apologies in advance.
On a couple earnings calls this morning, but just in general obviously, we heard from one of your.
Licensing peers last night on worsening.
Smartphone market demand in general channel inventories.
Obviously youre.
Situation is a little different not being on the volume side of licensing, but just kind of curious how that really impact you guys and what the I guess way to navigate that if there is a need for that.
Are you.
Yeah, Hey, John Good morning, this learn.
So regarding our license agreement.
<unk>.
<unk> commented here 80, or 90% of our license agreement comes from fixed fee agreement.
So in that context here, where ICU better situated than most in our industry to be able to weather sort of amount of downward storms in this area, having said that though steel we are not completely immune when we have re negotiations for renewals and so we are obviously very carefully managing this dynamic.
But it's worthwhile mentioning a few things here one is when we negotiated this agreement those are long term agreement is reached commented earlier, the five years or longer. So we are really looking at long term projection for body, where these period of time, so <unk> and diesel right out the bumps down about it if you would in the logging.
Second thing.
More applicable cloud side and some of our peers.
We currently as we discussed in prior calls we have roughly 55% of the market covered.
So we are working really hard to get to about 80% to 85% by signing up some.
Licensed customers that are using our technology. So as we expand our cirrus EWC plan of growth in those space.
And lastly.
Starting this quarter, we are separating our consumer electronics, our tea and auto industry opportunity and we have done a really good job growing that stagnant in the last year and a half. So we feel with all of those parameters balancing together, we have a really really good.
Licensing program here.
Okay.
Got it okay. That's helpful.
I guess could you.
Mentioned, the 55% penetration.
On I guess going after new deals.
Obviously, the current environment is not hopefully not a long term consideration.
But has that have you seen that impacting any conversations on that and in terms of maybe royalty rates or.
I guess, just general sentiment on signing new deals at this point.
Tommy.
Signing new deals, it's always challenging, but we have a really long time Friday in the industry to negotiate and most of the deals sort of bilateral negotiation.
Particular, though of our largest opportunity that are licensed currently it's really <unk> and Lenovo, which combined has roughly 25% of the market share here.
So I think all we're <unk> and Lenovo are boasting litigation.
So in that context, especially for Lenovo, we are just waiting for the UK judge to issue Fran decision, which could come anytime soon.
So in that context here, we don't see banking near term market up and down impacting of those decisions.
Got it okay that makes a lot of sense.
And then separately on the.
Recent collaboration deal with Philips or the on the codec side can you just discuss any potential impacts I guess on bottom line and kind of just what you see.
Coming from that deal in terms of flow through to the P&L.
Yes, so our collaboration with various states really our R&D collaboration where we are working together on the multi media user experienced an immersive user experience, which is <unk> even.
Extending.
Virtual reality.
User experience. So it's frankly still are foundational research. We are doing is leveraging the strengths. We already have in some of the crude at the area in terms of <unk> and others.
Frankly, it's still early stage R&D and then the ISR market adoption.
Still relatively low volumes, so we do not see any immediate.
P&L impact.
Okay.
Got it okay. That's all for me thanks, guys.
Thank you.
Yes, Thank you and again as a reminder.
If anyone would like to make.
Or ask a question you will need to press star one on your telephone please wait while we organize the queue.
At this time I'd like to turn it back to the speakers for any further comments.
Thank you operator, and I'll hand, you back to Larry for a final message.
Before we sign off I, just like to thank our employees and our shareholders for their ongoing support I also hope all of you enjoy the upcoming holiday time and the rest of the year.
Thank you for your participation in today's conference.
This does conclude the program you may now disconnect.
Okay.
Alright, it looks like everything went great is there anything else you guys like to deal with like in the stream.
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