Q4 2022 InterDigital Inc Earnings Call
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Good day, and thank you for standing by and welcome to the fourth quarter 2022 earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you will need.
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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 speaker for today Richard Lloyd. Please go ahead the floor is yours.
Good morning to everyone and welcome to Interdigital fourth quarter 2022 earnings Conference call.
I am Richard Lloyd Communications Director and with me in today's call other than Chen, our president and CEO and rich Brzycki our CFO .
Consistent with last quarter's call, we'll offer some highlights about the quarter and the company and then open up the 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.
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, including those described.
As described in the risk factors sections of our 2020 to your annual report in Form 10-K 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 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.
Thank you for joining us today.
2022 what the accident year for interdigital.
Continued success in our core smartphone licensing program.
And record setting performance in our CE and Iot, including alcohol licensing programs.
We increased recurring revenue to a record level.
Significantly increase our net income year over year, and we believe put the company in its strongest position ever to deliver our future business grows.
I will first discuss our fourth quarter performance, then I will provide some more highlights our key achievement in 2022.
And stem cells are positioning in 2023 and beyond.
Yeah.
In the first quarter despite of ongoing macroeconomic headwinds, we continue to execute exceptionally well you know our goals across the business.
Revenue for the fourth quarter was up to a $117 million.
5% increase year over year, while net income jumped by 48% year over year to 32 million.
Thanks to new licensing deals and continuing disciplined management of operating expenses.
We once again demonstrate our strengths in our smartphone core with a binding arbitration agreement with Samsung for new items.
We grew our revenue from consumer electronic licensees by renewing our deals with Panasonic and announcing a new deal with LG and <unk>.
Shortly after year end, we announced a large expansion of our share buyback program.
Our sons arbitration as we have previously disclosed both parties have agreed that the new license will start January one of 2023.
We are continuing to negotiate for a period of time before lagging the arbitrator decided on issues we cannot agree on.
This is a binding process, what both parties that will lead to a new license and we estimate the whole process will conclude around the middle of 2024.
Rich will cover the topic of revenue recognition in his section.
I want to remind everyone that Samsung has been licensed to our patents for more than a quarter of a century.
And their commitment to another deal reflects how foundational argue military remains to the mobile industry.
Together with the renewal of our Apple deal in the third quarter. Our agreement with Samsung is further evidence of our position as one of the leading innovators.
And our.
Our top license source in the smartphone industry.
I am pleased that Samsung has recognized the quality offering innovation and our relationship with them will continue.
In the fourth quarter, we also build our increasing momentum for licensing in the spaces of CE and Ot, including auto.
Our agreement with LG encoder, both televisions and Pcs.
And licenses algae to our patents related to H E B C and D. We see.
The latest video compression technique technologies, where we believe we are world leader and where we see further licensing opportunities.
Like Samsung Panasonic as a long term licensee and our new agreements with the company along with our new deals with LG and their lines, a goose strengths, our CE licensing program.
Coming into 2022, we knew it was going to be a pivotal year for our company.
We are thrilled that as a company we have risen to the challenges.
We continued headlines smartphone agreement led by our new Apple deal with our incredible strong 12 months is far licensing program outside the smartphone space.
We not only welcome allergy or the new <unk> and BBC license fee, but also entered into a multiyear license with Amazon.
Covering a wide range of Amazon's consumer electronic devices, Android interdigital patents.
We also saw considerable growth in the automobile market through our licensing partner with more than 80 person of the connectivity cars.
Currently licensed to our <unk> portfolio.
Annual revenue from seasonality in calling out auto reached more than $100 million for the first time.
With recurring revenue increased 63% year over year.
That helped push total revenue to $458 million for the year incur.
The increase of 8% from 'twenty to 'twenty one.
Including almost 400, and a $4 million recurring revenue a record setting level up by 15% year over year.
This continues our recent trend of delivering consistent increases to our topline.
Well as I mentioned in our last call. Our recent licensing success. It means that we have signed more than 20, new agreements and renewals with an aggregate contract value of over $1 $5 billion since early 2021.
This gave us incredible strong platform for which to drive further growth and continue to invest in our western footprint.
At our heart, we are innovation business.
Extremely excited by the road that we are playing in the evolution of technology in cellular <unk> AI and beyond.
Technology that have only become more central to consumers and businesses around the world.
So I emphasize we placed on innovation is clear in the pipeline of New you mentioned.
With our new with our number up innovation of invention disclosures, increasing by more than 40% in 2022.
Last year we.
We also made a key hire to our executive team.
With the appointment of Doctor redress Pan cards, as our new Chief Technology Officer.
Since he joined Rogers has hit the ground running and his expertise and leadership.
Proving invaluable as we play a key role in the development of next generation connected ecosystems.
Shortly after quarter end.
We received further about <unk> of our position us well towards leading innovators.
Were included for the second consecutive year.
In last us NASA innovation momentum.
The global 100 report.
This report recognized not only our impact on innovation today, but also the likely impact of that.
In the longer term.
On the litigation front, we have recently witnessed three decisions since the start of the year from courts in UK in our dispute with Lenovo.
Each decision our pattern was held to be valid and eastern shelf two bars saddled us tenders.
Infringed by Lenovo.
We are very pleased with these readouts.
These decisions serve as further confirmation of the quality of our patented innovations that many of the leading device manufacturers have chosen to license.
We are still waiting for the UK courts decision, our friend licensing trial, and we remain confident industry in our case.
Yeah.
Thus, we celebrate our <unk> year as a leader in developing connected technologies I'm delighted that 2022 was one of the most productive and successful years in our history.
Looking ahead in 2023 and beyond.
We believe we are well position to deliver additional smartphone deals.
Increased revenue in consumer electronics.
Close new agreement in the high growth Iot, including auto centers.
And make progress in our new licensing opportunities in services.
From our innovation pipeline to our business momentum to our financial strengths.
We believe the company is.
The strongest position it has Arab being and we are perfectly placed to continue to deliver our compelling growth story.
And with that.
And you were to reach two talks around numbers in more detail.
Thanks, Larry.
Our strong execution throughout 2022 delivered excellent financial results.
But more importantly puts us in what we believe is the strongest position the company has ever been.
Our final results for Q4 came in above our preliminary estimates, which we published last month.
The improvement was driven by favorable order reports, we received in the intervening period as well as a slightly lower effective tax rate for the year.
Building on <unk> comments I'll highlight a few noteworthy items from our full year 2022 results.
In 2022, we reported over $400 million of recurring revenue.
Our record for Interdigital.
In fact, including the fourth quarter of 2021, we have now reported recurring revenue in excess of $100 million in four of our last five quarters.
For our entire history prior to that period, we only had two such quarters.
Our 2022 revenue included $104 million of CE.
Including auto revenue.
This is more than four times, our CE and Iot, including audio revenue from 2020 and demonstrates our ability to grow revenue by capitalizing on the value our fundamental horizontal technologies bring to markets other than smartphones.
After initiating proactive cost management measures in 2021.
We realize the related benefits in 2022.
Our operating expenses decreased by $47 million year over year, including a $25 million reduction in restructuring charges.
Our 2022, adjusted EBITDA was $254 million or $8 35 per share and our adjusted EBITDA margin was a healthy 56%.
A seven point improvement from 49% in 2021.
We ended the year with a $1 2 billion cash balance and $600 million of that cash.
In 2022, we returned over $115 million to shareholders through dividends and share buybacks and we currently have authorization to repurchase another $400 million.
With all that we accomplished in 2022. The most important thing is that we have laid a strong foundation for future growth.
With Apple renewed through 2029, and Samsung and binding arbitration.
Our first quarter guidance includes revenue from both accounts.
In the case of Samsung, we're recording revenue at a conservative level consistent with the revenue we have recognized from our patent license agreement that just expired on December 31 2022.
This conservatism is consistent with generally accepted accounting principles and reflects the fact that the binding arbitration with Samsung will define a patent license agreement that is effective beginning January one 2023.
We believe it is likely that the arbitration award will exceed the conservative revenue, we are recognizing and require a catch up at that time.
As a reminder, we expect to receive the arbitration award mid 2020 around mid 2024.
Moving on to cash.
Our year end cash balance was driven by $345 million of free cash flow in Q4.
As we collected more than $400 million of customer receipts in the quarter.
A significant significant portion of this.
To a large upfront payments associated with the patent license agreement signed earlier in 2022.
The strong free cash flow has a very real impact on our year end balance sheet with Apple and Samsung arbitration, we are well positioned to continue our company's strong history of returning cash to our shareholders.
As a result, we increased our share repurchase authorization to a total of $400 million and subsequently launched a $200 million modified Dutch tender.
Since we announced our first dividend in December 2010, we have returned nearly $1 $4 billion to shareholders through buybacks and dividends.
In that time, we've reduced our outstanding share count for more than $45 million to fewer than 30 million shares.
At current prices, our $400 million authorization would further reduce our share count below 25 million shares.
With lots of opportunity to drive our cash flow even higher.
Capital allocation and specifically returning cash to shareholders will continue to be among the foremost topics for the management team and our board.
With that I'll turn it back to Richard.
Thank you rich.
Operator, you can now open the call for questions.
Okay.
Thank you if you would like to ask a question. Please press star one on your telephone one moment, while we compile the Q&A roster.
First question is going to come from Scott Searle.
Ross Your line is open.
Hey, good morning, guys. Thanks for taking the questions nice job on the quarter. He learned I'm not sure if I missed it and rich.
But did you give an update in terms of the Dutch a modified Dutch auction process in terms of where we are and then on the Samsung arbitration of your including components of that I thought you said.
Something related to past performance.
But it looks like if I kind of back into the recurring guidance that you are taking a conservative view, maybe down about by a third kind of take the midpoint of the range of where.
Prior Samsung contribution had been is that in the right ballpark and am I think about the right way and why I know youre approaching from a conservative standpoint, but is there any particular reason that you are settling on that number.
Yes, so Scott first on the Dutch tender. The most recent update there was we updated the price range a little over a week ago.
But maintain the original timeframe.
With respect to.
Samsung My comments, there were that were recognizing revenue at a level.
Consistent with the agreement that just expired December of last year.
So when you look at.
Our.
If youre looking at Q4 revenue on a recurring basis for instance, and then fast forward to Q1.
Youll note in the 10-K, we always described both current your explorations and upcoming explorations.
So there is about $50 million.
Related to agreements that expired at the end of 'twenty two that we haven't yet renewed of course, the big the Big news for 'twenty two in terms of explorations with Apple and Samsung and Youre clear on where that is.
Got it but just to clarify rich, though so are you assuming in the guidance of recurring revenue of $94 million to $98 million 19, plus million from Samsung or is the number of lesser than that.
Yes, it's a level consistent with what we recognized up through December 22.
Got you, Okay and then.
You indicated you thought you look into 2023 that.
Youre comfortable.
You are continuing to progress with more.
Progress on the smartphone front specifically.
Specifically I guess that leaves kind of a couple of a couple of Oems out there Lenovo, who you're actively engage with I'm not sure. What the timeline is if there's an updated timeline related to the France litigation and then as it relates to auto in vivo as the two other big outstanding parties.
Somehow.
Is the dialogue and active engagement going on that front, particularly given the geopolitical environment out there is that impacting at all and then I have one last question.
Yeah.
Hey, Scott.
So on the Lenovo.
Updating my prepared script here, we have recently gotten re very good patent wins, we are still waiting for their friend decision that hearing finished last year early last year.
Our Opel and available.
Aware from our prior calls we will we are in litigation with them, which we filed a series of pattern.
Cases against them in December of 2021.
And some of the cases are close to <unk>.
Going to trial and in the meantime, we are maintaining active ongoing negotiation with them and so it is a case for weibo.
Regarding your comments on geopolitical situation between U S and China, we are obviously very closely.
Closely watching the situation and but it's always worthwhile.
Thinking through the main licensees, we are trying to signed up for they are global player.
And almost all of them.
We are talking about here has significant sales outside China are technologies global our licensing program is global frankly on the rare occasions, when we have to enforce our patent rights. He is also a global enforcement campaign. So that's that's consistent with our approach.
Got you and lastly, if I could on the services front you indicated youre at.
The opportunity for their I think video fits into that category.
I'm wondering if there are any updates on that front in terms of how youre thinking how the market is developing and you also mentioned Amazon now as a customer as well is that device specific on the relationship with Amazon or is that something thats going on from video and services standpoint. Thanks.
Yes.
Yes, we are as a company.
Very very positive on the opportunity about <unk>. If you look at the overall macro trend for hull consumers how companies are using.
Your line services cloud drilling services for entertainment part.
Activity remote learning.
And <unk>.
Many many use cases that are driven by connectivity as well as video use case. So we are very excited about the opportunity I think it's very clear that our foundational in the leases are being used and the service providers are benefiting from our technology. So we we are working very actively on this space.
And but as we commented before launching a new licensing program frankly, new different vertical it takes time to give out the revenue and that will put a lot of effort keep ongoing that opportunity.
Regarding the Amazon deal as I commented in my prepared remark the Amazon deal is covering a wide range of consumer electronic devices. So the service.
For the opportunity.
Great. Thank you.
Thank you for your question one moment, while we prepare for the next question.
And our next question is coming from Jonathan <unk> with Bank of America. Your line is open.
Hey, guys great job this quarter just one question.
For me.
Hum.
Handset recurring revenues were down on a year over year basis in <unk>.
Just curious if you could just talk to that.
Yes, so Jonathan.
We talked about.
On a renewal with Apple that was in increase.
When you look at it compared to the last deal. We did have some elevated revenue recognition in the final year of that Apple agreements. So that was a contributing factor.
Got it Okay, and then on nonrecurring revenues on the guidance for <unk> I know it was asked about already but just kind of wanted to double click on it.
So it is expected to decline roughly 3% year over year.
Understand the Samsung contribution is relatively conservative but are there any other drivers and kind of how we should think about that in terms of just recurring revenues in general being down on a year over year basis in <unk>.
Yes, so I'll kind of fall back on the comment I made before that.
Youll see this in the 10-K, when we talk about explorations theres about $15 million related to agreements that expired that we recognized in 'twenty two.
Those agreements expired by the end of 'twenty two.
So that's a driver when you look Q4 versus Q1 of 'twenty three.
So of course, there's a lot of opportunity for new licenses as well as to renew those.
Got it Okay and then my last question is actually on the pre announcement ahead of this quarter.
Just curious on kind of what the drivers were there and what.
What you saw kind of develop throughout the quarter, if that was from new agreements.
Agreements reached or just better terms that then were expected previously.
Yes, so what happened.
If I understand your question, Jonathan you're referring to.
How does the final results come in relative to the preliminary results that we issued the end of January and.
The favorable difference is driven by royalty reports that we've received in the intervening period. So although it's a smaller portion of our total revenue there is roughly 10%.
That is based on variable and therefore, the revenue recognition ultimately is decided by what.
The report says how much they owe us for the quarter.
Prior to if we don't have those reports we have to estimate that.
And it just so happens the timing for the Q4 reports a lot of them came in in that intervening period.
Got it Okay and then my last question I know this was also asked about but there is no further update on the Dutch auction beyond the recent increase in price range correct.
That's correct okay.
Okay awesome. Thanks, guys.
Thanks.
Thank you for your question one moment, while we prepare for the next question.
Our next question is coming from Anja, so listen.
Sidoti Your line is open.
Alright, Thank you for taking my questions and none of them have been addressed already but I thought I would add to click into this.
First quarter recurring revenue guidance I understand it's due to the Samsung negotiations, but is that that's mainly for the handhelds right. There just smartphone and consumer electronics, we should we should see pretty steady performance and.
Yes so.
The revenue when I talk about recognizing revenue first Samsung while we're in this arbitration.
What we're saying is that.
Whereas arbitration Thats going to result in an agreement that agreement becomes effective January one 2023, so we're estimating at a conservative level.
That we keep it consistent with the agreement that just expired.
As far as the.
The decline.
Q4 to Q1 guidance, that's driven by extra ratio of five agreements and $15 million as we disclosed in the Q.
But.
We didnt breakout beyond that.
Smartphone versus CE Iot auto.
We'll obviously provide more details as we move forward in time.
Okay. Thank you and that will come from me.
Okay.
Thank you one moment, while we prepare for the next question.
And our next question is coming from Alexandra <unk> of William Blair. Your line is open.
Hi, guys. Congratulations on the quarter one housekeeping for me just in terms of how to think of litigation expenses, you talked about the five licenses that expired in 2022. It looks like you have a larger chunk.
Potentially expiring in 2023, according to the case it seems like it's 55 million how do we think about potential litigation around coupled with Samsung arbitration.
Litigation expense in the year.
Okay.
Alex how are you. Good morning, let me take the first half of the question and then I'll, let rich comment on some of the expense side here. So on the 55 million unless you are referring into the largest right.
Bobby as we disclosed.
We are currently in active negotiation lease quality as well as the.
Another brand, which is called honor that was a spin off from Bobby.
From the last time, we have negotiated contract.
We are negotiating with both of them.
Difficult for me to comment on frankly going forward, what the litigation will look like but what I want to emphasize on is we as a company always preferred to conclude license agreements a bilateral negotiation and most of the time they do.
So on a rare occasion, we have clean for us either through a <unk> of a binding arbitration, we make those decisions very carefully.
Yes, I'll just add to your perspective.
The number is $15 million as you go from 'twenty two to 'twenty three.
The same number for the same set of.
Those that were scheduled to expire in 'twenty two as we came into the year was closer to $200 million right, So because apple and Samsung.
Were either renewed through a license agreement or through the arbitration agreement with Samsung.
Or at.
At least at a conservative level included in our Q1 guidance.
Okay, and then rich just actually one follow up on the Opex. It looks like you changed some of the.
Categorization buckets, a little bit.
Can you shed a little light on kind of what's changed now in research and portfolio development with licensing broken out.
Sure I'd be happy to.
Yes.
We're always looking at what we can do better and making sure that we're evolving our disclosures and presentations as the company evolves.
You saw that in Q3, when we changed our description of revenue.
For a long time, we had it was more important to breakout fixed fee versus variable, but as I alluded to earlier, we've been at 10% give or take on the variable side and it became more important as CE and Iot, including audit was growing to breakout those line items. So along the same vein when we look at the operating expense.
<unk> and think about the business.
Think about the investment in research and the horizontal technologies that we invest and innovate in.
And how closely that ties to protecting our rights associated with them.
Whereas the act of monetizing licensing enforcing et cetera, it's probably they are all related they are all connected but we thought that this was a better presentation.
That reflects the.
The direct link between the research and the portfolio development.
Okay.
Okay. Thank you that's helpful with that I'll go back in queue.
Thank you.
Concludes today's Q&A session I would like to turn the call over to Richard for closing remarks.
Thank you operator, I will just answer Lawrence for closing remarks.
Thank you Richard before we close I'd like to thank our employees for their dedication and contributions to interdigital as well as our many partners and licensees and thank you all for attending the call today.
Look forward to connecting with many of you in the coming months.
Okay.
This concludes today's conference call. Thank you all for joining and enjoy the rest of your day.
The.
France will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
Yes.