Q2 2023 InterDigital Inc Earnings Call

Yeah.

Good morning, and thank you for standing by welcome to Interdigital second quarter 2023 earnings call.

Star One one again, please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your Speaker today right for Gerbrandt head of Investor Relations. Please go ahead.

Good morning to everyone and welcome to the Interdigital second quarter 2023 earnings Conference call.

I am ready for Gary Brown head of Investor Relations for Interdigital with me on today's call are lira, Chen our president and CEO .

Average bruski our CFO .

Consistent with last quarter's call, we will offer some highlights about the quarter and the company and then open the call up for questions before we begin our remarks I need to remind you that 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.

<unk> looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from results ended that's contemplated by such forward looking statements.

These risks and uncertainties include those described in the risk factors section of our 2022 annual report on Form 10-K.

And our other SEC filings and.

In addition, today's presentation may contain references to non-GAAP financial measures reckon.

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.

Taken care of I will turn the call over to Larry.

Thank you Rupert.

Everyone. Thanks for joining us today.

This was another strong quarter for the business.

<unk> continued our excellent track record of returning capital to shareholders.

Let me start with a status update on licensing.

We continue to make solid progress in the smartphone space, where we added a new licensee in Q2.

In addition, we closed a new licensing agreement with Alps Alpine.

Specialist system under technology provider in the Iot and auto sector.

In the first half of the year, our recurring revenue from the consumer electronics, I know, what he including auto.

Increased by almost 20% year over year.

Once again, highlighting how we are capitalizing the opportunities in multiple verticals yes.

In addition, early third quarter, we added another new licensee from consumer electronics sector.

We also continue to advance our casing, our arbitration with Samsung.

The three arbitrators, who will.

Here the case has now been confirmed.

And a case management conference being held today.

As a reminder, sasol has already agreed to take a license to our portfolio. If I keep January 1st of 2023.

The arbitration process work beside the monetary terms.

We remain confident that our new license with Samsung will reflect the body of our portfolio and continue our long term relationship with Samsung that started more than 25 years ago.

Next I wanted to give you an update on our litigation with Lenovo.

Recently, we received another good decision from the UK High Court.

Which increased the amount Lenovo mass pay us for a license to our <unk> 45 patents to just under a hungry $85 million, which we already received from Lenovo.

We have explained that Ravi Iraq and eastern topic in his remarks.

This is a very positive development for us and adds to the courts previous ruling the Lenovo mass pay us in full for the Pos sales going back to 2027.

Well. It's court noted this is intended to be a powerful way of discouraging licensees from holding out on taking our friends life is.

I want to remind you that the $185 million judgment is far license to only our seller of patents until the end of 'twenty two 'twenty three.

It does not include our valuable portfolio of Voodoo, Wi Fi and implementation patios.

And we remain committed to we see a full and fair return or technology that Lenovo uses ESD varieties each state.

What aspects of our dispute, which I'm, particularly pleased with is that when we started out a patent in three separate technical trials against Lenovo.

Each pattern were found to be about eight essential and infringed.

Because they are all standard essential patents this not only places us in a strong producing a lenovo case.

But also your future negotiations and integration with other prospective licensees.

We are your heart, our research and innovation business the technology with you about that.

And that would be filed each year.

The high quality are proof of our portfolio is directly connected to our ability to with me at the cutting edge of foundational research in wireless radio and increasingly in AI.

This year has already including many examples of how we excel I'll say you know with some business.

Our engineers produced a record number of new you mentioned your filings in the first half across both <unk> and <unk> spaces.

As we continue our working five D, including what will be the first release of Pfizer you advised.

We are also deepening our research for 16.

In Q2, we announced a new research partnership with the University of surgery in the U K to focus on specific technologies that we think will become a part of the <unk> standard.

Our ongoing novartis work, including the use of AI to improve the efficiency and reliability of mobile and Edwards is an excellent example of house into our AI has become so much of our innovation.

Our CTO right, yes, <unk> is a well known the leading expert in AI and has been working in this space for years.

Many of our other engineers are becoming noted expert and like Rod, Yes, Sarah has emerged as leaders in the field.

For example in Q2 <unk>.

Our senior engineers, where you're likely with a Y is chair of our industry group within the standard body assay.

Which is focused on creating standards to preserve and improve the security of AI.

Okay.

Steel staying our innovation success, we were recently named by Lexisnexis.

<unk> top 100 companies innovation that our banks is sustainability.

We strongly believe that our innovation, it's only become more valuable in an increasingly connected world and I'm delighted that we are also playing our part in steering us towards a more sustainable future.

Before I hand, it over to rich I want to thank all our employees for their hard work in putting us in a strong position and deliver superb value to our shareholders.

Our financial strength combined with our innovation leadership and the growing importance of our technology for different use cases means that we remain ideally placed to build on our recent success.

And with that I'll hand, it over to rich.

Thanks Lauren.

I am pleased to share that in Q2, we delivered diluted earnings per share and adjusted EBITDA above the high end of our guidance range.

This was driven primarily by revenue in line with expectations, coupled with continued expense management.

It's worth highlighting that when we received the initial whenever a judgment in Q1, we.

We recognized a large amount of catch up revenue and a smaller amount of recurring revenue.

In Q2, the UK High court increase the value of the award but in Q2, we recognized the same conservative level of recurring revenue from Lenovo as in Q1.

Furthermore, we expect to continue to recognize revenue on that same basis throughout the balance of the year or until the related appeal process progresses.

As such we are deferring.

Recognition for about 40% of the updated award.

This is rooted in the conservatism inherent in the generally accepted accounting principles applicable to the situation.

And some of the award is still contingent on appeal.

Even with the deferral our revenue continued to drive strong profitability as we posted adjusted EBITDA of $54 million at a 53% adjusted EBITDA margin.

Notably we have delivered an adjusted EBITDA margin over 50% in seven out of the last eight quarters.

Our adjusted.

The EBITA margin shows the power of our business model as even in a quarter with only a small amount of catch up sales, we converted over half of our revenue to adjusted EBITDA.

This is driven by the operating leverage inherent in our model combined with the discipline to ensure we maximize the conversion of revenue to profit and cash flow.

As discussed on our last few calls we believe adjusted EBITDA is a great metric to measure the ability of our business to generate cash over time, because it adjusts for timing differences in cash collections under our fixed fee agreements.

For example, this year, we used cash in the first half of the year.

But expect customer receipts, including Lenovo will drive well more than $200 million of free cash flow in Q3.

And we continue to return excess cash to shareholders.

As previously discussed in the first quarter of this year, we repurchased two 7 million shares through a $200 million Dutch tender.

Since then we have repurchased over 700000 additional shares for almost $60 million.

That brings the year to date totals to over a quarter billion dollars of share repurchases a reduction of 12% of the outstanding shares since the beginning of the year.

Looking forward to Q3.

I'll remind you that our Q3 revenue guidance is based off of contract signed to date since the timing of new license agreements is inherently uncertain.

We expect Q3 recurring revenues will once again be around $99 million.

We expect operating expenses to be similar to Q2.

We expect an adjusted EBITDA margin of about 50%.

We expect to continue to repurchase stock.

And finally, we expect GAAP diluted earnings per share of 60 to 70.

Since both of our converts are in the money now the diluted share count in our guidance includes an estimated one 2 million shares of accounting dilution.

It is important to note that while the converts are dilutive from a GAAP standpoint, they are not economically dilutive below a $106 due to hedges we have in place.

Longer term our goal remains to achieve and sustain a 60% adjusted EBITDA margin on $650 million of annual recurring revenue from device licenses with additional upside from licensing new products and services.

With that I'll turn it back to raiford.

Thanks Rich at this point, Michelle we are ready to take questions.

As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

The first question comes from Manav solder strong with Sidoti Your line is open.

Alright, and thank you for taking my question and congratulations on the solid execution.

A question on the on the Lenovo a case.

Let's listen you've got another $185 million and its just in time in regards to license for the celadon.

Are you running the other technologies parallel or is that something you will.

When do you think that's going to be able to resolve this matter or hows that progressing.

Yeah, Hey, good morning this learn.

As I mentioned in the prepared remark, our current $185 million reward from the UK judge only captured <unk> cellular technology.

But it also only captured the use of those technology until end of this year.

So therefore, there is really three elements for additional body wise, we have other patterns plus Wi Fi H E. B C on implementation pattern that their devices are using.

We also have patents reading other non cellular devices, including their PC or laptop, which are not part of the judge's decision.

After the end of the year going forward the licensed even for the cellular devices.

So regarding <unk> captured the value. We currently already have ongoing litigation against them for example in Germany.

Asserting our <unk> patents against both their laptop.

Mobile devices cell phones, and the trial is that would be coming up.

In next months, so we definitely working on dose and to be exact but as I said in the prepared remarks to be paid 44, our technology that they are using.

Yeah.

Okay. Thank you and in terms of capital allocation with all this cash coming in.

What's your sort of priorities.

Yes, so on yet.

Our priorities are to be responsible stewards of our cash.

We returned as I noted in my comments are quite a bit of cash so far this year, but we have $142 million remaining on the authorization.

And as I indicated we certainly plan to continue to repurchase shares into Q3.

So as.

That's always an ongoing discussion with us.

Okay. Thank you that was all for me.

And so thank you.

As a reminder to ask a question. Please press star one one on your telephone.

Please standby for our next question.

The next question comes from Brian Chin with Jefferies. Your line is open.

Hi, Thanks for taking my question.

Just on the targets that you've outlined 500 million for <unk>.

Wireless and $150 million for Iot revenues could you. Please give an update on.

Reaching those targets how should we think about levers that you still need a pool, perhaps upside from the ongoing cases to reach that $500 million.

Wireless target.

Okay.

Yes, Hi, Brian this learn.

So on the target for $500 million for mobile.

Proceeding very well, obviously, the Lenovo cases part of that.

Towards that decision, but the three largest unlicensed.

Including also opined label.

Frankly size wise are bigger than lenovo regarding their annuity lifestyles.

We currently have cases against Opal pending modular jurisdiction wound the thing I mentioned in my prepared remarks, the decision in UK for the three patent trials. Its IPO already how 40 season, given for the Opel case, because the <unk> standard essential patents or patent has been found to three pad.

There have been found to be battered infringe at Acura to the standard.

Allows us to fast track that case.

In UK against <unk>.

Theres a clear important hearing coming up in October of this year. It's a really in this trial and then followed by a friend rate determination next February . So those are frankly, the old pool timeline, it's quite quite good and regarding way will be a continuing dialog with them. So we feel.

Confident about our $500 million target for the mobile side.

Regarding the CE and our key space. The 115 million, that's something we are making progress and frankly, if you look at our program here are our TCE growth rate is faster than our mobile we have been achieving double digit growth for for the <unk> space for the last couple of years already in first half <unk>.

Sure.

About 20% year over year, so we like to keep on building on that momentum.

Okay.

Okay perfect.

I had one follow up so on.

You guys have started articulating potential.

Potential monetization of services could you perhaps provide an update.

The potential size of opportunity and timing of those.

If you could provide any color.

The processing strategy in building out this platform that'd be great.

Yes.

Again look Bradley to learn so if you look at.

What kind of technology those online services that you would buy online services are being.

The distributional video either land to accurately interactively.

It's beyond any reasonable doubt that they are using and benefiting a lot from our connectivity as well as from a BD with technology.

So the real question is really how do we launched a licensing program in there, which we have been working out for quite a bit now.

If you look at the market size.

Video space is projected to be growing to about $500 billion in 2027.

It's interesting not the same size as of todays smartphone market size.

So we are working on that quite diligently currently we don't have enough specification per provider.

A precise estimate on how big a licensing opportunity. This is with us because we really would prefer to sign up it takes a while more license before we put out a specific number to it.

So we'll keep you informed and we have been working.

Quite diligently on that space.

Okay.

Okay, great. Thank you.

To ask a question. Please press star one one on your telephone.

Again to ask a question. Please press star one one on your telephone.

I am showing no other questions in the queue at this time I would now like to turn the call back to Ray FERC for closing remarks.

Thank you Michelle I'll now turn it back to lira for his closing remarks.

Hey, Thank you everyone, who joined today's call and we look forward to updating you on our progress next quarter.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

Okay.

Okay.

Yes.

[music].

Okay.

[music].