InterDigital, Inc.

Good day and welcome to the InterDigital Inc. Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Tiziana Filolia. Please go ahead, ma'am.

Thank you, Anna. Good morning to everyone and welcome to InterDigital Second Quarter 2021 Earnings Conference Call. I'm Tiziana Filolia, Vice President of Finance and Investor Relations at And with me in today's call are Leland Chen, our president and CEO, and Rich Bradsky, our CFO. Consistent with last quarter's call, we will offer some highlights about the quarter and the company, and then open up the call 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 guaranteed for 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 factor sections of our 2020 annual report on Form 10-K and our second quarter 2021 quarterly report on Form 10-Q and in other SEC filings. In addition, Today's presentation may contain references to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures, 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 Liren.

Thank you, Tiana. Good morning, everyone, and thank you for joining our call today. I hope everyone's safe and healthy. In terms of financial performance, our second quarter revenue and expenses were in line with our expectations. I will let Rich speak through the financials in more detail later. On today's call, I would like to focus on key areas where InterDigital continues to show strength and momentum, namely our licensing, our technology leadership, our patent portfolio, and our overall execution. These are all exemplified by our new long-term agreement with Xiaomi, which we announced earlier this week. Xiaomi is a public-traded China-based vendor with almost 150 million smartphones shipped in 2020. They are consistently one of the leading handset vendors worldwide, including in China, India, and other emerging markets. They are also holding double-digit and growing market share in Europe. The agreement, Xiaomi, recognizes the depth and breadth of InterDigital's patent portfolio across several key technologies related to cellular wireless, including 3G, 4G, and 5G, Wi-Fi, and HEVC video technology. It also adds one of the world's leading smartphone manufacturers to our current list of approximately 80 companies, including Apple, Huawei, Samsung, and Sony, that have taken licenses to InterDigital's extensive patent portfolio. I'm particularly delighted that by adding Xiaomi and working consistently with our industry leader, we now license our patented technology to more than 800 million handsets around the world this year alone. about approximately 55% of the worldwide smartphone market. As part of the agreement, InterDigital and Xiaomi has agreed to terminate all pending litigations and other legal proceedings. And we look forward to enhancing the collaborations between the two companies. On the litigation front, in the past several months, we have seen some excellent outcomes that demonstrate both our ability to handle multi-jurisdictional cases and the strength of our portfolio. Last week, the UK High Court has decided that one of our 4G LTE patents is valid, essential, and infringed by Lenovo. This decision is the first from five technical trials that are scheduled to proceed before the UK High Court. and serves as further proof of strength of the innovation developed by InterDigital's R&D team, as well as our ability to enforce our related rights through our worldwide patent portfolio. We look forward to a related France trial scheduled for January 2022, where we expect the UK court to set France terms that would be applicable to a worldwide license with Lenovo. I want to reiterate that our long held desire to reach amicable agreements through bilateral negotiations. However, as we have demonstrated, we balance this desire with our willingness to pursue actions against implementers that are unwilling to accept fair and reasonable terms for a license to our technology. In terms of research and development, our teams continue to produce great work and demonstrate leadership across all the technologies that we develop. In cellular wireless, our current contributions to 3GPP 5G standards in 2021 have increased by more than 50% when compared to the same period in 2020. In addition, our engineers continue to be named to leadership positions within important industry organizations like 3GPP to develop 5G and future 6G standards. On the video side, InterDigital Innovator has also been named into several leadership positions to a key MPAC standard group and to the ITU group responsible for standardization in the areas of video and program production. focusing on energy consumption and sustainability considerations. The overall quality of our innovation continues to be very high. This was most recently evidenced by our 5G-enabled end-to-end robotics telepresence pilot, which we executed in cooperation with Telenor and BT and was named to the shortlist of the CSI Award in the Best 5G Mobile or Video Technology Service category. This project highlights the work our engineers continue to do at the core of 5G innovation as networks become more efficient and flexible for different use cases. This follows the award we received in May when our advantage edge emulation platform was recognized as the best emerging technology at the Small Cell Forum Awards. Now look at our patent portfolio. We continue to further strengthen our IP position with an increased pace of new inventions related to 5G wireless standard. For example, so far in 2021, we are on track to exceed last year's number of inventions by nearly 30%. Significantly, these inventions relate to important features and functionalities, such as increasing data rate, reducing latency, improving reliability, and enabling faster and more accurate cellular positioning technology. And we expect to continue to build a portfolio of valuable IP because we have a robust inventor community. As we communicated previously, more than 60% of inter-digital employees are engineers, and more than 90% of those engineers are inventors. So to put it another way, more than half of all inter-digital employees are inventors, which represents a remarkable culture of innovation. Consistent with the continuing execution of our strategy, we recently announced a restructuring effort with the intent to better align our research resources with our business model. We expect this effort to lead to some level of reinvestment that will help drive further growth and revenue in the future. In summary, I believe the combination of our technology leadership, the breadth and quality of our patent portfolio, and our reasonable and fair approach for licensing, combined with the execution of our litigation strategy, will drive continued success in the future. With that, let me turn it over to Rich.

Thanks, Liren. As Liren mentioned, our Q2 results were more or less in line with our expectations. Specifically, the $88 million of revenue we reported, which did not include our Q3 Xiaomi agreement, came in at the high end of our expectations. Meanwhile, Q2 operating expenses at $91 million were at the lower end of our expectations. Our total revenue and expense were each driven to the favorable end of the respective ranges by recurring revenue of $78 million and restructuring and one-time charges of $15 million. A contributing factor to the lower than expected restructuring and one-time charges was timing. As we first indicated in our June expense guidance, we expect additional charges related to our restructuring in the second half of the year, with the specific timing dependent on meeting the criteria for when we can account for such changes, charges. Meanwhile, our estimated annualized expense savings from the restructuring remains roughly $15 million. We expect to begin to realize a portion of that savings sometime in the fourth quarter of this year. Looking forward to Q3, we expect our financial results to benefit from our long-term fixed-price agreement with Xiaomei, including the expected recognition of two-quarters worth of non-recurring revenue in Q3. In addition, we expect to recognize a level of recurring revenue that would put our revenue platform at roughly $360 million. I'll remind everyone, that when I refer to our revenue platform, I am annualizing the recurring revenue for a given period. In this case, the Q3 revenue platform is a preliminary estimate that accounts for the Xiaomei license and for the loss of a relatively small amount of recurring technology solutions revenue in connection with our ongoing restructuring. We will provide additional details around our expectations for Q3 revenue and expense including any adjustment to compensation accruals and any expected restructuring charges in one or more releases later this quarter. Finally, moving on to capital allocation, between January 1st of this year and August 3rd, we've reduced our outstanding share count by another 300,000 shares through the repurchase of $20 million of our common stock. With that, I'll turn it back over to Tiziana.

Thank you, Rich. Thank you, Liran. And we will now open the call for questions.

And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you would like to ask a question. And we'll pause for just a moment. And once again, that is star 1 if you would like to ask a question. And we'll now take a question from Derek Soderberg with Collier Securities.

Hey, guys. Congrats on getting Xiaomi signed. Rich, I actually wanted to start with you on opt. on OPEX. So I know you don't guide OPEX specifically, but I guess I'm curious sort of if we take out the one-time impacts that we saw and then sort of exclude some of those restructuring charges, sort of how should we be modeling OPEX just from a sort of directional standpoint from here?

Yeah, well, certainly I'd start with what you said, taking out the one-time impacts. If you look at our financial metrics, which we published on our website today, there's a total of roughly $15 million driven by the $13 million of restructuring charges. So that would obviously be the first thing. The second thing that I always talk about is when you're comparing period to period is looking at it with and without litigation because litigation is always going to move around depending on what's going on and how the cases are evolving. So, you know, as far as more specific guidance from that, that's kind of a baseline. As far as more specific guidance, we will provide that later to the extent that, you know, we think there's important things to consider from a trend perspective. And certainly in the second half of this year, we expect additional restructuring how much, if any, is in Q3 versus Q4, as I said, is a bit dependent on timing. So that'll definitely be something we'll want to make clear as it becomes more clear to us with new information.

Got it. Got it. That's helpful. And then just back to the Xiaomi deal, I guess I'm just curious, I wonder to what degree is that deal maybe an example of how some of the other deals you've done looked like in the past, or was there anything that you felt that was unique about this deal that, you know, I guess was different than the ones that you've done in the past?

Hey, Derek, this is Len. So if you look at the Xiaomi deal we just completed early this week, it's very much consistent with the past deal we have done. It's a long-term deal. It covers worldwide device sales. And if I have to, you know, outline a few other things here, it covers our cellular technology, our Wi-Fi technology, as well as our HEVC standard essential patents.

Yeah, and I'll just add, Derek, that, you know, as Leonard said, it's a long-term deal. I mentioned in my script that You know, we expect in Q3 to recognize two quarters of non-recurring revenue in Q3 associated for it. And, you know, in total, expect it to run five years. Perfect. Thanks, guys.

And as a final reminder, that is star one. If you would like to ask a question, we'll pause once more. And it appears there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

Thank you, Anna. Alderman, do you have any final remarks?

Yeah, I just want to say thank you to all the employees for their dedication and keeping executing during a very challenging time. I look forward to leading the company to further success in the future. I also want to hope everyone stays healthy as we continue to navigate through the pandemic. Thank you.

Thanks, Liren, and thanks to everybody for joining us today. We look forward to giving you an update next quarter.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.