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spk05: We are still many additional participants and the call should begin shortly. We do thank you for your patience and please continue to stand by.
spk04: Please stand by.
spk05: Good day, and welcome to the InterDigital Inc. first quarter 2022 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Richard Lloyd. Please go ahead, sir.
spk06: Good morning to everyone. and welcome to InterDigital's first quarter 2022 earnings conference call. I am Richard Lloyd, communications director, and with me in today's call are Liren Chen, our president and CEO, and Rich Breske, 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. 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. and uncertainties include those described in the risk factors section of our 2021 annual report on 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 measures 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.
spk00: Thanks, Richard. This was another strong quarter underlying our success in converting our growing technology footprint into a strong reoccurring revenue base and in managing our cost base in a disciplined manner. Among our headline numbers, total revenue increased by 23% year-over-year to $101.3 million, while net income increased to $18 million, up more than three times from $5.6 million in the first quarter of last year. Rich will provide more details in his section. Through the course of this quarter, we demonstrated our strengths as a leading technology innovator in wireless and video, expanded our patent portfolio, saw several of our engineers appointed to leadership positions within standard and industry bodies, and once again added to our list of 5G licenses. I would like to start with 5G to focus on where we stand, both as a company and in the wider context of wireless industry. As you might be aware, sales of 5G smartphones have continued to gain momentum, and in January, the market reached a notable milestone with new 5G smartphone shipment surpassing 4G shipment for the first time, nearly three years after the commercial launch of 5G devices. We hit this milestone two years ahead of time, compared to the 4G device adoption. This is a remarkable achievement for everyone involved. And at InterDigital, we are proud of our foundational contributions to this latest GE that is proving such a success with consumers. While we have been working on 5G for many years, our engineers continue to contribute to the ongoing development of this exciting technology. In fact, in the first quarter, our 5G-related invention disclosures were the highest they have been in several years. In total, our cellular standard essential patent footprint for 5G multiple device has reached nearly 10,000 patents and applications. This reflects not only the considerable investment we make to each generation of cellular technology, but also our extensive work to create one of the largest and most valuable patent portfolios in the industry. This is an exciting time for those of us contributing to the development of 5G. Not only are we seeing the commercial success of the initial releases of 5G, but we are also about to reach a notable milestone next month in 5G evolution with the standard latest technology specification known as Release 17. I will not go into all the details here, but it is worth noting that release 17 has been designed to broaden the reach of commercial adoption of 5G through features such as low latency communication for industrial IoT and improved backhaul to better support the new radio using 5G. These and other innovations show further 5G expansion of cellular communication beyond commercial smartphones taking enhanced connectivity into new sectors and industries. Interdigital engineers made a wide range of key contributions to release 17 such as features that improve communications in higher frequency range using advanced in MIMO and beamforming. We also continue to add key technologies in multiple areas, including increased support for new verticals, like automotive with V2X technologies. We expect to continue to be at the forefront of the technology evolution, and I'm delighted to announce that in the first quarter, two of our engineers were appointed to leadership role for the next release of 5G, release 18, which is coming in 2023 and will be the first release known as 5G Advanced. Staying on the topic of industry leadership, in March, two of the traditional engineers was elected to a senior leadership position on an advisory group within the International Telecommunication Union. The ITU is a highly influential body that helps develop technology standards across the communication industry to ensure that consumers can connect seamlessly. The selection of engineers to the leadership role like this not only reflects the high regard in which our innovators are held, but also the central role inter-digital play within the industry. As much as I appreciate the actual recognition our engineers receive, we feel it is important that we, as a company, also recognize innovation from our own outstanding inventors. In February, we announced our inventor of the year, rewarding a pair of innovators for their critical blend of research contributions, standard leadership, and innovation impact in 5G wireless and video. Between them, they have developed more than 250 inventions in areas like dynamic bandwidth and beam switching for 5G, and in the VVC standard in video. It is because of the countless hours of work from engineers like them and the deep investment we make to cultivate our foundational research that we are determined to ensure we receive a fair and reasonable return on our significant R&D investments. Our strength is increasingly being recognized as evidenced by our new agreement with Sharp to cover our 5G patents. The agreement expands our previous agreement with Sharp that covers our 3G and 4G assets, and it's a latest example of our increasing momentum to translate our competitive 5G innovation into new license agreements. As I have said many times before, the cellular, Wi-Fi, and video innovations that we have heavily invested in are some of the most important horizontal technologies. The great thing about our business model is the resulting patented innovations are integral to product and services across a number of verticals beyond just smartphones. To reach real detail, this past quarter, we had one of our strongest quarters yet in consumer electronic licensing, and we expect additional success in automobile and IoT in the second quarter. through both our direct and platform licensing efforts. We also have noted in the past calls when companies using our technology are unwilling to sign a license on fair terms after lengthy negotiations and insist on continuing to infringe our IP, we are fully prepared to enforce our rights as a patent holder. Let me provide an update on two incidences in which we have done so. In February, our trial to establish front-term for global license with Lenovo concluded in London. We are very happy with the case we presented and are currently waiting a decision. We remain confident in the strength of our technology, the quality of our IP portfolio, and the merits of our case. Moving on to the second instance, On the last call, I mentioned we filed a serious lawsuit against OPPO, which together with the Realme and OnePlus brand is a top five smartphone manufacturer. It is worth remembering that where we have had to litigate in the past, we have always concluded a license agreement on friend terms. Before I hand it over to Rich, I'd like to thank all our employees for the hard work. I'm consistently impressed by their dedication and expertise of all the inter-digital team and feel extremely confident that together we can continue to execute on our strategy.
spk04: Thanks, Liren.
spk02: And good morning, everyone. As Liren noted, we continue the momentum we established in 2021 with another quarter of strong financial performance. including our third consecutive quarter with revenue exceeding $100 million, another sequential reduction in expenses, and overall strong profitability. We closed our license renewal with Sharpe late in the quarter, pushing our total revenue above our guided range, which topped out at $100 million. Recurring revenue alone was just shy of $100 million and benefited not only from our Sharpe renewal, but also from more than $8 million of recurring CE revenue. Importantly, our CE recurring revenue has more than doubled from the first quarter of last year as a result of signing seven agreements covering the CE space over the last 12 months and strong underlying per unit sales. Moving on to expenses, we reported a $15 million sequential decrease in operating expenses. Of this, $7 million was related to lower restructuring charges with an $8 million sequential decrease across the balance of our expenses. On a year-over-year basis, our total operating expenses were relatively flat, but when you adjust for litigation and share-based compensation, our operating expenses in Q1 of this year were down by $7 million from the prior year. On the whole, we are pleased to see our efforts to reduce our expense base manifest in our latest results. Strong revenue and cost management leads to strong profit, and we are pleased to report 58 cents of GAAP EPS in the quarter, an increase of 40 cents from the prior year. We talked a lot about our strong business and financial performance in 2021, and looking at our year-over-year results for the first quarter of 2022 really shows how far we have come in this last year. Looking forward to Q2, we currently expect total revenue to come in between $114 and $120 million, including recurring revenue of $97 to $101 million. This expectation is based on license agreements in place at the end of Q1 and license agreements that we currently expect to be executed in Q2. We'll provide additional details on these new agreements, which cover automotive, IOT, and other products at a later date. But for now, I will note that we don't expect any incremental expenses from the new agreements. We do, however, expect a slight unrelated increase in recurring expenses going into Q2, plus an additional $3 to $4 million of restructuring charges. For the most part, the restructuring charges are driven by facility realignment and represent the final step of our previously disclosed restructuring plan. As a final note, you will see in our press release and financial metrics that we have reported and adjusted EBITDA figure, which is a non-GAAP measure that adds back stock-based compensation and eliminates certain non-recurring expenses. We believe this metric is a useful measure of the progress and health of our business and plan to continue to report on it in future periods. As this is the first quarter we have reported on this metric, we have presented it for each of the eight quarters reported in our financial metrics, including, in each case, a reconciliation gap figures. With that, I'll turn it back to Richard.
spk06: Thank you, Rich and Liren. Operator, we will just take a pause for questions.
spk05: Thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function
spk01: is turned off to allow your signal to reach our equipment again that will be star one if you would like to signal with questions our first question will come from scott surly with roth capital hey good morning thanks for taking my questions uh nice job on the quarter guys hey maybe just start to dive right in on uh auto and iot it sounds like you're getting more excited on that front as well as we'll lump c in there i was wondering if there were some revenue figures that you could attach to that in terms of the size of CE contribution right now, what video is kind of looking better, you know, how we should be thinking about that. And then specifically, I think you've called out this quarter, we'll start to see an acceleration in auto and IOT. And it sounds like it's going to be both direct as well as through the advance units. I was wondering if you could flush that out a little bit and maybe the magnitude of the impact.
spk02: Yes, Scott, this is Rich. So I did mention in the script that we have about $8 million in recurring CE revenue in Q1. So that's one of the stronger quarters we've had in CE and doubled from a year ago. Now, of course, CE does have a lot of per unit. Overall, we're 90% fixed fee. It's almost the inverse with close to 90% per unit in the CE space. So that is dependent on quarter-to-quarter shipments. But we're really pleased that, you know, we've been able to sign agreements in 21, and you see some of those results in Q1. On auto and IoT, we alluded to, you know, new agreements already signed in Q2 or expected to close. So, we'll have more details there. You know, through the platform license we participate, GM was, you know, announced as a recent addition there. So, we expect that to contribute in Q2.
spk01: Great. And, Rich, just to follow up quickly on the – oh, sorry, Liren?
spk00: Yeah, Scott, the only thing I would add is, as I mentioned in my portion of the script, Release 17 is expected to come out in June of this year. Release 17 has very specific features that we believe will enable IoT use cases as well as automobile use cases from the standard development perspective.
spk01: Okay, very helpful. And, Rich, one other cost question, OPEX – being down in the March quarter, particularly R&D and development was down. Is that a sustainable level that we should think about going forward, or is there some one-time element going on in there?
spk02: Yeah, there's, I mean, you have a little bit of seasonality where sometimes some fringe and so forth is higher in Q1, but then there's also some, we benefited for some things that, you know, maybe aren't going to recur in Q2. So I did note, and the guidance reflects a little bit of an increase in recurring expense going into Q2. So, you know, we think we're, you know, at a pretty good level overall, but it always is going to move around just a little bit.
spk01: Gotcha. And, Laren, if I could, there are a couple of big customers that have expiring relationships this year. I was wondering if you have any updated thoughts on that progress. Is there opportunity where those could actually be larger contracts than they've been in the past? I mean, how should we be thinking about that?
spk00: Yeah, hey, Scott. As you are mentioning here, so we do have the Apple agreement expiring by end of Q3 and Samsung agreement by end of this year here. We are in active negotiation, and so we believe strongly that our technology has been more important than ever. And both of those vendors, they tend to compete in the higher end of the product offering that frankly benefit even more from 5G and have the high level features. So we are feeling comfortable about where we are, and we are in active negotiation, you know, try to get them down, obviously, by the time they expire.
spk01: Okay, helpful. And lastly, if I could, and then I'll hop back in the queue, some of the relationships with the unlicensed China-based OEMs, more and more it seems like they're relying on exports. I think for Vivo and Oppo, 50% to 55% of their units in the first quarter continue to be from exports. Given the current situation, global geopolitical landscape. What are your current thoughts on that front? Is there creating more of a sense of urgency, given what we're seeing in terms of 5G adoption, particularly in markets like Europe, where they're trying to gain share, that it's driving them closer? Is the active discussions, are they better? You know, how's it all kind of playing out in terms of the macro landscape? Thanks so much and congrats on the quarter again.
spk00: Yeah, thanks, Scott. So, yes, you're absolutely right that large vendors, including OPPO, Vivo, and also Lenovo are exporting a lot. More than half their sales are outside China, and they are targeting Europe as well as India as one of their major markets. So we are definitely seeing that trend to continue. And our discussions, we are, as we disclosed, in litigation with OPPO and Lenovo. So our litigation strategy definitely factors those in, and we are also currently in active discussion with Vivo. So I see those as helpful trend in our negotiation dynamic. But the most important thing is we really drive value through our R&D. Our patent portfolio is global-based. And we have a very established licensing program with more than 80 current licensees that we can point to as very, very favorable comps. So I think all those factors is helpful.
spk04: Great. Thanks so much.
spk05: And our next question will come from Angela Soderstrom with Sedoti.
spk03: Hi, thank you for taking my questions and congratulations on the good performance in the first quarter. A lot of good questions asked already. I'm just curious for the consumer electronics. You said that that had shown pretty good growth in the first quarter. Should we expect that trajectory to come in or was this something special that happened in the first quarter?
spk02: Yeah, thanks for your question. We talked about CE kind of closing out the end of 21. We noted that we added a number of, you know, significant agreements that year, a number of agreements, including, you know, a top 10 TV manufacturer. And we kind of viewed it at a, you know, called a $25 million run rate. You know, obviously at $8 million for the Q1, that's running above that. So, I don't want to say it's going to be 8 million every quarter without additional deals, which we're working on. It's going to depend in this business on, or that end of the business, on per unit sales and what those reports look like. But, you know, in the last couple quarters, they've been strong.
spk03: Okay. And those per unit sales must have been affected then by the supply chain issues, right?
spk02: Yeah, so I think particularly strong given supply chain issues, but there also can be a little bit more seasonality in that business than we sometimes see in the cell phone business. So you're looking at, you know, so that plays into it as well when you look at the last couple of quarters.
spk03: Okay, got it. And then I'm just curious, the fixed fee royalty declined in the first quarter. Is there anything to call out there?
spk02: The only thing I'd point to is we had disclosures in our 10-K for 21 leading, you know, a year ago, leading into the 21 calendar year about what was going to expire and then updated that in our most recent 10-K. So you'll note that there were a couple of fixed fee expirations in that disclosure.
spk03: Okay, great. That was all from me. Thank you.
spk04: Great. Thanks, Anna.
spk05: Once again, if you would like to signal with questions, please press star 1 on your touchtone telephone. Again, that is star 1.
spk04: We'll pause for just a moment. There are no further questions at this time. I'll now turn the conference back over to you.
spk06: Thank you, operator. I'd like to turn it back to Lauren for some final remarks.
spk00: Yeah, thank you, everyone, for joining the call. I just want to say thank you to our employees, to our customers, as well to our shareholders for the past quarter. We appreciate your support. And I also still hope everyone to stay safe as we continue to navigate the COVID pandemic. Thank you.
spk05: Thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.
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