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spk05: Good morning, and thank you for standing by. Welcome to the second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your phone. You'll then hear an automated message advising you that your hand is raised. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today. Richard Lloyd, please go ahead.
spk01: Good morning to everyone, and welcome to InterDigital's second 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 Bredsky, our CFO. Consistent with last quarter's calls, 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 risk 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 factors sections of our 2021 annual report on Form 10-K, our second quarter 2022 quarterly report on Form 10-Q, 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 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.
spk06: Thank you, Richard, and good morning, everyone. In the second quarter, we continue to make excellent progress across all parts of the business. And I'm particularly pleased that the strong momentum we built in 2021 has continued into the first half of this year. In Q2, we significantly increased revenue and net income on both a sequential and year-over-year basis. We entered into a multi-year worldwide non-inclusive fee-bearing license with Amazon, covering a range of Amazon's consumer electronic devices and their individual patents. We made a major addition to our leadership team. We strengthened our balance sheet and we saw significant growth in revenue outside a core smartphone market. In the second quarter, our total revenue increased 42% year-over-year to $125 million. We also delivered a substantial improvement to our profitability, more than doubling our adjusted EBITDA to 78 million, and we drove a 14-fold increase in earnings per share to 69 cents per share. I will let Rich talk you through our financial performance in more detail while I cover some other notable highlights from the quarter. starting with the recent announcement that Dr. Rajesh Pankaj has joined InterDigital as our new CTO. Rajesh was previously a senior vice president and the head of corporate R&D at Qualcomm, where he spent 25 years in research and senior leadership roles. His background in cellular wireless, including both 4G and 5G, and the application of AI to connectivity, is a perfect fit with our technology footprint and with the long-term direction of our innovation. He's a named investor in 230 patents worldwide, and he has a strong track record of translating technical breakthroughs into patented innovation. I'm delighted that Rajesh has joined us, and I'm confident that he will lead our R&I team to even greater heights and will build on the leadership of his predecessor, Dr. Henry Terry. Along with our ability to attract world-class talent, one of the keys to our recent success has been the value that we continue to thrive as a leading innovator across a range of critical technologies. Our research on additional horizontal technologies like cellular, Wi-Fi, video, and AI and machine learning. We license the IP that covers these horizontal technologies across many verticals that utilize them. Smartphones use all of these technologies and continue to be our core market. Meanwhile, CE devices, as well as the growing array of IoT products, often use multiple technologies such as Wi-Fi and video. In short, we are in excellent position to drive growth from both existing relationships and new opportunities. In recent years, our strength in video has become even more valuable as we have built a formidable innovation pipeline, explored opportunities in building more immersive consumer experience, and continue as a leading contributor to both the HEVC and VVC video standards. We have also achieved impressive growth in our video portfolio, which now numbers approximately 7,000 patents and applications. In wireless, our portfolio of cellular SEPs for 5G multi-mode device continue to grow in the second quarter and now stand at more than 10,000 patents and applications, giving us an incredible strong base in a generation of mobile that will define connectivity for the rest of this decade. This foundation has been enabled by our team of superb engineers. In second quarter, the Institute of Electrical and Electronic Engineers, IEEE, recognized one of our senior wireless engineers for his work in 5G by awarding him a prestigious Benjamin Franklin Key Award. Specifically, he was recognized for his groundbreaking contribution to millimeter wave, which is a foundational technology that enables both 5G's incredible speed and its ultra-low latency. Staying on the IEEE, another inter-digital engineer was recently appointed as a chairperson of a topic interest group that is responsible for identifying and exploring use cases for artificial intelligence and machine learning in Wi-Fi. While we continue to reap the rewards for innovation being implemented in today's devices, many of our research efforts are firmly focused on the technology that will shape connectivity and content consumption in the years to come. I'm especially excited by the new partnership we announced in June with INRIA, France's leading institute for research in digital science and technology. This new innovation This new initiative will not only support innovations across France, but also enable engineers to pursue cutting-edge scientific research and to explore technologies that will define media currents in the future in areas such as XR and metaverse. On the licensing front, we believe strengths of our innovation, the increasing value of patent portfolio, and our licensing track record will position us to renew key agreements and sign new ones. In the second quarter, in addition to the Amazon deal I mentioned earlier, we also closed an additional agreement with industry device manufacturer Zebra Technology, covering our 4G, 5G, and Wi-Fi technology. Zebra's devices are used in retail, healthcare, banking, manufacturing, transportation, and other industries. This license agreement demonstrates the broad applicability of InterDigital's foundational innovation and our patent portfolio beyond smartphones. We also enjoy significant progress in licensing our innovation to auto sector with new deals signed with GM and Ford through our licensing platform partners. Almost half of the connected cars on the market are now licensed to our 3G and 4G standard essential patents. In summary, our licensing performance this quarter underlines the opportunity that we see in our core markets and in newer areas where our innovation is helping creating considerable value. This is an exciting time to be an innovator in connected technologies. and I'm pleased with how our strong foundational innovation translates into new licensing agreements. In terms of litigation activity, we continue to look forward to the upcoming decision from the UK High Court in our French trial against Lenovo. And I will reiterate my message from our last earning call that we remain confident in the strength of our technology, the quality of our IP portfolio, and the merits of our case. On the policy front, I want to highlight that the DOJ, NIS, and USPTO recent withdrawal of a 2019 policy statement on SCP licensing and FRAN remedy is a positive development. I will not get into all the details here, but the announcement has moved the HCC policy in US in a fair, balanced, and more predictable direction and confirmed our belief that while disputes over SEP licenses do arise, factors such as the value of the underlying innovation should guide the court's decision making. The second quarter also saw more progress in our ESG program with the release of our second annual corporate sustainability report. At InterDigital, We passionately believe that our technology contributes to building a better and more sustainable world. And this year's report details not only how we mitigate our environmental footprint, but also how we maximize our social impact, ensure our governance meets best practices, and how we strive to help our employees to excel. I will encourage you all to read the report which can be found on our website. With that, I'll turn it over to Rich.
spk07: Thanks, Liren. As Liren noted, we delivered another strong quarter with significant increases in revenue and profitability on both a sequential and year-over-year basis. We grew total revenue 42% over second quarter 2021 to $125 million, including $100 million of recurring revenue. While mobile agreements, such as Xiaomi, have driven a large part of our growth, we have also begun to see meaningful growth in the CE, Auto, and IoT markets. In second quarter 2022, we had over $35 million in combined revenue from the CE, Auto, and IoT markets, including almost $12 million on a recurring basis. Both the total and recurring revenue from these markets represent record levels. For the first half of 2022, we recognized about $23 million of recurring revenue from these markets, representing a 70% increase from the comparable period in 2021. While we are pleased to report such strong revenue from these markets, we remain committed to driving continued growth. Moving on to expenses, You can see the benefits from the cost management actions we initiated a year ago in our first half 2022 results. On an annualized basis, excluding litigation and stock-based compensation, we have reduced our operating expenses by almost $35 million. This savings is net of the reinvestment we have already made, and we believe that we have improved our capabilities while lowering our cost base. Moving on to capital allocation, we made the decision to refinance our convertible debt during the second quarter as it became clear we were heading into a volatile period marked by inflation and rising interest rates. Similar to our prior financings, we entered into an option structure that increases the per share price at which we experienced dilution from our new debt to $106. The net proceeds from our new debt were primarily used for two purposes. First, to buy back approximately two-thirds of our old debt, and second, to concurrently buy back $75 million of our common stock. Looking forward to the third quarter, we currently expect revenue to come in between $96 and $100 million. At this point, our revenue guidance is based only on existing contracts, so the entire range is comprised of recurring revenue. On the expense side, we expect additional investments in research and development and an uptick in litigation costs related to ongoing proceedings will drive operating expenses to the range of $76 to $80 million. Finally, we expect non-operating expenses comprised of interest and other expenses to be in the range of $6 to $8 million and an effective tax rate in the range of 25 to 27%. With that, I'll turn it back over to Richard.
spk01: Thank you, Rich. Thank you, Liren. Operator, we can now open the call for questions.
spk05: Thank you. At this time, we'll conduct a question and answer session. And as a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. Thank you. Anja Soderstrom. Sidoti, please go ahead. Your line's open.
spk04: Thank you for taking my questions, and congrats on good progress. Can you just talk a little bit about maybe if at all the sentiments among your counterparts have changed given the economic environment and geopolitical situation? Is that affecting at all your discussions?
spk06: Yeah, hey, Sonia, this is Lauren. So I understand the geopolitical situation in part of Asia in particular is fairly sensitive. And then the economic has been in turmoil in the last couple of years, partially due to COVID. But our current revenue is primarily supported by our fixed revenue contract. So we are likely very shielded from the near-term turmoil. And some of the downturn may play a role in our renewal discussion. But the major contract we are currently negotiating, they're not being that much impacted by some of the issues. So we are well positioned. On the geopolitical side here, we are a global player. So we have been watching the global environment very, very carefully. And so far, we have been demonstrating a very strong track record. striking fairly deals across multiple windows in many different continents. But we are watching it very carefully.
spk04: Okay, thank you. And Rich, you mentioned the operating expenses were reduced by 35 million net of reinvestments already made. What kind of remaining reinvestments do you have?
spk07: Yeah, so we've been reinvesting primarily in R&I And we expect that to continue. For the moment, I'll stick to the guidance I've provided for the next quarter where we mentioned an uptick, you know, led by R&I reinvestments, but also a little bit from the litigation associated with ongoing matters.
spk04: So that uptick is isolated to that third quarter.
spk07: Yeah, yeah, that relates to the third quarter guidance, you know, the uptick being on a sequential basis versus Q2.
spk04: Okay. Thank you. That was all for me. Thank you.
spk00: Thanks, Anya.
spk05: Our next question comes from Jonathan Isenson from Bank of America. Your line is open. Go ahead.
spk03: Hey, guys. Thanks for taking my question. The first thing I wanted to touch on is if you have any visibility for your OPEX guidance, given that the implied operating margins seem to decline sequentially, so we'd appreciate any color there. And then I also just wanted to ask if you have any updates on the Apple and Samsung deals. Thanks.
spk07: Sure, Jonathan. I'll take the first part. So there's not a close association between our revenue in a given period and our operating expense in a given period. You know, the R&I that I was just referring to related to the last question that we are investing in today is to drive revenue that, you know, we would see years down the road because we make such long-term investments in fundamental research. So it's not so much that, you know, we really have a effectively 100% gross margin on new business because there's not variable cost associated with it. When we license, we're granting permission to use technology that we've already invented in the past. So this uptick in R&I is really to drive future growth, not related to the upcoming third quarter. So hopefully that answers that part of the question. I'll let Liren answer the second part.
spk06: Yeah. Hey, Jonathan. For the Apple-Samsung negotiation, obviously our relationship with Apple and Samsung is very, very important to us, and we have been focusing on renewing their contract for quite a while. And I think everyone is aware the Apple contract expires end of Q3 of this year, and Samsung contract expires end of Q4 of this year. And it's always worth reminding that those licensing agreements with us, it really represents a very long-term relationship. Apple has been our licensee since 2007, before they shipped the very first iPhone. And Samsung has been our licensee for actually more than 25 years before they shipped the very first Galaxy phone. So through such a long-term relationship here, there have been multiple renewals happening. And we feel confident about the current negotiation based on how much our technology has advanced. And frankly, they have become even more important with the connected world with a lot of multi-video content being consumed on the device. Obviously, 5G adoption will be a pretty major driver in our negotiation. And also, it's worth noting that both Apple and Samsung has a much higher concentration of the premium devices in, you know, their worldwide sales. So those devices actually make more and better use of our high-end technology. So to that degree, you know, it's worthwhile obviously for us to remind them how much they have benefited from everything we have developed.
spk03: Got it. Thank you.
spk05: Yep. Okay. Thank you, Jonathan. Our next question comes from Cal Liani from Bank of America. Your line is open. Go ahead.
spk02: I apologize if my questions are green because I'm new to cover the stock. Last year, you grew sequentially in 3Q 63%. This year, you're guiding for a decline both on a sequential basis and year-over-year basis. Can you talk about seasonality? If I get it right, you're guiding for $98 million, which will be down year over year and will be down sequentially. Can you talk about seasonality, what drives these fluctuations in growth, and any color on what to expect later on? Even if there's no explicit guidance, can we talk about what drives ups and downs, these quarterly fluctuations? Thanks.
spk07: Yeah, yeah, no, no, it's a good question, Tal. I'm happy to address it. A couple things I'd point to. The first, regarding seasonality, there's not a lot of seasonality in our revenue, and you can find this on our financial metrics that we publish on our website. We show the percentage of revenue that comes from variable agreements per unit where customers are reporting the volume they shipped and the associated revenue or royalties they pay us for the quarter. And then also fixed fee revenue, where there's a fixed price over the term of the agreement, and we typically amortize that total quantum over the term on a straight line basis with maybe sometimes exceptions. Um, but 92% of our revenue, uh, in the quarter, uh, and year to date is coming from those fixed price agreements. Uh, so therefore that's a really stable base, you know, quarter to quarter. Um, and there's only a small amount that's coming from, uh, the variable, you know, less than 10% that, that may be a subject to, uh, any seasonality that does exist. Uh, the majority of, uh, the, the fixed fee, the majority of the total revenue is on the mobile side. that definitely leans towards the fixed fee. On the consumer electronics side, that's where it tends to be more variable, and maybe there is a little bit more seasonality, but overall a small component. So what's driving some of these changes? On a sequential basis, we also break out, I'll mention, recurring revenue from past sales. And with some of the new agreements that we signed this quarter, when you think about Amazon and then through our licensing partner, GM and Ford, as well as others. There's some past sales where they're basically catching up for the use of our technology prior to entering into these agreements. So we recognize that past amount, and we try to delineate it so it's clear to everybody what that impact on the quarter was. And in the current quarter, it was roughly $25 million. The recurring number of $100 million, therefore, is kind of what to think about going from quarter to quarter. And at the midpoint, we're maybe down 2%. It's a relatively small number. And that, again, can be driven by expectations around the variable side. And then the final aspect to all this is, so what are the meaningful changes? And that's, if you look year over year, we had some licenses that expired last year, renewed a bunch of them, not all of them. Some customers had left the business. And then in terms of growth, it's the step function changes from adding significant new agreements. A great example of that is third quarter of last year when we signed Xiaomi. Incidentally, third quarter of last year, signing Jame, there was a lot of past sales there as well. So on a year-to-year basis, that drives some of that decline.
spk02: Got it. Now, the industry is weakening if you look at Corvo and what they reported and Qualcomm, what they reported. Everyone is talking about slowdown of devices. Devices still make the vast majority of your revenues. And I know you have a different business model with a lot of it being fixed fixed revenue rather than per device revenues. And the question is, what happens when the industry is weakening? What's the history? Do you have customers coming back to you and say, hey, we want to renegotiate our historical agreement because now we're selling 15% less or not? Or what's the variable portion of your revenues that is tied to the weakening handset market, smartphone market?
spk06: Yeah, he taught us to learn. So as Rich mentioned earlier, so a vast majority of our smartphone license agreement is fixed fee agreement. What that means is that under contract, those vendors pay us the same dollar amount year after year during the term of the contract. So I mean, All our customers honor their contracts, so we do get paid regardless whether the market goes up or down, if you would. And that dynamic does come in play when we have to renegotiate for the next contract. So if they have lost significant market share and those factors will be frankly factored in, but it's worth noting that for the next contract we are trying to negotiate is also a long-term contract. We actually try to frankly look at third-party projections try to both party make certain amount of forward-looking expectation projection to see in the next five years or longer, how much the volume will be. So some of the shorter term up and downs will be hopefully factor in, but not exactly driving the long-term numbers. But more importantly for us though, Tao, it's worth noting that we currently have roughly 55% coverage of the market, 50% a little bit higher of the smartphone market. So we see over a relatively short period of time, after we resolve less than a handful of vendors' relationship here, we should be able to grow into about 80% to 85% market penetration. So I think gaining more vendors and their coverage will actually be, in my opinion, a much bigger driver than the short term, a certain amount of vendors losing some market share.
spk02: And these missing vendors are mostly Chinese vendors as much as I understand. In the current environment where China market is weakening, does it help you to get the contract? Could it inject delays in the contract, in signing the contract? What's the timing aspect of getting this extra vendor that are currently not paying?
spk06: Yeah. So there are three major vendors we have identified as our main vendors we need to sign up for. And the largest one is OPPO, who among three brands, OPPO, Realme, and OnePlus, ships over 200 million devices per year. And then the next vendor is Weibo, which is somewhat smaller than OPPO, but still very, very large vendors. And then the third one, which is Lenovo, you know, again, through the purchase of Motorola brand, they are a major player, you know, in a number of different markets, including U.S. So currently we are in delegation with Lenovo and OPPO. Our Lenovo delegation is actually in year three now. And we are, as I mentioned earlier, we are waiting for a major court decision out of the U.K. where the court will decide on global base how much our worldwide patent portfolio is worth. You know, there's so-called friend rate determination case, and that trial also consists of past damages. You know, how much money they supposed to owe us for all the past infringing of our patents against the worldwide scope. The OPO, we are also in litigation with OPO. Interdigital has filed a series of lawsuits last December in multiple jurisdictions against them, But, you know, we don't have a progress report yet because those cases are relatively new. So back to your earlier question to see, you know, how much the China awakening impact those negotiations. I'll say they have somewhat impact but not significant. The reason being all the three vendors we are talking about, they are really global vendors. And, you know, like Lenovo and Opel and Vivo, they sell very significant market outside China. Actually, in the case of Lenovo, a vast majority of their phones are actually sold outside China. I would say everything is determined on a global basis here.
spk02: Last question. My education is in finance, but I became almost a lawyer covering Qualcomm with the history. In the Qualcomm case, it always goes to court, but in the last second, there is an agreement. Once someone loses a side, the court rarely decides. I've been following Qualcomm since the 90s and it's always settled out of court eventually. What's the history of your negotiations? Is it based on court decisions or do you typically negotiate once you win a major milestone or you lose a major milestone in court?
spk06: Yeah. So you are correct that Frankly, a vast majority of the cases are negotiated or settled before trial. That frankly has been inter-digital experience also. So we, like Qualcomm, we prefer bilateral negotiation and most of the deals do get done through bilateral negotiation. So just try to give you a data point here. Since the beginning of last year, we have signed 16 new agreements up to the end of Q2 here. So that's a very large number, and we frankly had a record-breaking year last year, signing 13 new agreements last year. So a West Madras agreement was signed through bilateral negotiation, without lawsuits. But once in a while, we do have to file lawsuits. Generally, those are after a very lengthy negotiation, where the other side simply refused to pay a fair term that many other vendors are paying. So when we go for those dedications, sometimes the frankie case gets settled before it goes to trial, and sometimes we do go to trial and get a court decision. It's hard to see. It's really case by case. But it's worth noting that through the history of interdigital, whenever we have filed lawsuits to enforce our patent rights, our IP rights, every single time, we end up in a license agreement under the frank terms. So our track record in these days has been quite strong.
spk02: Got it. Great. Thank you. Thanks so much.
spk05: Thank you for your questions, Tal. As a reminder, to ask a question, you'll just need to press star 1-1 on your phone and then wait for your name to be announced. Okay, so our next question is from Scott Searle with Ross. Black, go ahead. Your line is open.
spk08: Hey, good morning. Thanks for taking the questions. Larry and Rich, I apologize. I got on the call late, so I won't rehash probably some of the stuff you covered in your opening monologue. But I was wondering on a couple of fronts, you know, Samsung recently renewed with Qualcomm. I'm wondering if there's anything to be read in that in terms of read-through for you guys in their ability, willingness to negotiate before an expiration of a renewal agreement.
spk06: Yeah, hey Scott, let's learn. So I did read the same news about Samsung renewing that agreement. They have continued their existing agreement, added seven more years to it. I think it's a great development for Samsung. It's also a great development for Qualcomm. And I do not really know for sure how that will impact our negotiation. But we definitely see that as an encouraging sign that licenses and licensors continue their long-term relationship. And we, as I mentioned earlier, has very long-term relation with Samsung, and I think that's an encouraging sign. Okay, good.
spk08: And on the technical front, I'm not sure, did you quantify CE or video contribution to the current quarter? And I guess as part of that, you've been building some momentum on that front, now with the macroeconomic overhang, if you will. Is that changing the discussion, the dialogue, and opportunity with any of the customers in the near term, or are things kind of progressing as they were before?
spk07: Yeah, hey, Scott, I'll take the first part of that question. Yeah, we mentioned we didn't break it out, but in combination, we said that CE, auto, and IoT contributed $35 million of total revenue in the quarter and $12 million of recurring revenue in the quarter. So we're pleased by the traction across those markets, and both that total and recurring figure represent records for us. Gotcha.
spk08: And, Liren, is there any impact in terms of the discussions going forward when you look at what's going on from a macroeconomic standpoint, particularly some of the end markets and slowdown in TVs or smartphones or other larger video display types of opportunities?
spk06: Yeah, Scott, I mean, I'll see – In general, we do not see a impact to our existing agreement because they are fixed fee agreement. But for the new license agreement here, it's really a case-by-case space. You guys know our near-term focus is on Apple and Samsung. And they are a major player on the premium tier. And based on all the reports we see, they are less impacted than some of the players who are competing in the low to mid-tier devices. Regarding the TVs and others, it's really, Scott, it's hard to see generically, but we are, as you probably aware, focused on getting some of the leading brand TV window deal signed. And those agreements are long-term agreement also. And frankly, there's already significant past sales components to it. So it's really the near-term impact. It's relevant, but it's not necessarily a deciding factor.
spk08: Gotcha. And lastly, if I could, I'm not sure, Liren, if you had any comments in terms of other video monetization and opportunities. Love to hear your thoughts on that front. If not, we can take it offline. Thanks so much.
spk06: Yeah, we didn't comment specifically, Scott. But one thing I was describing earlier is we, combined with our Technicolor acquisition, we really built ourselves, you know, through the past several decades, I agree. into one of the leading technology developer and frankly leading patent holders in video space. Video are increasingly becoming relevant for, you know, many, many devices, smartphones and many other connected devices here. We did identify, you know, there's different layers of technology involved and some of those services layer are also benefiting from our video technology and we are actively looking into the space and we'll hopefully provide more updates in the future.
spk03: Great. Thanks so much. Thanks, Scott.
spk05: Thank you, Scott. I'd now like to turn the call back to Liren Chen for closing remarks.
spk06: Yeah. Hey, thanks, everyone. Before we sign off, I'd just like to thank all the shareholders for the continued support. and our employees for the contribution to another outstanding quarter. Thank you all for joining us today, and I hope everyone enjoys the rest of the summer.
spk05: Thank you for your participation in today's conference. This concludes the program, and you may now disconnect.
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