InterDigital, Inc.

Good day and thank you for standing by. Welcome to the Interdigital Inc. Third Quarter 2024 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 will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Rayford Garibrandt, Head of Investor Relations. Please go ahead.

Thank you, Grace, and good morning, everyone. Welcome to Interdigital's Third Quarter 2024 earnings conference call. I am Rayford Garibrandt, Head of Investor Relations for Interdigital. With me on today's call are Leran Chen, our President and CEO, and Rich Bresky, our CFO. Consistent with prior calls, we will offer some highlights about the quarter and the company, and then open the call up for questions. For additional details, you can access our earnings release and slide presentation that accompany this call on our investor relations website. 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 can 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 section of our 2023 annual report on Form 10K and in our other SEC violence. In addition, today's presentation may contain references to non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the supplemental materials posted to the investor relations section of our website. With that taken care of, I will turn the call over to Leran.

Thanks, Reefer. Good morning, everyone. Thanks for joining us today. I'm very pleased to share that we have delivered a strong third quarter with revenue, adjusted EBITDA, and EPS all exceeding the high end of our guidance range. Driven by accelerating momentum of our business and major deals completed at the beginning of Q4, we have also raised our 2024 annual guidance by $145 million at midpoint to $860 million. To start, as some of you may have already seen, a couple of days ago, we announced that we signed a new license with OPPO Group covering the worldwide sales of OPPO, Realme, and OnePlus branded mobile devices. As part of the agreement, both parties agreed to dismiss all pending litigations between us. Based in China, OPPO Group is one of the largest smartphone manufacturers in the world. With this agreement, combining with our existing licenses with Samsung, Apple, and Xiaomi, we now have the top four smartphone OEMs under license and have licensed about 70% of the smartphone devices globally. This agreement provide more validation of the importance of our foundational innovations in wireless, radio, and AI, and the strength of our patent portfolio to drive our future growth. It also accelerates the momentum we continue to build across all our licensing programs as we work to license the remaining major smartphone vendors, drive more growth from consumer electronic, IoT, and auto, and address our greenfield opportunity in video services. Turning now to our performance in third quarter, I'm pleased to share that we delivered revenue of about $129 million, exceeding the top end of guidance, which we'll go over the numbers in more detail in his section. We delivered a strong performance in Q3, mainly from the growth from our consumer electronic and IoT licensing. Our new licensing agreement with TPV, a top 10 television vendor that sells devices and several different brands, an excellent example of our recent success in closing deals with leading CE manufacturers. The agreements include both our joint licensing program with Sony and Interdigital's valuable HEVC video assets. In third quarter, we also signed a new agreement with Panasonic, which cover our 4G and 5G cellular patents, as well as our Wi-Fi and HEVC patents. Staying on the licensing front, as I mentioned earlier, we are off to a great start at the beginning of Q4. In addition to the OPO agreement, we have signed a binding global arbitration agreement to set the terms of a new license agreement with Lenovo. As part of arbitration agreement, both parties have also agreed to dismiss our pending litigations. As we have said before, binding arbitration can be an excellent mechanism for settling global licensing disputes, providing a more efficient way of reaching an agreement. We expect the process to take roughly 18 months to complete. But you may recall, we are in binding arbitration to settle the final terms of our licensing with Samsung for mobile devices. The party just finished last round of hearings, and we expect to have a final decision soon after the end of the year. As a reminder, Samsung already agreed to take a license to our portfolio starting from January 1st, 2023. And this binding arbitration will determine the final terms of the license. Our licensing success further strengthens our ability to reinvest in cutting edge R&D and foster innovation for next generation technology that benefits the whole industry and BDSL consumers in the future. Our engineering and patenting continue to fire on all cylinders. We keep on adding to our leadership in advanced video technology such as HEVC and VVC, and our video engineers on track for record year in new invention findings. Our position at the cutting edge of video innovation was recognized at a recent award ceremony hosted at this year's International Broadcasting Convention, where we receive award for the best immersive video technology and for best video processing technology. Both awards demonstrate why we believe our innovation will remain central to the video space, including consumer electronic, in streaming, and in new, more immersive video experiences. The amount of video data consumed globally continue to increase every day, making our innovation even more critical in ensuring that -to-end content distribution system works efficiently and reliably. In wireless, our innovation pipeline are also growing at an impressive rate, including a record number of 5G inventions declared this year. Bring our total pattern and application declared as potentially essential to 5G, 4G, and 3G to just over 13,000. For a company focused on driving foundational research, this constant creation of new invention is the engine that drive our business growth for years to come. Recently, we were ranked among top five pattern owners in Wi-Fi, we analyzed in terms of quantity and quality of new report from LexisNexis. Across three separate report from LexisNexis, we are one of just three companies in the world to rank in top five in 5G, Wi-Fi, and advanced video compression. We can judge on both size and quality of our portfolio. But the world become more connected and we believe this puts us in a very powerful position to continue to drive more growth of our business. During our investor day in September, we announced a target of a billion dollars in annual recurring revenue by 2030, including a target of $500 million in annual recurring revenue for our smartphone program by 2027. Our new license agreement with OPPO and arbitration agreement with Lenovo represents excellent progress towards those targets. In summary, we are a recognized leader in technology like 5G, video, Wi-Fi, and AI, which are only becoming more critical to devices and services in multiple industries. We have a world-class team and a track record of superb execution. With a large addressable market, including smartphone, CE, and IoT, and our greenfield opportunity in cloud-based video services, we believe we have a clear path to drive significant growth going forward. And with that, I'll hand you over to Rich.

Thanks, Leran. I'm pleased to share that in Q3, we again delivered excellent results with revenue, adjusted EBITDA, and non-GAAP EPS exceeding the high end of our guidance range. These excellent Q3 results were driven by new license agreements signed in Q3 as well as the resolution of outstanding litigation. Our Q3 agreements today together with our Q4 OPAW license agreement and Q4 Lenovo arbitration agreement have also resulted in us increasing our full year revenue guidance to $860 million. This is a 20% or $145 million increase from our prior guide. I'll cover our forward-looking guidance in a moment, but getting back to Q3, total revenue of $129 million was well above our outlook of 94 to 98 million. Our Q3-24 revenue included recurring revenue of 99 million and catch-up revenue of 30 million. As Leran mentioned, our new license agreements with TPV, a top 10 TV manufacturer, were leading contributors to our better than expected results. And through the end of Q3, CE and IoT continued to be our fastest growing program with revenue up 15% year over year. On a year over year basis, Q3 total revenue decreased primarily due to lower catch-up revenue in Q3-24 and the expiration of the Huawei agreement at the end of 2023. Our adjusted EBITDA for the quarter of $65 million meaningfully exceeded our outlook range of $36 to $39 million. Non-GAT BPS came in at $1.63 per share compared to our outlook of 70 to 80 cents per share. Cash generation was very strong in the quarter with cash from operations of $78 million and free cash flow of $65 million. As a result, we ended the quarter with over $800 million in cash. Stepping back for a moment, I'd like to reiterate some of the key points from our recent investor day that illustrate why we believe we are well positioned to drive value going forward. First, our innovation engine is running strong and powers three pillars of growth. As Leera mentioned, we are one of just three companies in the world to be ranked by LexisNexis among the top five patent holders in each of 5G, Wi-Fi and advanced video compression. This portfolio of innovation drives our growth toward our long-term annual recurring revenue target of $1 billion across smartphone, consumer electronics and IOT as well as video streaming. Second, the operational leverage inherent in our business enables the growth to translate into margin expansion and strong cash flow. Our long-term target includes an adjusted EBITDA margin of 60%, equating to $600 million of adjusted EBITDA. Third, our financial strength and capital allocation philosophy allow us to reinvest for growth while also returning significant amount of cash to shareholders. In 2024, we have paid roughly $225 million to reduce our debt and return capital to shareholders, including repurchasing .5% of our outstanding share count since the beginning of the year and a 13% increase to our dividend, which we announced last month. We discussed all of these points at our investor day this September. In the short time since, we have delivered meaningful progress against these targets. Specifically, as a result of recent agreements with OPPO and Lenovo, we have raised the midpoint of our 2024 revenue guidance by $145 million to $860 million. This includes our expectation for a record level of recurring revenue for Q4 of approximately $118 million from existing agreements, equating to an ARR of roughly $470 million, an increase of more than $80 million in ARR. It's important to highlight that despite the significant increase in expected revenue, our expected expense level has not changed that much and in fact remains within the prior range. As a result, we expect the increase in revenue will mostly flow through to adjusted EBITDA, driving our expectations for a full year 2024 adjusted EBITDA to $538 million with a 63% margin at the midpoint. As a final point of clarification, this updated full year guidance is based only on contracts we have signed today. With two months remaining in the year, any new agreements would be added to this guidance. With that, I'll turn it back to Rayford.

Thanks, Rich. Before we move to Q&A, I'd like to mention that we'll be attending a number of investor events in Q4, including the RBC Tech Conference and the Roth Tech Conference, both in New York. Please reach out to your representatives at both farms if you'd like to schedule a meeting. Now we are ready to take questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Scott Searle with Roth Capital Partners. Your line is now open.

Hey, good morning. Congrats on the quarter. Thanks for taking the question and congratulations on getting the oppo done. I know this one has been a long time coming. Leran Rich, maybe just to dive in on the fourth quarter guidance. It sounds like certainly you have oppo in there from a recurring revenue standpoint, TPV, but I wanna get some clarifications in terms of what you're doing from a Lenovo standpoint, given that it's in an arbitration process, are you gonna be recognizing some revenue like Samsung? And I thought you said in your opening remarks that Samsung, you expect the resolution and disclosure of the arbitration after the first of the year. Just wanted to clarify that. And if there's any Samsung in that recurring number that you talked about of 118 million.

Yeah, Scott, so I'll take the first part of the question. Yeah, our Q4 guidance does include revenue from Oppo, the new agreement we signed there in Q4, as well as from Lenovo based on the arbitration agreement we signed there in Q4 as well. So similar to Samsung, the terms will be set through the arbitration process. So at the moment, under our accounting rules, we're booking revenue based on what we believe is a conservative estimate.

Yeah, hey Scott, good morning. So

let

me follow up on the Samsung arbitration question. So you are correct that I did see in my prepared remark that based on the latest hearing we had with Arbitrator, we believe the result of the arbitration will be completed soon after end of the year. The primary reason is there are some additional questions Arbitrator was asking, and plus as we approach to the holiday season, so in fact this will take a bit longer. Regarding the revenue recognition, as you are aware, we have been recognizing Samsung revenue under the conservative estimation, the same as a prior agreement, which we believe is conservative. And that's the case we continue to do for Q4. And when the arbitration is complete, if the number of turnout be higher, then we will swap the number at the time of the award.

Great, very helpful. And if I could, Rich, on the litigation front, it was down a little bit, your cost this quarter, but now that we've got resolution of some of your major cost factors, Lenovo going to arbitration, and APA resolution, litigation dropping, how should we think about that number going forward and into 2025?

Yeah, so Scott, I don't wanna comment on details of our expense items, other than to say that, our current expectations for litigation expense are baked into our guidance for the fourth quarter.

Gotcha, fair enough. And lastly, if I could, Laren, just on the video services, they're streaming opportunity. I'm wondering if you could just outline some broad steps and milestones as we go forward. I know this continues to be an evolutionary process, but maybe give us an update in terms of the level of engagement, anticipation, and kind of what we should be looking forward to in 2025. Thanks.

Yeah, thanks, Scott. First of all, we believe video services is a great opportunity for us. As a matter of fact, we believe it's one of the largest greenfield opportunity for us. We as a company have been working on this for multiple years. We always start with innovation, which we believe our video could access, and others are very critical to the overall service level, and which frankly others has benefited from quite a bit. We have been engaging in the field. We have a dedicated team. We are engaging with all the major players, but it is hard to predict the precise timing when we get the deals done. But as Scott, we have demonstrated over the years, we always prefer a bilateral negotiations. We will try to negotiate, and we are quite patient, and try to try to find the fair value for our assets. But in the meantime, as you all aware, we are always ready to defend the value of our patent portfolio if we have to. So this is partially why when we get into the litigation planning, we always spend certain amount of money to get ready if we have to.

Great, thanks so much. I'll get in the back of the queue, but congrats on the quarter in APO. Thanks. Thanks.

Thanks,

Scott.

One moment for our next question. Our next question comes from the line of Arjun Bhatia with William Blair. Your line is now open.

Great, congrats guys on getting the APO and Lenovo deals done. Nice to see that. Maybe, Laren, actually starting off on that point for you, obviously these are significant deals for Interdigital. When you think about how this might impact your future opportunities to get licenses signed with the remaining Chinese manufacturers, what kind of impact are you expecting there? Does it kind of speed up the process with OAN VIVO, or is it maybe a little bit too early to tell what that impact might be?

Yeah, hey Arjun, good morning. Thanks for the kind words. I do feel getting OPPO done is very, very positive for us as a company. As you are aware, OPPO is very large regarding the volume. We did see combining with Samsung, Apple, and Xiaomi. Now we have the top four mark windows signed up, and together with some other license agreement we have in place, we are covering 70% of the overall global smartphone sales. So getting OPPO done, I do think, accelerates our momentum to get a few other windows on. If you look at who else do we need to sign up, we are really identifying VIVO, Honor, Huawei, and Transcend, which is primarily setting devices in Africa and a few other places. And then we will essentially sign up all the major players. So I do think it's very positive. As I said in my prepared remark, give us yet another benchmark for the value of portfolio and also giving us further momentum to engage those customers.

Okay, perfect, understood. And then just in terms of, I know Lenovo is still in arbitration, but in terms of pricing and your economics with at least the OPPO agreement, what can you comment on in terms of what those economics look like relative to some of the other smartphone licensing agreements that you have? Will you satisfy with how that turned out? And how should we compare OPPO to your prior agreements?

Yeah, so those individual agreements are confidential, so I will not be able to comment specifically. One thing I do want to draw attention is in Rich's prepared remark, we did see in Q4, if you look at our ARR for the quarter, it's gone up substantially. And if you translate the increase in Q4 over the year, the whole year, we are essentially expecting a $80 million increase on an annualized basis. So that's obviously a competition of multiple accounts, but that should give you some indication.

Okay, got it. Rich, actually on that point, can you maybe help us understand what the catch-up revenues, what we should expect there in Q4? Are we gonna see revenue and cashflow from both of these deals coming in Q4, or is that something that's gonna happen a little bit later?

Yeah, so I can comment on the revenue, that the revenue is kind of baked into that full year guide. And I did mention that in Q4, we're expecting about 118 million of recurring revenue. So I think you can kind of do the algebra to get to the catch-up there. And it's from that 118 that we get to the ARR increase of 80 million and 470 overall. Okay,

got it, thank you.

One moment for our next question. Our next question comes from the line of Madeline Brooks of B of A, your line is now open.

Great, thanks for taking my question. I guess I just wanna talk a little bit more around longer term as we start to think about 2025. Obviously 2024 has been a great year for you all with the different agreements as well as litigation resolvements. Can you just remind us what we potentially have in terms of what we could see from litigation and renegotiation that's coming up in 2025? Thanks so much.

Yeah, hey Madeline, good morning. So if you look at our 2024, with our increased projection, we are predicting a record-setting year for both the top line revenue as well as recurring revenue. As you all were, most of the recurring revenue will carry on into 2025. So we are set out to be a very strong starting point for 2025. Obviously we still have two more months for this year, which we hope to add more. And then next year we will continue to make progress in smartphone, consumer accounting, ROT, as well as the streaming licensing side. Regarding major contract for expiration, we do disclose quite a bit in our findings as well as our website. I think the major one that come to my mind is our Xiaomi contract. We are up for renewal, which we obviously will negotiate in due course.

Yeah, I just wanna be clear. That's at the end of 2025. So we only have five agreements that contributed 17 million of revenue in 2023 that expire at the end of 2024 going into 2025. That was disclosed in our last 10-cut.

Great, thanks so much.

As a reminder, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. Please stand by for our next question. Please stand by for our next question. Please stand by for our next question. Our next question comes from the line of Anya Soderstrom with Sudadi. Your line is now open.

Hi and thank you for taking my questions and congrats on the nice progress here and getting up on board. As you grow the recurring revenue and add these large OEMs, How should we think about the fixed fee ratio in terms of the smartphone revenue?

Hey Anya, I didn't quite hear that. What ratio were you looking for?

The fixed fee. Are these contracts going to be on a fixed basis as they're also larger or are they going to be on a variable ratio basis?

Yeah, Anya, so the exact term of the contract is under NDA so I won't be able to specify it coming on the OPPO agreement. However, you are aware of the vast majority of our large accounts are signed on fixed fees.

Okay, thank you. And then in terms of the taxes with this step up in recurring revenue, how should we think about the tax rate going forward?

Yeah, so Anya, I think when you think about the tax rate going forward, it doesn't dramatically change our view of the tax rate going forward. We said kind of like our long-term tax rate we see in the mid to high teens and there's no real change there.

Okay, thank you. That was all for

me. This concludes the question and answer session. I would now like to turn it back to Liren Chen for closing remarks.

Thank you. Before we close, I'd like to thank our employees for their dedication and contribution to InterDigital as well as our many partners and customers for outstanding work and continued progress throughout the year. Thank you, everyone, for joining the call today and we look forward to updating you on our progress next quarter.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.