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InterDigital Inc  (NASDAQ:IDCC)
Q1 2019 Earnings Call
May. 02, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to today's InterDigital's first quarter 2019 earnings conference call. As a reminder, this call is being recorded, and it is now my pleasure to turn today's call over to Mr. Patrick Van de Wille. Please go ahead, sir.

Patrick Van de Wille -- Chief Communications Officer

Thank you very much, Carey. Good morning, everyone, and welcome to InterDigital's first quarter 2019 earnings conference call. With me this morning are Bill Merritt, our President and CEO; Kai Oistamo, our COO; and Rich Brezski, our CFO. Consistent with last quarter's call, we'll offer some highlights about the quarter and the company and then open 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 guarantees of future performance and 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 set forth in our earnings release and our quarterly report on Form 10-Q for the quarter ended March 31, 2019, filed this morning, and from time to time in our other filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof. And except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

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 first quarter 2019 Financial Metrics Tracker, which can be accessed on the Investors' section of our home page, www.interdigital.com, by clicking on the link that says Financial Metrics Tracker for Q1 2019.

With that taken care of, I'll turn the call over to Bill.

William J. Merritt -- President and Chief Executive Officer

Good morning everyone and thank you for joining us on the call this morning. As you saw up in this morning's press release, we delivered a good quarter, highlighted by solid recurring revenue and careful expense management. We also continued our strategic evolution of the company, largely completing the integration of our first transaction with Technicolor, and then taking the significant, but very logical next step of moving to acquire Technicolor's Research & Innovation unit in France.

We expect to close that deal in the first half of this year. At that point, the strategic reshaping of the company that we have been discussing for a number of years will be complete, evolving us from a single technology company focused on a single market, connected devices, to a much larger company with substantial innovation strength in two key technologies, video and wireless, operating in three massive overlapping and complementary markets, wireless devices, IoT and consumer electronics. And then becomes all about execution.

So let me talk about our operational priorities for the year, of which there are three, sign Chinese OEMs to new patent license agreements, sign new licenses under our new consumer electronics licensing program and manage our costs back to 2017 levels. I and Rich will provide some details on each of these, but let me give you just a few highlights.

On the Chinese OEM licensing initiatives, we are engaged with all the major unlicensed companies and leveraging resources across the company to bring these deals to closure. The effort involved, not just our licensing teams, but our R&D groups, our government relations team, our executive management and where appropriate, our Board. Obviously, this effort is and will remain our top priority, as we understand the extreme strategic importance of signing the rights deals.

As I mentioned before, the overall tone around IP remains very positive, driven in part by the trade negotiations that are under way between the US and China where IP sits at the epicenter. Converting that positive tone to value-driving deals is our focus. We are looking to report positive results this year.

On a separate note, we are very encouraged by the success of Avanci, the IoT patent licensing platform that we're a founding member. In April, Avanci announced new licenses with Audi and Porsche, and slowly but surely, Avanci is proving as single-stop shop for cellular IP can be very valuable to customers and inventors alike. That will create significant value for us over time.

On the consumer electronics play, we have taken what was largely a shuttered licensing program and successfully restarted. We had a very solid first quarter, restructuring a license with a set-top box manufacturer that provided a meaningful revenue contribution to the quarter and also successfully engaged with the vast majority of the TV and set-top box manufacturers. We are encouraged by the response to date and we would expect to deliver additional value during the course of the year.

Lastly, as Rich will explain, we continue to make great progress on managing our expenses. As we have mentioned in that with regard to our strategic journey, the simplest way for us to drive the greatest value is to move the top line up while holding the expense line in check. We are well on our way to doing just that.

With that high level view, let me turn the call over to Kai.

Kai Olavi Oistamo -- Chief Operating Officer

Thanks, Bill and good morning everyone and thanks for joining us. I'd like to provide a review of the main operational points during the quarter. I'll start with what's the biggest on our dashboard, which is the handset licensing. There we continue to engage with unlicensed companies, against an obvious backdrop of trade negotiations between US and China. With those trade talks don't -- while those trade talks don't have a direct impact on our negotiations, any element of uncertainty can certainly bring some delay. That being said, we are optimistic that both countries will reach an agreement and that importantly intellectual property protection will be a centerpiece.

The first quarter of any year is also a very important quarter for the mobile business. Since, it sees the industry come together for the Mobile World Congress in Barcelona. Our presence there this year was our most successful yet in every respect. Our experts twice spoke in the main stage, a tremendous result for any company and our many demos, including some are very exciting demos completed in conjunction with Technicolor R&I and featuring their video technology, showed that our research is leading edge and relevant as ever.

A lot also happens behind the scenes and our licensing, corporate development, technology and government relations teams were able to use the event as accelerating backdrop for important meetings. As highlighted by our co-demonstrations in Barcelona, one of the primary areas of focus right now is finalizing the integration of Technicolor acquisition and work to close the second of those transactions, the acquisition of Technicolor R&I division. That integration is proceeding to completion, very, very well and includes the implementation of new patent management system that will bring tremendous visibility and efficiency to what is a very important part of our business.

Right now, we are expecting to close the second transaction by the end of second quarter and that will make us one of that the largest long-term R&D and licensing companies in the world. That integration and expanding -- the footprint makes it particularly useful that we added Henry Tirri as a CTO almost exactly a year ago, and recently expanded his role in leading our research efforts. With his background at Nokia, and then additional experience at a CTO in consumer and business electronics at Harman, Henry is ideally suited to the role of leading both InterDigital labs and the Technicolor R&I team once the transaction closes.

On the consumer electronics side, we've begun engagement with companies that implement technologies of our new combined portfolio. Like many companies involved in video coding as well as patent pools in the space, we are at the stage where many of those meetings are exploratory and involve mainly price discovery.

Our Chordant book of business while obviously not as big as our core handset licensing business is nonetheless meaningful and coupled with a tight expense control can be a profit driver. Our goal is to complete some deals even small ones in 2019 and early 2020, which will give us an ability to communicate to investors some data-driven estimates of market potential for us as a business. Even at this stage, we are very confident that it is a business with tremendous potential. So, with continuation of integration and execution on the business plan, the pending completion of acquisition of Technicolor R&I team and the work to integrate their efforts with our InterDigital Labs team and our efforts to expand our core business, there's a lot of exciting work going on at InterDigital.

With that, I'll turn it over to Rich.

Richard J. Brezski -- Chief Financial Officer

Thanks Kai. We delivered a solid quarter in Q1 2019 with growth in recurring revenue, careful cost control as we continue our integration and value return to shareholders. Recurring revenue at $74 million, saw a 16% increase compared to first quarter 2018 and included a $4.9 million contribution to recurring revenue from consumer electronics. While obviously not as big as our core business, these numbers show that the new consumer electronics business is beginning to have a meaningful impact.

As Kai said, our near-term goal for the CE business is to sign some deals in 2019 and use that data to size the market for investors. On the non-recurring side, we recognized a $5.5 million charge as a contra to revenue driven by the restructuring of the license arrangement with a long-term customer.

Moving on to costs, we're able to bring operating expenses in a little lower than we anticipated although that was driven by lower integration costs. Excluding integration and intellectual property enforcement costs, we're about on par with Q4. Last quarter, we reported our recurring cost to run the business was roughly back to 2017 levels, and I'm happy to report that that continues to be the case.

As we move closer to the close of our acquisition of Technicolor's Research and Innovation division, which we hope to see as early as Q2, we will provide a better idea of where our Q2 costs might come in. More importantly, I do want to reaffirm our plan to reduce cost post acquisition such that we exit 2020 in line with 2017 levels, as we've previously explained. Finally, since the start of the year, we invested another $130 million to buy back almost 2 million shares of our common stock, bringing our outstanding share count to under 32 million.

Looking back a bit more broadly, the last couple of years have marked an important period of investment and cash management. And roughly that time we announced two significant acquisitions, one that closed and another we expect to close soon. Since mid-2017 we've also paid out more than $80 million in dividends and in addition, we have increased our buyback authorization by $200 million and repurchased more than $250 million in shares of our common stock. We continue to buy back stock since the most recent quarter end and most especially, we look forward to earning return on these investments on behalf of our shareholders. I'll now turn it back over to Patrick.

Patrick Van de Wille -- Chief Communications Officer

Thanks very much. Rich. Carey, if we can open the call for questions.

Questions and Answers:

Operator

Thank you. At this time, I'd like to open the floor for questions. (Operator Instructions). It looks like our first question will come from Eric Wold with B Riley.

Eric Wold -- B. Riley & Co -- Analyst

Thank you, good morning guys. I guess the first question is, I just want to make sure I understood the comment around the $4.9 million contribution to recurring revenue from CE in the quarter. Is that -- I know you signed the deal in the quarter. So, is some of that a kind of a make-good past sales component, or is that a run rate going forward, just want to make sure I understand how that looks?

William J. Merritt -- President and Chief Executive Officer

Yeah, Eric. So that's a recurring number. So it doesn't include past sales, and I'll note that we did have contributions in Q4 from the business. So it's not all growth sequentially, but obviously year-over-year in comparison to the period when we didn't have the acquisition. So, it's a recurring number based on both product shipments that happened during the period. And then to the extent that there's variable estimates that are made period to period, you also true those up.

Eric Wold -- B. Riley & Co -- Analyst

Got it. And then thinking about the IoT business, can you update us kind of where you stand on that kind of a stand-alone versus including Avanci as well, what we need to see this year in terms of deals getting signed, kind of efforts around Avanci is going to get comfort in that long-range guidance you gave a couple of years ago, or at least confluenced (ph) in a path toward numbers around that level in the next couple of years.

William J. Merritt -- President and Chief Executive Officer

Sure. I'd take a couple of pieces Eric so that contributed to the overall IoT business. So, the one you noted is Avanci and that's an important component of that, so it's great to see them having traction now with the automotive manufacturers. What we hope to see it is and we are seeing now indications of that is they start to have a little bit of same/more effect as more people sign up. So that will be a nice contributor toward the overall goal. Avanci, in general, also has other aspects of the IoT market and it was going to explore them, so that's another area, we'd like to start to see some element of traction from them during the course of the year.

Separate from that in the IoT business was sort of the middleware layer, and that was what was being pursued by the company and now is nomination with Sony, there is two pieces to that. There is a patent licensing piece and there is a software piece to that. So I think there what we want to see is further market uptake of the one end-to-end solution, so Chordant is out there advocating that, I think if we see and we continue to see positive indications there and I think if we see more of that it will tell us that the portfolio that we've built that supports the one end-to-end business as a solid going forward portfolio.

I wouldn't expect a lot of patent licensing revenues per se in that space this year, but more just the adoption of the standard. And then beyond that there will be a level of contribution coming from Chordant sales as well and they continue to have success in terms of engaging the customer. So, I think it's a -- there's some element of revenue growth and most of that will come from Avanci, a little bit from Chordant, but more -- their second part would just be market indications and that's mostly around one end-to-end.

Eric Wold -- B. Riley & Co -- Analyst

Okay. And then two quick questions kind of on the Chinese OEM side. With the OEMs in China that you're still looking to sign initial handset deals with, will all those benefits from the inclusion of Technicolor in the discussions or some of them kind of not seeing the value there and will you frame the discussion that's kind of improving since Technicolor was brought in the mix. And then Huawei kind of in the same bucket, so to speak, any known procedural dates, I looked in the 10-Q, in the 10-Q, nothing in there different by any non-procedural dates on the calendar around the complaint filed by Huawei.

William J. Merritt -- President and Chief Executive Officer

Well, I think on the second item, give the first back to Kai -- on Huawei there's no procedural dates. Yeah, so I'd put it back to Kai in terms of Technicolor's contributions of the overall product exit.

Kai Olavi Oistamo -- Chief Operating Officer

And that is very helpful in all negotiations. I mean it is important for any potential handset licensee as the video technologies are prevalent in every single smartphone today. And so it's equally important for any of the unlicensed people in China.

Eric Wold -- B. Riley & Co -- Analyst

Got it. Thank you, guys.

Operator

Thank you. Our next question will come from Charlie Anderson with Dougherty & Company.

Charlie Anderson -- Dougherty & Company -- Analyst

Yeah, thanks for taking my questions. Good morning. So I wanted to start on the consumer electronics side, I think you mentioned sort of roughly the $5 million of recurring revenue. I wonder if you can maybe just help us unpack that a little bit in terms of what types of devices you're covering there right now. I don't know if there's any customers, you'd be willing to call out at this time. And then as you started to sign, I think it sounds like you sort of signed a deal, can you maybe help us a little bit on maybe the content royalty per device or anything. Just to sort of build up to, you know, what the TAM could be there and then I've got a follow-up.

Richard J. Brezski -- Chief Financial Officer

Yeah, Charlie, this is Rich. So, really there's -- at this point, I'll just note that it's much more disaggregated market, in the handset market. So it's not at this point in time large deals driving it. In the aggregate, it's still just up to $5 million. But we certainly would plan, as Kai indicated and I indicated in my remarks, to unpack that a little bit more once we get some more traction in the market and set some goalpost up.

Charlie Anderson -- Dougherty & Company -- Analyst

Great. And then for follow-up I noticed the buyback activity, obviously very strong, I think, by my count it was maybe the strongest in at least a decade. I wonder if you could maybe just give us a little bit color on sort of why you're more aggressive than normal on the buyback. And then secondarily, with the maturity date coming up on the convertible debt, I wonder if you could give us any updated thoughts on how you're going to approach that? I know last time you guys basically did a kind of a bit of a refinancing there, any incremental color on how you're approaching that? Thanks.

Richard J. Brezski -- Chief Financial Officer

Sure. So on the -- let me start with the buyback. I always say not to focus on small time frames, when you look at our buyback activity, look at the bigger picture because the bigger picture certainly shows a long-term trend of returning capital to shareholders through buybacks. Certainly that's reflected as you commented in the near term. But you know at this point, we have acquired the Technicolor licensing business and paid some cash for that in 2018 and that certainly was a marker and we evaluate that every period. Look at our cash balance and ultimately a number of different factors led to us buying at the levels that we've had.

With respect to your second question on the convert. You know the only thing I'll say there is certainly, we appreciate the balance sheet strength, it is part of why we're able to be aggressive in buybacks from time to time. So that's always something that we're looking at, we will continue to evaluate that.

Charlie Anderson -- Dougherty & Company -- Analyst

Right. And then if I could just sneak in one more for Bill. Obviously we had a pretty landmark deal signed recently between Qualcomm and Apple on the IP side, I wonder if there is any read through from your perspective as to whether that's helpful or hurtful to all the peers in the industry. Thanks.

William J. Merritt -- President and Chief Executive Officer

So, I think it's helpful. I think anytime intellectual property is validated, as it was in that case, it's a strong indication for the rest of the market. There was also a comment by Qualcomm yesterday that they felt that gave them some tailwind in their discussions with Huawei. So that's helpful to us as well. So I think frankly all good on that front.

Charlie Anderson -- Dougherty & Company -- Analyst

Perfect. Thank you so much.

Operator

Thank you. (Operator Instructions) Your next question will come from Matthew Galinko with National Securities. Matthew your line is on.

William J. Merritt -- President and Chief Executive Officer

Matt, I believe you might be muted.

Matthew Galinko -- National Securities Corporation -- Analyst

Thank you. Can you hear me now?

William J. Merritt -- President and Chief Executive Officer

Yes, we can. Thanks.

Matthew Galinko -- National Securities Corporation -- Analyst

Thanks. So, I guess I think in the Q you might have mentioned that the revenue split might change for consumer electronics after the secondary deal closes. So, would that consumer electronic revenue stream that you are now generating is, I guess, recurring at -- I guess for the deal you signed prior to that acquisition, would you -- with the revenue split change until you subsequently get additional revenue from existing agreements starting Q3. Is that the right way to think about it at this point?

Richard J. Brezski -- Chief Financial Officer

Yeah. So, Matt, I think what you're referring to is the revenue, what we call the revenue share, which is really under the original agreement in the consumer electronics market, which has been opened up to us by that acquisition, we've agreed to share a portion of revenue, net of estimated cost with Technicolor. So that will get modified once we close the second acquisition. At this point, it's not as relevant based on the level of revenue that we have today, but it could be in the future and we can see if we can provide some more detailed description of that in the future as well.

Matthew Galinko -- National Securities Corporation -- Analyst

Okay, and then it sounds like you have a fairly hands on or all-hands-on effort to try to get licensing done in China now. Can you maybe project or give us some color on, if we don't get a trade agreement on, if sort of trade hostilities continue, how big of a blocker is that going to be for you? How much is sort of within your control to get something done in the kind of existing environment and how dependent are you on sort of external resolution of conflicts to culminate some deals in China?

William J. Merritt -- President and Chief Executive Officer

So, as I said on my remarks, getting the trade deal done would remove one uncertainty in the marketplace. And then hence it will be helpful, but it's not a blocker in any which way that people are signing IP deals in the current environment as well.

Matthew Galinko -- National Securities Corporation -- Analyst

Got it. All right, I'll leave it there. Thanks.

Operator

Our next question will come from Scott Searle with Roth Capital.

Scott Searle -- Roth Capital -- Analyst

Hey, good morning. Thanks for taking my question. Hey guys, just to back clean-up here on the couple of things. Looking at the contra-revenue charge, could you give us some idea the impact of that going forward that customer, how big they were in terms of fixed or per unit royalties to help us kind of normalize the models going out and what that baseline revenue run rate should be on the wireless side of the equation?

Richard J. Brezski -- Chief Financial Officer

Yeah. So, Scott, that's basically reflected in our recurring revenue for the period. So the recurring revenue would reflect the recurring impact associated with that.

Scott Searle -- Roth Capital -- Analyst

So wait, so just to clarify Rich, so that's going to be a $5.8 million quarterly impact going forward?

Richard J. Brezski -- Chief Financial Officer

No, no.

Scott Searle -- Roth Capital -- Analyst

No.

Richard J. Brezski -- Chief Financial Officer

No, that was a one-time non-recurring impact to the extent there was any impact from the restructuring of the arrangement that impact is the recurring impact for the quarter was reflected within our recurring revenue.

Scott Searle -- Roth Capital -- Analyst

But what was -- could you give us some idea though to normalize, what that will it had been on a quarterly basis and what that will be then going forward? Right. Is that relationship been terminated, it sounds like it's been modified right, so what is the actual impact to recurring revenue if I'm looking at going into the June quarter.

Richard J. Brezski -- Chief Financial Officer

Yes. So what I tell you is that you look to first quarter for that because the first quarter, which show the recurring impact of that, as well as everything else. So the -- I'm trying to see, I can say this better. It's a smaller license agreement that I can't get into the confidential terms on. But what's important to know is the one-time impact has been taken that's in recurring revenue and it's behind us now. The recurring impact to the extent there was recurring impact that was basically reflected in the first quarter results. In essence, as if that impact as if that was in there from January 1 on.

Scott Searle -- Roth Capital -- Analyst

Got you. So maybe just to clarify Rich, so if I back out that $5.8 million contra-revenue charge, that is the normalized recurring revenue run rate to be working off of. Correct?

Richard J. Brezski -- Chief Financial Officer

Yeah, because that contra-revenue charge, we took to non-recurring revenue. So, if you go to the metrics, you'll see it broken out, the recurring is $74.2 million and the non-recurring is negative $5.5 million. So, you know, as with any quarter, you know, you can look at the non-recurring and say, OK, that's relevant to this quarter, but it's not necessarily relevant going forward, the more relevant number going forward is the recurring revenue number.

Scott Searle -- Roth Capital -- Analyst

Got you. You know that's helpful in calibrating. On the CE relationship, you said $4.9 million this quarter, you mentioned there were some in the fourth quarter as well. Could you give us an idea of what that look like and then as it relates to the revenue share back to Technicolor, is that reflected in your patent administration costs?

William J. Merritt -- President and Chief Executive Officer

So with respect to the first part of the question that is, it's definitely an increase over the fourth quarter. I'm not sure if we disclosed what the fourth quarter contribution from the CE business was. I almost, I want to say that we did, but I don't have it at my fingertips, but I can definitely tell you it's a sequential increase quarter-over-quarter. With respect to the Rev Share because it's net of an estimated level of expenses there we haven't had a Rev Share-to-date there.

Scott Searle -- Roth Capital -- Analyst

Okay. And I would presume just kind of based on the revenue line items fixed per unit royalty that the CE relationship is a fixed royalty arrangement or a fixed license arrangement.

William J. Merritt -- President and Chief Executive Officer

Well, it's, there is more than one CE relationship.

Scott Searle -- Roth Capital -- Analyst

Okay.

William J. Merritt -- President and Chief Executive Officer

So yes, like the other business they could be fixed or variable, they probably tend to be more variable.

Scott Searle -- Roth Capital -- Analyst

Got you. And just following up on the cost front, I think you said on the call that the OpEx structure normalized for charges, was basically flattish from the December quarter. Just wanted to clarify that because your SG&A and development are up about $2.5 million sequentially, patent admin was up about $3.5 million sequentially, I assume there's something in there for the CE relationship and royalty payback. But is that kind of the rough ballpark of non-recurring items for charges and other fixed costs in there related to the Technicolor integration?

William J. Merritt -- President and Chief Executive Officer

Yes so that's right. And I think we've defined in the past, kind of what goes into that metric. The sum total of all those things is basically flat in Q1 versus Q4, and therefore in line with 2017. The other thing that you didn't mention that I'll highlight is litigation is also put out there as well, because that's something that can move up and down and not really be reflective of our cost base, just more the stage of a litigation we might begin.

Scott Searle -- Roth Capital -- Analyst

Got you. And just lastly, looking at Technicolor, I was wondering if you can give us some idea more qualitative in terms of the level of engagement in that pipeline right now. I know you're just kind of getting out there and starting to shake the trees, but you've already had some pretty good results early on, and I know you don't want to commit to any sort of royalty numbers or unit numbers, but just kind of wondering if there is some softer metrics qualitatively in terms of how big that pipeline, number of companies that you're engaging with, how we should be thinking about that over the next 12 months? Thanks.

William J. Merritt -- President and Chief Executive Officer

So yeah, I think the softer indicators would just be the number of meetings and the level of engagement. So, as an example, there's a industry group within China that we were meeting with, that gives you access to that whole market, our people to participate in that particular consortium. There's meetings going on with the major manufacturers of TVs as well. (inaudible) as it goes we settle along. And TV piece is the bigger value piece there, set-top box piece is a nice value add. But just observing the level of activity to me is very encouraging. You know, as we indicated in the script, there's a bit of price discovery that will go on this year, but so far we're very happy with what we're seeing.

Scott Searle -- Roth Capital -- Analyst

Great, thank you.

William J. Merritt -- President and Chief Executive Officer

Thanks Scott.

Operator

I'm showing no further questions in the queue at this time.

Patrick Van de Wille -- Chief Communications Officer

Thanks very much, Carey. Thanks everybody for joining us today and we look forward to being in touch with you again at our Annual Meeting in June.

Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.

Duration: 36 minutes

Call participants:

Patrick Van de Wille -- Chief Communications Officer

William J. Merritt -- President and Chief Executive Officer

Kai Olavi Oistamo -- Chief Operating Officer

Richard J. Brezski -- Chief Financial Officer

Eric Wold -- B. Riley & Co -- Analyst

Charlie Anderson -- Dougherty & Company -- Analyst

Matthew Galinko -- National Securities Corporation -- Analyst

Scott Searle -- Roth Capital -- Analyst

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