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InterDigital, inc (IDCC) Q3 2021 Earnings Call Transcript

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IDCC earnings call for the period ending September 30, 2021.

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InterDigital, inc (IDCC -0.43%)
Q3 2021 Earnings Call
Nov 4, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the InterDigital, Inc. Third Quarter 2021 Earnings Call. [Operator Instructions]

At this time, I would like to turn the conference over to Richard Lloyd. Please go ahead, sir.

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Richard Lloyd -- Communications Director

Good morning to everyone, and welcome to InterDigital's Third Quarter 2021 Earnings Conference Call. I am Richard Lloyd, Communications Director. And with me in today's call are Liren Chen, our President and Chief Executive Officer; and Rich Brezski, our Chief Financial Officer. 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. These risks and uncertainties include those described in the Risk Factors sections of our 2020 annual report on Form 10-K and our third quarter 2021 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 to the most directly comparable GAAP financial measures are included in our financial metrics Tracker which is available on the Investor Relations section of our website.

With that taken care of, I will turn the call over to Liren.

Liren Chen -- President and Chief Executive Officer

Thank you, Richard. Good morning, everyone, and thank you for joining us today. This was a highly successful quarter for InterDigital with revenue growing by 64% year-over-year to more than $140 million, driven by an excellent blend of strong reocurring revenues and royalty payments for past sales. Our performance was fueled by licensing deals signed with several major device manufacturers, including a mobile license with Xiaomi and a consumer electronic license with one of the top 10 global TV manufacturers. I will let Rich give you more details on the numbers. But I want to emphasize that this kind of result is only made possible when the business is closely aligned with our strategic goals and when we execute superbly across the company on our key initiatives. Since the beginning of 2020, we have signed 16 new agreements, including 10 so far in 2021. It's worth remembering that most of these deals have been signed during the COVID pandemic, when meetings with prospective licensees have taken place virtually. This is a remarkable achievement and demonstrates the adaptivity, the expertise and the tenacity of our whole team. Additionally, our use of video conferencing in these negotiations highlights the importance of the connectivity and video technologies we have created.

During the third quarter, we closed our new license with Xiaomi, which has risen to become one of the top three smartphone manufacturers in the world in 2021. This agreement provides consistent, substantial, reoccurring revenue for years to come, and underscores the value of our cellular portfolio, particularly in 5G as well as the importance of our patent coverage in video and Wi-Fi. In addition to the Xiaomi deal, we also signed a new license agreement with a top 10 global TV manufacturer and renewed our license agreement with Seiko. Together, this agreement underlines both the quality and the breadth of our research and our patent portfolio. It also points to our excellent recent progress, including deals in the CE sector.

Our performance highlights the strong momentum we continue to build and cements our status as the leading innovator in mobile and video technologies. With increasing adoption of IoT and video services, our technology has never been more important. However, there are still major manufacturers that continue to benefit from the innovation InterDigital has created but have yet to pay a licensing fee like many of the peers. We remain actively engaged on multiple fronts with those manufacturers. And while we would prefer to reach agreement via commercial negotiations, we are prepared to enforce our IP rights when necessary should we be unable to come to an agreement with them. Our groundbreaking research is the foundation of everything we do, and our R and I engineers are consistently recognized for the quality of the research and their leadership of the industry. Recently, one of our senior engineers was appointed as the chair of a key working group with European Telecommunications Standards Institute, which is working on technology that could dramatically improve the use case for wireless connectivity.

On the video side, the Head of our Regional Standard Team has been given the highest technical honor by the Advanced Television Standards Committee for his years of working on the cutting edge of video technology. Our work in Wi-Fi has also received further recognition with our research team being commended for their contributions in power-saving technology which significantly extend battery life and also in high-frequency Wi-Fi, which dramatically increases network speeds. While we are always delighted to see InterDigital engineers receive well-deserved industry accolades, a highlight of research is how our R and I team contributes across the board to our world-class patent portfolio. More than 90% of our engineers are inventors and almost 60% of our inventors have at least 10 patents. Despite of the impact of pandemic, we remain focused on developing key wireless and video technologies and are on pace to grow our contribution to the 5G standard by well over 50% year-over-year and the number of 5G invention disclosures by more than 30% year-over-year.

In short, we believe our 5G story has never been more competitive. At InterDigital, we pride ourselves in being at the forefront of development of the next generation of innovation in connectivity, which is why I'm particularly pleased with some of the work we are doing in the early stages of 6G. For example, we are a founding member of the University of Texas at Austin 6G Research Center, along with fellow founders, AT and T, NVIDIA, Qualcomm and Samsung. We will work with the University in areas that will form the core of 6G such as AI and machine learning, advances in technologies and more. In September, we also cohosted the 6GSymposium Fall, a two-day virtual event that we held in partnership with Northeastern University and the Next G Alliance. The event attracted over 2,000 participants and brought together over 60 speakers from industry, garment academia and beyond to discuss some of the priorities, opportunities and challenges for 6G. On the litigation front, our new license agreement with Xiaomi means all pending cases between the parties will cease. We still have ongoing proceedings with Lenovo in the U.K., U.S. and China.

In August, we won a complete victory from the U.K. High Court in our first technical trial, which found our patent in suit to be valid, essential to 4G LTE standard and infringed by Lenovo. We are now preparing for our FRAND trial in U.K. which will take place in January of 2022 and will determine the terms that will be applicable to a worldwide license with Lenovo. Moving on to some internal changes at the company. As we first announced in June, we have taken steps in 2021 to restructure our research and innovation group with a focus in France. We recently expanded that effort to look at total cost structure of our G and A functions, largely centered in the U.S., which will result in significant annual cost savings beginning in 2022.

Additionally, as we announced two weeks ago, we appointed Josh Schmidt as our new Chief Legal Officer and Corporate Secretary. Josh was previously Deputy General Counsel at InterDigital where he managed a wide range of matters, including public company reporting, corporate governance, M and A, employment, R and D collaboration agreements and our ESG initiatives. After six years with InterDigital, he has in-depth understanding of the company and is a superb addition to our executive leadership team. Josh is taking over from Rick Gulino who is retiring after several years of excellent service as our Chief Legal Officer. Rick has agreed to stay on board as a strategic advisor until December to ensure a smooth transition, and I'd like to thank Rick for his contribution to InterDigital and to wish him well for his retirement.

And with that, I will let Rich provide you with more details on our third quarter business performance.

Richard J. Brezski -- Executive Vice President, Chief Financial Officer

Thanks, Liren. I'm really pleased to provide details on what has been our strongest quarter in almost four years. With increased adoption of both the 5G cellular standard and HEVC video standard, the combination of our wireless and video technologies has never been more important. This is evident in our strong financial results, headlined by $144 million of revenue, including $93 million of recurring revenue. Both the increase in recurring revenue and the past sales were driven by new license agreements, including Xiaomi on the mobile side, and with a top 10 global TV manufacturer on the CE side.

Xiaomi is the third major smartphone manufacturer who has taken a license to our wireless and video technologies in the last two years. Led by our 5G wireless and HEVC video technologies, the aggregate value of these three contracts is expected to be more than $0.5 billion. We now have roughly 55% of the smartphone market under license and expect to be paid on about 800 million smartphones shipped during this year. Given the increased concentration within the market, we believe we have an opportunity to increase our license market share to about 80% by adding a few customers.

At the same time, we are increasing our penetration in CE markets where the latest licenses have raised our recurring revenue to roughly $20 million on an annualized basis. Given our substantial operating leverage, the 64% increase in total revenue we reported led to a 138% increase in operating income. This occurred despite reporting onetime expenses of $26 million. The remaining sequential increase in operating expense was driven by a $3 million increase in litigation costs as we move toward our scheduled January 2022 FRAND trial with Lenovo. Even including the onetime expenses, we reported GAAP EPS of $0.83 per share, which was our best quarterly mark since first quarter 2018. Moving on to cash. We reported $87 million of free cash flow in the quarter, driving our quarter end cash balance to $900 million. We also reported that our year-to-date share repurchases have reached approximately $30 million as of November 3. Looking forward to Q4, we expect total revenue to be in the range of $98 million to -- excuse me, $105 million, including an expected increase in recurring revenue to $97 million to $100 million.

As always, these figures do not include any new agreements we might sign over the balance of the quarter. As for fourth quarter expenses, Liren already noted, we expanded our restructuring program early in Q4. We now expect to recognize another $5 million to $6 million of related restructuring expenses in the fourth quarter, on top of our recurring expense base of just over $80 million from the third quarter. We believe these actions will better position us for growth by providing the space to make additional investments to further expand our leadership in key areas while driving higher profit margins and better returns to our shareholders. We will provide additional updates on the long-term net savings from these actions as we evaluate our levels of reinvestment in connection with developing our 2022 plan.

With that, I'll turn it back over to Richard.

Richard Lloyd -- Communications Director

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

Questions and Answers:

Operator

[Operator Instructions] And we'll take our first question from Ian Zaffino with Oppenheimer.

Ian Zaffino -- Oppenheimer -- Analyst

Just wanted to get a little detail on what's going on, on the smaller video players? I know you talked about doing some patent pools. What's the progress there? And help us understand how that's going to proceed?

Richard J. Brezski -- Executive Vice President, Chief Financial Officer

Ian, we missed the beginning of your question. I think you were asking what the status is with smaller video players and how we plan to proceed there individual licensing versus pools?

Ian Zaffino -- Oppenheimer -- Analyst

Yes, because you talked about it somewhere in the video there. Yes. So I wanted maybe to go down to the next tier and get a little color on that.

Richard J. Brezski -- Executive Vice President, Chief Financial Officer

Yes. So Ian, we announced -- I think Liren mentioned in his script, the number of licenses we've signed over the last year which was quite a few, particularly if you compare that to historical patterns. And part of that is by making progress with some of the smaller video players. Of course, the big news for the quarter is on the video side is signing a top 10 global TV manufacturer. That's the most significant CE deals that we've signed since closing the Technicolor acquisition. But of course, that's still -- that acquisition still plays into the Xiaomi deal, which, as I mentioned, includes HEVC technology. Does that answer your question?

Ian Zaffino -- Oppenheimer -- Analyst

Yes. Thank you very much. That's all.

Operator

And our next question comes from Derek Soderberg with Colliers Securities.

Derek Soderberg -- Colliers Securities -- Analyst

Hey guys! Congrats on the very strong results. And congrats to you, Rich, on the retirement. On the commentary that you guys put could potentially license 80% of the handset market. Wondering what the time line you envision for potentially getting to that 80% number? What sort of needs to happen as well? And can you guys benefit as you see that concentration sort of go up from the key players in the industry? Or sort of, do you need to wait until those existing deals that you have with those guys -- you have to wait until you resign those deals?

Liren Chen -- President and Chief Executive Officer

Derek, this is Liren. Yes, regarding the 80% market concentration question, we do see we can get to that number by simply signing another few vendors that has significant market share. And regarding the exact timing of the signing of those agreements, each individual discussion has its own sort of discussion dynamic. As we described earlier, we always prefer commercial negotiations and most of our deals do get done through commercial negotiations. However, we have to enforce our right, as our track record as indicated. We are able to successfully enforce a right, which every single time leads to a license agreement that supports our valuation. So regarding the key player market increase. Of the agreement that has already in place, a vast majority of our agreements are $6 amount agreement. So in that context, we got a substantial reoccurring, but it is the same payment throughout the course of the agreement. And we do have some variable agreements, but they are a smaller portion of licensing program. However, as you have pointed out here, our agreements, they all have certain terms. So when the agreement expires when we do negotiate with them for the next agreement, the increased volume as well as future projections are some of the key indicators that we will consider.

Derek Soderberg -- Colliers Securities -- Analyst

Got it. That's helpful. And then on noncurrent royalties came in higher. It looks like due to that TV agreement. I think that brought in close to $21 million. That seems a bit atypical for a consumer electronics agreement. Could you provide any additional color as to why that was the case this time?

Richard J. Brezski -- Executive Vice President, Chief Financial Officer

Yes. I think what I'll just say there is there was a period of infringement prior to signing the agreement. So that was the result of covering some of that prior infringement.

Derek Soderberg -- Colliers Securities -- Analyst

Got it. Got it. And then just another quick one on recurring revenue. It looks like that TV deal contributed $1.5 million to $2 million this quarter, but guidance sort of implies a decent step-up. Just curious if you can sort of parse out the upside in recurring revenue guidance as it relates to new deals, timing of some of the -- you guys receiving a revenue, tech solutions? Any color on that sequential growth in recurring revenue would be helpful.

Richard J. Brezski -- Executive Vice President, Chief Financial Officer

Yes, sure. So I guess the first thing I'd say relative to the TV deal, we had been reporting roughly $15 million annualized recurring revenue in CE. And now I've kind of talked about that CE recurring revenue being $20 million on an annualized basis. I'll note that, that does move around a little bit more than the mobile side because there's a greater proportion, a much greater proportion of variable deals on CE. So that's going to really move up and down based on shipments in a given quarter. Where on the mobile side, we have, particularly on a dollar-weighted basis, much more revenue coming from fixed price agreements, which are going to be generally the same quarter after quarter. That $5 million increase, if you think about it, if you just take 1.5 annualized, that's about $6 million. So that's kind of in that zone. And again, we don't want to be overly precise because of the variability quarter-to-quarter. So hopefully, that addresses the question. If there was another aspect I missed, Derek, please let me know.

Derek Soderberg -- Colliers Securities -- Analyst

No, no, that was very helpful.

Richard J. Brezski -- Executive Vice President, Chief Financial Officer

Okay. And then let me just clarify, Derek, there's a plethora of Richards that I got. In addition to myself, we have Richard Lloyd here today. It was Rick Gulino, our Chief Legal Officer, that had retired so.

Derek Soderberg -- Colliers Securities -- Analyst

Congratulations to him.

Richard J. Brezski -- Executive Vice President, Chief Financial Officer

No worry. Just wanted to clarify.

Operator

And our next question comes from Scott Searle with ROTH Capital.

Scott Searle -- ROTH Capital -- Analyst

Just to follow up on the prior question. In terms of the TV relationship that was signed. I want to make sure that there was a recurring element to that, that was recognized in the quarter. Also wondering kind of what the pipeline looks like that in the near term. And if there was any IoT contribution during the quarter, if that's starting to ramp up and where that stands?

Richard J. Brezski -- Executive Vice President, Chief Financial Officer

Yes. So Scott, there was a recurring element to the TV deal signed during the quarter. So I'll start with that. And as to IoT, there continues to be revenue recognition from -- contributions from the Avanci platform. I don't think there's anything material to call out in terms of a change there. But certainly, we'll keep you updated as that does evolve.

Scott Searle -- ROTH Capital -- Analyst

Great. And I'm wondering if you could give a quick update in terms of the relationship and discussions with LG in terms of their potential exit from the handset market and sell that business. What that means for any sort of potential licensee opportunities going forward. Is there any update on that front?

Liren Chen -- President and Chief Executive Officer

Scott, this is Liren. So as you pointed out, LG has decided to exit the smartphone licensing program. So as a result, the mobile licensing program no longer in place. So LG is a very significant player in TV market. So as we are expanding the CE market, consumer electronic market, we are engaging in active discussions regarding getting paid on the CE side. I don't have more precise as to report other than we are having active engagement with them.

Scott Searle -- ROTH Capital -- Analyst

Okay. And lastly, if I could, Liren. Now that you've been in for a bid, you guys are certainly generating significant amount of cash flow. You start to return some of that to the shareholders in terms of buybacks and otherwise. But I'm wondering how you're starting to think about inorganic opportunities. Are you actively looking on that front? Or do you have enough on your plate in terms of executing with unlicensed mobile providers as well as the video opportunity?

Liren Chen -- President and Chief Executive Officer

Yes. So regarding -- yes, we do have a substantial amount of cash on our balance sheet, which is I consider a very strong strength for the company. And we have a very strong team, super strong patent portfolio and a very impactful track record enforcing our right when we have to. We are always looking at new opportunities. So if there's a right opportunity coming and that makes sense for us to consider merger acquisition, we will. But internally, we are very, very strong. Regarding the on-license opportunities that you are pointing out to here, as I mentioned earlier, we always prefer commercial negotiation, and we are having negotiations with multiple vendors on multiple fronts. And as I mentioned also earlier, we are ready to enforce our right if necessary. And we have a very good track record in that space also.

Scott Searle -- ROTH Capital -- Analyst

Great, thank you.

Operator

[Operator Instructions] We'll take our next question from Joseph Kowalsky with Upstream Investment Partners.

Joseph Kowalsky -- Upstream Investment Partners -- Analyst

Good morning. Congrats on a great quarter and a great beginning to the new management team. I've been a shareholder since the early 1980, and I have about 100 clients for our shareholders as well. And you really answered my questions, but I did want to make two brief comments. Bill Merritt was a great litigator. But I think it showed in his management style, and I'm really happy to see indications that the new management has a more collaborative approach, and I appreciate that very much. The other comment is that InterDigital was known for years for its good relations with its shareholders who acted frequently as a free public relations resource. And at some point in the not too distant past, there seems to be more of a circling of the wagon. And I'm grateful to see that the company is working to renew good relations with the shareholders that I think could again be a very good resource for the company. And an example being simply taking questions and comments on this call. And it really -- it encourages me, and I think that the entire movement of the company in the last several months has been just in the absolute right direction. I really want to just thank you very much for all of that.

Richard J. Brezski -- Executive Vice President, Chief Financial Officer

Thank you, Joe. Appreciate your comments.

Liren Chen -- President and Chief Executive Officer

Joseph, this is Liren. I also appreciate your comments. I also want to thank you for being a long-term shareholder for InterDigital. And we collectively for the new management, definitely wanted to build on Bill's legacy, which he had built a very strong company and we're grateful what we have, and we obviously wanted to work with shareholders for the next level of success.

Operator

[Operator Instructions] At this time, I'm showing no questions in queue. I would like to hand it back over to our speaker for any additional or closing remarks.

Richard Lloyd -- Communications Director

Thank you, Amy. Liren, do you have any final remarks?

Liren Chen -- President and Chief Executive Officer

Yes. Thank you for everyone for joining us today. I'll close by saying thank you all to all the employees for your dedication and strong execution. I also hope everyone stays safe and healthy as we continue to navigate through the pandemic.

Richard Lloyd -- Communications Director

Thanks, Liren. And Amy, we can hand it back to you.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Richard Lloyd -- Communications Director

Liren Chen -- President and Chief Executive Officer

Richard J. Brezski -- Executive Vice President, Chief Financial Officer

Ian Zaffino -- Oppenheimer -- Analyst

Derek Soderberg -- Colliers Securities -- Analyst

Scott Searle -- ROTH Capital -- Analyst

Joseph Kowalsky -- Upstream Investment Partners -- Analyst

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