InterDigital Inc

NASDAQ:IDCC

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and welcome to the InterDigital Inc. Second Quarter 2021 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Tiziana Figliolia. Please go ahead Ma'am.

[Tiziana Figliolia, VP of Finance and IR]

Thank you, Anna. Good morning to everyone, and welcome to InterDigital's second quarter 2021 earnings conference call. I'm Tiziana Figliolia, Vice President of Finance and Investor Relations. And with me in today's call are Liren Chen, our President and CEO; and Rich Brezski, our CFO. Consistent with last quarter's call, we will offer some highlights about the quarter and the company. And then open up 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 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 risk and uncertainties include those described in the Risk Factors section of our 2020 Annual Report on Form 10-K and in our second quarter 2021 quarterly report on Form 10-Q and in 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 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 CEO]

Thank you Tiziana. Good morning, everyone and thank you for joining our call today. I hope everyone is safe and healthy.

In terms of our financial performance, our second quarter revenue and expenses were in line with our expectations. I will let Rich speak through the financials in more detail later.

On today's call, I would like to focus on key areas where InterDigital continued to strength and momentum, namely, our licensing, our technology leadership, our patent portfolio, and our overall execution. These are all exemplified by our new long-term agreement with Xiaomi, which we announced earlier this week. Xiaomi is a public traded China based vendor with almost 150 million smartphone shipped in 2020. They are consistently one of the leading handset vendors worldwide, including in China, India, and other emerging market. They are also holding double digit and growing market share in Europe.

The agreement with Xiaomi recognizing the depth and breadth of InterDigital's patent portfolio across several key technologies related to cellular wireless, including 3G, 4G, and 5G, WiFi, and HEVC video technology. It also adds one of the world's leading smartphone manufacturers to our current list of approximately 80 companies, including Apple, Huawei, Samsung and Sony that have taken licenses to InterDigital's extensive patent portfolio.

I'm particularly delighted that by adding Xiaomi and working consistently with an industry leader, we now licensed our patented technology to more than 800 million handsets around the world this year alone, about approximately 55% of the worldwide smartphone market.

As part of the agreement InterDigital and Xiaomi has agreed to terminate all pending litigations and other legal proceedings. And we look forward to enhancing the collaborations between the two companies. On the litigation front in the past several months, we have seen some excellent outcomes that demonstrate both our ability to handle multi-jurisdictional cases and the strength in our portfolio.

Last week, the UK High Court has decided that one of our 4G LTE patent is valid, essential and infringed by Lenovo. This decision is the first from five technical trials that are scheduled to proceed before the UK High Court and serves as a further proof of strength of the innovation developed by InterDigital's R&D team, as well as our ability to enforce our related rights through our worldwide patent portfolio.

We look forward to our related FRAND's trial scheduled for January 2022, where we expect the UK Court to set front terms that will be applicable to a worldwide license with Lenovo. I want to reiterate that our long held desire to reach amicable agreement through bilateral negotiations. However, as we have demonstrated, we balanced this desire with our willingness to pursue actions against implementers that are unwilling to accept fair and reasonable terms for our license to our technology.

In terms of research and development, our teams continue to produce great work and demonstrate leadership across all the technologies that we develop. In cellular wireless, our current contributions to 3GPP 5G standards in 2021 have increased by more than 50% when compared to the same period in 2020. In addition, our engineers continue to be named to leadership positions within important industry organization like 3GPP to develop 5G and future safety standards.

On the video side, InterDigital innovator has also been named into several leadership positions to a key MPEG standard group, and to the IPU group, responsible for standardization in the areas of video and program production, focusing on energy consumption, and sustainability considerations. So overall quality of our innovation continues to be very high. This was most recently evidenced by our 5G enabled end-to-end robotics telepresence pilot, which we executed in cooperation with Telenor and BT, and was named to the shortlist of the CSR award, in the best 5G mobile all video technologies service category.

This project highlights the work our engineers continue to do at the core of 5G innovation, as network become more efficient and flexible for different use cases. This follows award we received in May, when our advantage Edge Emulation Platform was recognized as the best emerging technology as a small cell form awards.

Now look at our patent portfolio, we continue to further strengthen our IT position with the increased pace of new inventions related to 5G wireless standard. For example, so far in 2021, we are on track to exceed last year's number of inventions by nearly 30%. Significantly, these inventions relate to important features and functionalities, such as increasing data rate, reducing latency, improving reliability, and enabling faster and more accurate cellular positioning technology. And we expect to continue to build our portfolio of valuable IP, because we have a robust inventor community.

As we communicated previously, more than 50% of InterDigital employee and engineers, and more than 90% of those engineers are the inventors. So to put it another way, more than half of our InterDigital employees are inventors, which represents a remarkable culture of innovation.

Consistent with the continuing execution of our strategy, we've recently announced a restructuring effort with the intent to better allow research resources with our business model. We expect this effort to lead to us some level of reinvestment that will help drive further growth and revenue in the future.

In summary, I believe the combination of our technology leadership, the breadth and quality of our patent portfolio, and our reasonable and fair approach to licensing, combined with the execution of litigation strategy will drive continued success in the future.

With that, let me turn it over to Rich.

[Rich Brezski, CFO]

Thanks Liren. As Lauren mentioned, our Q2 results were more or less in line with our expectations. Specifically the $88 million of revenue we reported, which did not include our Q3 Xiaomi agreement, came in at the high end of our expectations. Meanwhile, Q2 operating expenses at $91 million were at the lower end of our expectations. Our total revenue and expense were each driven to the favorable end of the respective ranges by recurring revenue of $78 million and restructuring and one-time charges of $15 million.

A contributing factor to the lower than expected restructuring and one-time charges was timing. As we first indicated in our June expense guidance, we expect additional charges related to our restructuring in the second half of the year, with a specific timing dependent on meeting the criteria for when we can account for such charges.

Meanwhile, our estimated annualized expense savings from the restructuring remains roughly $15 million. We expect to begin to realize a portion of that savings sometime in the fourth quarter of this year.

Looking forward to Q3, we expect our financial results to benefit from our long-term fixed price agreement with Xiaomi, including the expected recognition of two quarters worth of non-recurring revenue in Q3. In addition, we expect to recognize a level of recurring revenue that would put our revenue platform at roughly $360 million.

I'll remind everyone that when I refer to our revenue platform, I'm analyzing the recurring revenue for a given period. In this case, the Q3 revenue platform is a preliminary estimate that accounts for the Xiaomi license and for the loss of a relatively small amount of recurring technology solutions revenue in connection with our ongoing restructuring. We will provide additional details around our expectations for Q3 revenue expense, including any adjustment to compensation accruals, and any expected restructuring charges in one or more releases later this quarter.

Finally, moving on to capital allocation. Between January 1 of this year and August 3, we've reduced our outstanding share count by another 300,000 shares through the repurchase of $20 million of our common stock.

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

[Tiziana Figliolia, VP of Finance and IR]

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

[Operator Instructions] We'll now take a question from Derek Soderberg with Colliers Securities.

[Derek Soderberg, Colliers Securities]

Hey, guys, congrats on getting Xiaomi signed. Rich I actually wanted to start with you on OpEx. So I know you don't guide OpEx specifically. But I guess I'm curious sort of we take out the one-time impacts that we saw, and then sort of exclude some of those restructuring charges, sort of how should we be modeling OpEx just from a sort of directional standpoint from here?

[Rich Brezski, CFO]

Yes, well, certainly I start with what you said, taking out the one-time impacts. If you look at our financial metrics, which we published on our website, today, there's a total of roughly $15 million driven by the $13 million of restructuring charges. So that would obviously be the first thing. The second thing that I always talk about is when you're comparing period to period is looking at it with and without litigation, because litigation is always going to move around depending on what's going on and how the cases are evolving.

So, as far as more specific guidance from that, that's kind of a baseline, as far as more specific guidance, we will provide that later to the extent that we think there's an important things to consider from a trend perspective. And certainly in the second half of this year, we expect additional restructuring. How much if any, is in Q3 versus Q4, as I said is a bit dependent on timing. So that'll definitely be something we want to make clear as it becomes more clear to us with new information.

[Derek Soderberg, Colliers Securities]

Got it. That's helpful. And then just back to the Xiaomi deal. I guess I'm just curious, I wonder to what degree is that deal maybe an example of how some of the other deals you've done looked like in the past? Or was there anything that you felt that was unique about this deal that I guess was different than the ones that you've done in the past?

[Liren Chen, President and CEO]

Hey Derek, this is Liren. So if you look at the Xiaomi deal, we just completed earlier this week, is very much consistent with the past deal we have done. It's a long-term deal, it covers worldwide device sales. And if I had to outline a few other things here is it covers our cellular technology, our WiFi technology, as well as our ACVC standard essential patents.

[Rich Brezski, CFO]

Yes, I'll just add, Derek, that, as Liren said, it's a long-term deal, I mentioned in my script that, we expect in Q3 to recognize two quarters of non-recurring revenue in Q3 associated for it, and in total expected to run five years.

[Derek Soderberg, Colliers Securities]

Perfect, thanks guys.

[Operator]

[Operator Instructions] And it appears there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

[Tiziana Figliolia, VP of Finance and IR]

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

[Liren Chen, President and CEO]

Yes, I just want to say, thank you to all the employees for their dedication and keeping executing during a very challenging time. I look forward to leading the company to further success in the future. I also want hope everyone stay healthy as we continue to navigate through the pandemic. Thank you.

[Tiziana Figliolia, VP of Finance and IR]

Thanks Liren and thanks to everybody for joining us today. We look forward to giving you an update next quarter.

[Operator]

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.