InterDigital Inc

NASDAQ:IDCC

Earnings Call Analysis

InterDigital Reports Strong Q3 with Increased Revenue Guidance

In Q3, InterDigital achieved remarkable financial results with revenue of $129 million, surpassing expectations. This was fueled by new licensing agreements, notably with OPPO, which positions the company to license approximately 70% of global smartphone sales. Notably, full-year revenue guidance was raised by $145 million to $860 million, a 20% increase. Adjusted EBITDA rose to $65 million, leading to a projected margin of 63% for 2024. Additionally, the company anticipates record recurring revenue of $118 million in Q4, driving annual recurring revenue (ARR) up by over $80 million, totaling around $470 million. With strong cash flow, InterDigital's strategy focuses on reinvesting in innovation and returning cash to shareholders.

A Strong Q3 Performance and Revised Guidance

In the third quarter of 2024, InterDigital achieved remarkable financial results, with total revenue reaching approximately $129 million, surpassing their previous guidance range of $94 million to $98 million. This strong performance was largely fueled by new licensing agreements and successful negotiation of outstanding litigation. As a result, the company has raised its full-year revenue guidance by 20%, amounting to $860 million, which is an increase of $145 million from earlier estimates. This positive momentum positions InterDigital favorably going into the future.

Highlights of New Licensing Agreements

A key driver of InterDigital's recent success has been the signing of new license agreements with major players in the electronics industry. The notable addition of OPPO Group, a leading smartphone manufacturer, strengthens InterDigital's patent portfolio and significantly increases its market position. With agreements in place with the top four smartphone manufacturers—Samsung, Apple, Xiaomi, and OPPO—InterDigital now covers approximately 70% of global smartphone sales. Such developments are expected to accelerate growth across InterDigital's diverse licensing programs.

Recurring Revenue Insights

In quarter three, InterDigital achieved recurring revenue of $99 million along with catch-up revenue of $30 million, indicating a healthy revenue model. Looking ahead to Q4, the company anticipates quarterly recurring revenue to reach about $118 million, boosting the Annual Recurring Revenue (ARR) target to approximately $470 million. This represents a noteworthy increase of over $80 million in ARR, signalling a strong business model driven by ongoing licensing agreements.

Operational Leverage and Margin Expansion

The company's operational structure allows for substantial margin expansion alongside revenue growth. InterDigital is targeting an adjusted EBITDA of $538 million for the full year 2024, reflecting a solid margin of approximately 63%. Such margins highlight the efficiency of their operations and the strong cash generation capabilities, which further positions the firm for reinvestment in research and development for innovations in wireless and video technology.

Investment in Innovation and Market Presence

InterDigital's commitment to innovation is evident, as they have been recognized among the top five patent holders in the fields of 5G, WiFi, and video compression technology. The firm is behind a record number of patent applications in these critical tech areas, ensuring their significant role in future technological advancements. They aim for a long-term target of $1 billion in annual recurring revenue by 2030, bolstered by a goal of $500 million in annual recurring revenue from smartphone licensing by 2027.

Debt Management and Shareholder Returns

In 2024, InterDigital has committed approximately $225 million to reduce its debt and enhance shareholder value. This includes repurchasing 2.5% of the total outstanding shares and announcing a 13% increase in dividends, showcasing a strong commitment to returning capital to investors while maintaining financial health.

Looking Ahead: Growth Celestial Path

Despite some contracts expected to expire in 2025, InterDigital remains optimistic about its growth trajectory as they continue to secure new licensing agreements and reinvest in innovation. The completion of ongoing arbitration processes, such as with Samsung and Lenovo, is expected to accelerate licensing successes, with new revenue expected to enter the books as agreements are finalized. The robustness of the company's patent portfolio and innovative technology positioning suggests a stable growth outlook for the foreseeable future.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the InterDigital, Inc. Third Quarter 2024 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Raiford Garrabrant, Head of Investor Relations. Please go ahead.

[Raiford Garrabrant, executive]

Thank you, Grace, and good morning, everyone. Welcome to InterDigital's Third Quarter 2024 Earnings Conference Call. I am Raiford Garrabrant, Head of Investor Relations for InterDigital. With me on today's call are Liren Chen, our President and CEO; and Rich Brezski, 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 a 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 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 section of our 2023 annual report on Form 10-K and in our other SEC filings. In addition, today's presentation may contain references to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the supplemental materials posted to the Investor Relations section of our website.

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

[Lawrence Chen, executive]

Thanks, Raiford. 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 accelerated 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, but 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, Opel Group is 1 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 4 smartphone OEMs and their license and have licensed about 70% of the smartphone devices globally. This agreement provides more validation of the importance of our foundational innovations in wireless, video and AI and strengthen 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 the third quarter. I'm pleased to share that we delivered revenue of about $129 million, exceeding the top end of guidance. Rich will 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, our top 10 television vendor that sells devices and several different brands are 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 the third quarter, we also signed a new agreement with Panasonic which cover our 4G and 5G cellular patents as well as our WiFi and HEVC pad. 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 Op agreement, we have signed a binding global arbitration agreement to set the terms of a new license agreement with Lenovo. As part of our petition agreement, both parties has also agreed to DPR 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. As you may recall, we are in a binding arbitration to settle the final terms of our licensing with Samsung for mobile devices. The party just finished last round of hearing 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 1, 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 faster innovation for next-generation technology that benefit the whole industry and billions of consumers in the future.

Our engineering and patent team continue to fire on all cylinders. We keep on adding to our leadership in advanced video technology, such as HEVC and VC and our video engineers on track for a record year in new inventory filings. Our position at the cutting edge of video innovation was recognized at the recent award ceremony hosted at this year's international broadcasting convention. -- were receivable Board 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 radio space, including consumer electronics, in streaming, any 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 end-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 in mentioned declared this year. bringing our total patent 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 drives our business growth for years to come. Recently, we are ranked among top 5 patent owners in WiFi with analyzing in terms of quantity and quality of new report from LexisNexis. Across 3 separate reports from licenses, we are 1 of just 3 companies in the world to rank in top 5 in 5G, WiFi and advanced video compression we judge on both size and quality of our portfolio. But the world become more connected, 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 $1 billion 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 OPPOand arbitration agreements Lenovo represents excellent progress towards those targets. In summary, we are a recognized leader in technology like 5G, video, WiFi and AI, which are only becoming more critical to devices and services in multiple industry. We have a world-class team and a track record of superb execution. With the large addressable markets, 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 work to Rich.

[Richard J. Brezski, executive]

Thanks, Liren. I'm pleased to share that in Q3, we again delivered excellent results with revenue, adjusted EBITDA and non-GAAP EPS on 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, together with our Q4 OPA 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 million to $98 million.

Our Q3 '24 revenue includes recurring revenue of $99 million and catch-up revenue of $30 million. As Liren 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 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 million to $39 million. Non-GAAP EPS came in at $1.63 per share compared to our outlook of $0.70 to $0.80 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 3 pillars of growth. As Liren mentioned, we are 1 of just 3 companies in the world to be ranked by LexisNexis among the top 5 patent holders in each of 5G, WiFi 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 a 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 2.5% 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 OPO 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 and 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 and driving our expectations for 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 to date. With 2 months remaining in the year, any new agreements would be added to this guidance.

With that, I'll turn it back to Raiford.

[Raiford Garrabrant, executive]

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

[Operator]

[Operator Instructions] Our first question comes from the line of Scott Searle with ROTH Capital Partners.

[Scott Searle, analyst]

Congratulations on getting OPPO done. I know this 1 has been a long time coming.

[Richard J. Brezski, executive]

Thanks, Scott.

[Scott Searle, analyst]

And Rich, maybe just to dive in on the fourth quarter guidance. It sounds like, certainly, you have APO in there from a recurring revenue standpoint, TPV. But I want to get some clarifications in terms of what you're doing from a Lenovo standpoint, given that it's in an arbitration process, are you going to be recognizing some revenue like Samsung -- and I thought you said in your opening remarks that Samsung, you expect the resolution or 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.

[Richard J. Brezski, executive]

Yes, Scott. So I'll take the first part of the question. Yes, our Q4 guidance does include revenue from OPO, 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.

[Lawrence Chen, executive]

Yes. So let me follow up on the Samsung arbitration question. So you are correct that I did say in my prepared remarks, that based on the latest hearing we had with arbitrator we delay the result of the arbitration will be completed soon after end of the year. The primary real there are some additional questions arbitrator was asking and plus as we approach to the holiday season. So we 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 the prior agreement which we believe is conservative. And that's the case we continue to do for Q4 and then the arbitration is complete, if the number turned out to be harder than we will drop the number at the time of the world.

[Scott Searle, analyst]

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 on some of your major cost factors. Lenovo going to arbitration and Oppo resolution litigation dropping. How should we think about that number going forward and into 2025? .

[Richard J. Brezski, executive]

Yes. So Scott, I don't want to 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.

[Scott Searle, analyst]

Got you. Fair enough. And lastly, if I could. Liren just on the video services, there's 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? .

[Lawrence Chen, executive]

Thanks, Scott. First of all, we believe we do 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, has been working on this for multiple years. We always start with innovation, which we believe are video, Kodak and others are very critical to the overall service level and which frankly others has benefited from quite a bit. We have been greeting 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 Scott, you have we have demonstrated over the years, we always prefer bilateral negotiations. We will try to negotiate a acquired patient and try to drive the fair value for our assets. But in the meantime, as you are 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 in the litigation planning, we always spend a certain amount of money to get ready if we have to.

[Scott Searle, analyst]

congrats on the quarter at AP.

[Lawrence Chen, executive]

Thanks.

[Operator]

Our next question comes from the line of Arjun Bhatia with William Blair.

[Arjun Bhatia, analyst]

Great. Congrats guys on getting the Apple 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 Huan Vivo -- or is it maybe a little bit too early to tell what that impact might be?

[Lawrence Chen, executive]

Thanks for nor 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 airplane. Now we have the top 4 vendors 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 Opel down, I do think accelerates our momentum to get a few other vendors. If you look at who else do we need to sign up we are really identifying Weibo on our Huawei and Tencent, which is primarily selling 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 remarks, give us yet another benchmark for to value our portfolio and also giving us further momentum to engage those customers.

[Arjun Bhatia, analyst]

Okay. Perfect. Understood. And then just in terms of -- I know Lenovo was still on arbitration, but in terms of pricing and your economics with at least the Apot 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 where you satisfied with how that turned out and how do we -- how should we compare OPPO to your prior agreements? .

[Lawrence Chen, executive]

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

[Arjun Bhatia, analyst]

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 going to see revenue and cash flow from both of these deals coming in Q4? Or is that something that's going to happen a little bit later?

[Richard J. Brezski, executive]

Yes. 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 million overall.

[Operator]

Our next question comes from the line of Madelin Brooks of BofA.

[Tal Liani, analyst]

Great. I guess I just want to 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 resolvement -- can you just remind us what we potentially have in terms of what we can see from litigation and renegotiation that's coming up in 2025? .

[Lawrence Chen, executive]

Yes. Malin -- 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, but you're aware most of the recurring revenue were carton into 2025. So we are set out to be a very strong starting Obviously, we still have 2 more months for this year, which we hope to add more. And then next year, we will continue to make progress in smartphone, consumer electronic IoT as well as the streaming licensing side. Regarding major contract for expiration, we do disclose quite a bit in our filings as well as on our website. I think the major 1 that come to my mind is our Xiaomi contract, we are up for renewal, which we obviously will negotiate these to course.

[Richard J. Brezski, executive]

Yes. I just want to be clear, that's at the end of '25. So we only have 5 agreements that contributed $17 million of revenue in 2023 that expire at the end of '24, going into '25 was disclosed in our last 10-K.

[Operator]

[Operator Instructions] Our next question comes from the line of Anja Soderstrom with Sidoti.

[Anja Soderstrom, analyst]

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?

[Richard J. Brezski, executive]

Anja, didn't quite hear that what ratio were you looking for? .

[Anja Soderstrom, analyst]

The fixed fee, are these contracts going to be on a fixed basis as they also larger? Or are they going to be on on a variable ratio basis.

[Lawrence Chen, executive]

Yes, no, the exact term of the contract is under NDA, so I won't be with a specific comment on the OP agreement. However, you are over West majority of our large accounts are signed on fixed fees.

[Anja Soderstrom, analyst]

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

[Richard J. Brezski, executive]

Yes. So Anja, 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've said kind of like our long-term cash tax rate we see in the mid- to high teens, and there's no real change there.

[Operator]

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

[Lawrence Chen, executive]

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

[Operator]

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