InterDigital Inc

NASDAQ:IDCC

Earnings Call Transcript 2021-Q4

[Operator]

Good day, and welcome to the InterDigital, Inc. Fourth Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Richard Lloyd. Please go ahead.

[Richard Lloyd, Communications Director]

Good morning to everyone, and welcome to InterDigital's fourth quarter 2021 earnings conference call. I am Richard Lloyd, Communications Director. 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 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 2021 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 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 & CEO]

Thanks, Richard. Good morning, everyone and thanks for joining us today. Quite simply, we had an excellent fourth quarter in what was a banner year for InterDigital. In Q4, our revenue increased 23% year-over-year to $112 million, bringing our total revenue for the year to $425 million, up 19% from 2020. In 2021, we improved our bottom line, grew our cash position, and achieved several major successes across the business. Among those successes, we have signed 30 new license agreements, including our deal with top three smartphone manufacturer, Xiaomi, our deal with a top 10 TV manufacturer, and our recent renewal with Sony. I would like Rich to talk you through this actual numbers in more detail. But first, I want to emphasize just how well positioned the company is for further growth. Over the last 12 months, we have increased our focus on the foundational technology that enables so much of the connected world, expanded our patent portfolio in 5G and radio, build strong deal momentum in our licensing programs, and yet again proved the strength of our research and our IP going to a truly tested in court. Recently, our pedigree as a world-class innovator was highlighted by our inclusion in a new report from LexisNexis called Innovation Momentum 2022, the Global Top 100. This report placed InterDigital among a very lucky group of the World's 100 most innovative businesses, and according to the report, specifically recognized companies with exceptionally technology relevance for the future, and those outperforming their peers. Our inclusion demonstrates how our strength in R&D continue to translate into one of the world's highest quality patent portfolio. I was also particularly pleased that the report highlighted our contribution to standards such as 5G. In 2021, our commitment to 5G deepened considerably as we almost doubled our contribution to 5G standard, and increased our 5G invention disclosures by more than 50%. 5G is proving to be a runaway success with hundreds of millions of consumers worldwide, and our innovation is clearly a foundational part of the 5G story. In video, our invention disclosure were up by more than 25% proving once again that despite of COVID changing the world we work, our engineers have responded, and our innovation engine continues to fire on all cylinders. The high quality of our innovator continues to be recognized by industry peers. In the fourth quarter, one of our senior engineers was appointed to the steering board of DVB, an importing industry body in development of digital television system. Another was appointed to the steering board of the Wireless World Research Forum, which brings together leaders from the industry and academia to identify key wireless trends that will shape connectivity over the next decade. So this connected world become more immersive. It is opening up opportunity for our technology to touch more consumers' lives. At the start of this year, we were selected by the standards organization MPEG, to contribute our technology to a new standard for Haptics, alongside Technical University of Munich, and another technology company Interhaptics. From the touchscreens of your smartphone and tablet, to game controllers and to more advanced devices, Haptics is a tactile technology that holds great promise in a growing number of applications. And I'm excited for how it could develop in areas like metal works and in industry such as automotive. The recognition of our work in this area proves that we are focused not only on the technology needs of today, but also on innovation that will underpin connected experiences for years to come. In the fourth quarter, we demonstrated once again, how effective we are in translating our technology leadership into licensing revenue. As I mentioned, in Q4, we have signed five new license agreements, including a renewal of our licensing deal and research joint venture with Sony. This brings the total number of new license we signed in 2021 to 13. Not only this more than double the number of licenses we have signed in 2020 this is more than we have signed in any years over the last two decades. I'm particularly pleased with the cadence of new deals, reflecting not only the strengths of our licensing team, but also our ability to execute across the company despite of the challenges of the COVID pandemic. Momentum can be an incredible powerful force in this business, and our deal making piece is a testament to the fact that new and existing licensees continue to recognize the quality of research and our contributions to numerous key technologies. We are working hard to deliver another strong licensing performance in 2022. But we're also need to ensure that each deal we sign reflects the true value of our technology and delivers a strong return to our shareholders. But our recent track record assume most of our risks -- most of our licensing deals are done through bilateral negotiations. Unfortunately, there are times when companies using our technology have been unwilling to license to some licenses on what we believe are FRAND terms. Earlier this month, our trial to establish FRAND terms for our license with Lenovo concluded in London. While I'm not going to comment on the specifics of that case, before the judge renders his decision, we remain confident with the strength of our technology, the quality of our IP portfolio, and the buyer [ph] of our case. In fourth quarter, we also filed a series of lawsuits against Chinese smartphone manufacturer Oppo in court, in UK, Germany and India. Again, I do not want to comment on the specific of the details, but it is worth remembering that where we had to litigate in the past we have always concluded a licensing agreement on front terms. Our track record assumes that we will not rework in protecting our research and proving the value of our patent portfolio. Further I look back on 2021, I'm very pleased not only with our estimated financial performance, but also with how we have continued to adapt to the challenges posed by COVID, how we have kept our innovation engine running smoothly, how we have continued to execute across the business, and how the technologies we have invented have become even more important in people's lives around the world. And as we look forward to the rest of 2022, we are very well-positioned to capitalize on our strengths in developing foundational technology, which helps billions of consumers connect to 5G network, engage with colleagues on video calls, streaming their favorite shows, and seamlessly connect to Wi-Fi networks. Before I hand it over to Rich, I would like to thank all our employees for their hard work and commitment in delivering this excellent performance. Like all companies, we have had to make changes to how we operate over the last couple of years. And the InterDigital team has consistently risen to the occasion. And with that, Rich, will talk you through the numbers in more detail.

[Richard Brezski, EVP & CFO]

Thanks Liren, and good morning, everyone. I'll start off by going into a little more detail on the very strong financial results we delivered in 2021. As Liren already mentioned, the 13 license we signed during the year drove total revenue of $425 million. Not only is this a 19% increase over last year, but it also represents the most revenue we reported since 2017. Dialing in on the fourth quarter, we earned $112 million of total revenue, which is 23% more than the fourth quarter of last year and 10% above the midpoint of our expected range. We came in above our expected range by signing a few new license agreements after issuing guidance, including our latest renewal with Sony. We also updated estimates for per unit royalties based on new reports we received. Importantly, our recurring revenue in the quarter was over $100 million. Our licensing successes drove year-over-year increases in revenue share and share-based compensation totaling approximately $28 million. In addition, we recognized a $28 million restructuring charge and a $6 million increase in litigation expenses over last year. Our restructuring activities help drive lower costs across the balance of our operating expenses as compared to 2020. Focusing on fourth quarter, our operating expenses were relatively flat compared with fourth quarter 2020. If we adjust for one-time items, and comparatively higher share-based compensation, our restructuring activities drove a year-over-year decrease of $7 million in the remaining operating expense base. Moving on to cash, we generated robust free cash flow of $65 million in fourth quarter and $95 million for the full-year. This follows a $121 million of free cash flow in 2020. In both years, the strong free cash flow was driven by new fixed price agreements. As I've discussed before, such agreements often have uneven or somewhat frontloaded payments, resulting in timing differences between when we collect the cash payments and recognize the related revenue. As always, we have provided additional details around our cash receipts, cash due from contractor licenses, and deferred revenue in our 10-K. The strong free cash flows drove our year-end cash balance up to $942 million, including more than half a billion dollars of net cash. In 2021, we continued our long-term effort to return excess cash to shareholders during the year with $73 million returned through buybacks and dividends. This brings our total return of capital over the last five years to more than $550 million. Looking forward to the first quarter of 2022, we announced today that we expect another strong quarter with revenue in the range of $95 million to $100 million, all of which is expected to be recurring revenue. As always, this expectation is based on contract signed to-date. We also expect that first quarter of 2022 will benefit from the restructuring activities we undertook last year. We expect total operating expenses will be roughly $80 million, including about $1 million of tail end restructuring costs, as related savings from our restructuring activities are expected to offset higher litigation costs. So in closing, we capped off an excellent year with another great quarter, providing us with a strong financial base to start 2022. With that, I'll turn it back over to Richard.

[Richard Lloyd, Communications Director]

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

[Operator]

Of course, thank you. [Operator Instructions]. We'll go ahead and take our first question from Scott Searle with ROTH Capital. Please go ahead.

[Scott Searle, ROTH Capital]

Hey, good morning. Nice job on the quarter, guys and thanks for taking my questions. Hey, Rich, real quick to dive in on the OpEx front, I just want to make sure I heard that correctly, $80 million in the first quarter, is that including stock comp as well, I just want to calibrate kind of what's in that number, what are you kind of allocating there in terms of litigation? And so what would the normalized number be kind of ex-litigation going forward at some point when that kind of shakes out?

[Richard Brezski, EVP & CFO]

Yes, yes, so I'll stick with the first quarter Scott, it is $80 million total OpEx. And that includes the $1 million estimate for restructuring charges. So you can see that's coming down. But I did mention that, we do expect litigation costs to be a little bit higher for the first quarter, of course, we had the trial as Liren mentioned in January and February.

[Scott Searle, ROTH Capital]

Got you, helpful. Liren, if I could, it's still early days in terms of starting to move into areas outside of mobility on the video front with TVs, what's going on, on the IoT front, and now you're starting to talk about Haptics as well. I was wondering if you could quantify what that was in the fourth quarter and what you think the penetration rate at the current time is into the TV market, and kind of how we should be thinking about that, that number in terms of absolute dollars in 2022 and 2023.

[Liren Chen, President & CEO]

Yes, hey, Scott. This is Liren. So we are doing quite well, both on the mobile space as well as the CE space. And as we reported, we have signed a top 10 TV vendors last year, which brings our recurring revenue on the CE side will be a little bit over $20 million. And it's also worth noting that our deal with a top 10 TV vendor last year also contains substantial amount of payment for parts sales. So overall, we're doing well. We need to probably make more progress in order to make our target which we have stated before about $150 million per year. So we have a long way to go. But we are making really good progress on that.

[Scott Searle, ROTH Capital]

Got you. Is there any number that you're comfortable with this year, Liren, in terms of does that grow 50%, does it grow 100% when you factor in the new relationship with Sony or re-signed a relicense agreement with Sony?

[Richard Brezski, EVP & CFO]

Yes. So I think moving forward, as Liren said, we're kind of creeping over $20 million and get closing in on $25 million as we look next year on signed contracts. But then further growth, of course will depend on how the market evolves, because there is some per unit in our CE base but then most importantly, getting new deals done.

[Scott Searle, ROTH Capital]

Got you. And if I could, on the litigation front, I'm wondering if you could lay out some of the timelines as you see them now, where things like injunctions kind of factor in as last resort is kind of like drawing the line in the sand where something has to get done and kind of how we should be thinking about things in 2022?

[Liren Chen, President & CEO]

Scott, loan litigation let me comment on couple of litigations here. As I mentioned here, the UK, France filed that hearing stage has completed, it finished last week. So we expect the Judge to take multiple months to, we all have evidence and to render his decision. So most likely that will happen this year. But we don't really know exact, precise timing for it. So regarding the Oppo case, we just filed the case last December. So we are still in the early stage of that case. So I frankly do not have a clear timeline yet. That case is still developing.

[Scott Searle, ROTH Capital]

Okay, very helpful. And lastly, if I could just on the capital allocation front, you guys have a high class problem of generating a lot of free cash flow. You've been doing buybacks, dividends, how else are you thinking about capital allocation? What's going on in the market from an M&A standpoint, Liren, are the things out there that are attractive, have valuations come in? And how should we be thinking about that? Thanks.

[Liren Chen, President & CEO]

Yes, let me comment on the M&A stuff. But I wanted Rich to follow-up on the overall capital allocation methodology here. On the M&A stuff here, we always look at all the opportunities that come to us, we as a company are incredibly well-positioned. I feel very good about where we are technology wise, where our IPO wise, and frankly, our track record of getting deals done, and it is picking up momentum wise. So but that obviously gives us our cash position allows certain freedom to look at all the different M&A opportunities. If there anything makes sense, we obviously pursue them. But so far, we feel very strong about what we are doing here.

[Richard Brezski, EVP & CFO]

Yes, and I'll just add, in addition to having opportunity present in the balance sheet, because we have a strong cash position. As always, it's important to maintain that strength because of litigations that we're either in or, frankly you want to prevent by showing that you're able to withstand litigation with bigger companies than yourself. And then, beyond that, we also as I mentioned, in my script, acknowledge that sometimes the cash flows are a little bit uneven quarter-to-quarter or year-over-year. So sometimes we get cash a little bit upfront when we sign new agreements as well.

[Operator]

And we'll go ahead and take our next question from Derek Soderberg with Colliers Securities. Please go ahead.

[Derek Soderberg, Colliers Securities]

Hey, guys, thanks for taking my questions. I wanted to start with some of the renewals. It looks like you had six customers that expired this or this past year 2021, four renewed, I'm curious how you are feeling about those other two that are still out there. Or any of them not expected to renew or any of them exiting the business. Just any additional color on that would be great?

[Liren Chen, President & CEO]

Yes. Hey, Derek this is Liren. So we had six up for renewals and you're absolutely correct, we signed four of them. So the other two that we have not signed yet they are Funai, which is a fairly small CE player that we are working on. The other one we have, we are still working on we haven't signed yet is ZTE. As you might be aware, ZTE's volume has gone down quite substantially in the last couple of years. So we're working very active with them. And this is something that we haven't signed yet.

[Richard Brezski, EVP & CFO]

And I'll just note, Derek. It sounds like you've probably already read it. But we have disclosures in our 10-K every year around the agreements that are up for renewal at the end of each year. And that disclosure on the four that's renewed and the revenue impact for the two that have not.

[Derek Soderberg, Colliers Securities]

Got it. Got it. And then Liren just back on the FRAND decision. In the past, you've eventually been successful, after sort of setbacks like the [Technical Difficulty] in the past. I'm curious if that might have any impact on the patent portfolio as it relates to renewals for this year. I think you guys have something like nine renewals due this year. Anything on that would be great?

[Liren Chen, President & CEO]

Yes, so Derek, I'll see our past history whenever we litigate we always end up with a license agreement that's under FRAND terms. So I see the trial we are having in UK, no different than previous litigations that we have undertaken. It is important to note that the FRAND are currently frankly the hearing finished last week evolved in a global FRAND rate determination. Basically, the Judge will decide, how much our portfolio on global base will be worse. I know we refused to take that that term then they are going to be facing the potential injunction. So in that context here, I think we are very well-positioned. Our technology has been demonstrated over and over again to become even more important. And our portfolio is very strong, as we have been found our patents to be valid infringed and accurate to the standard. So in that context here, as we think this is a very positive development, and pending the Judge's decision.

[Operator]

And we'll move on to our next question from Anja Soderstrom with Sidoti. Please go ahead.

[Anja Soderstrom, Sidoti]

Hi, thank you for taking my questions and congratulations on a great year. A lot of good questions asked already. But I'm just curious, it seems like you had a good momentum in the licensed time for this year, what has been driving that would just say did litigation cases help you in the communications with that -- with the new licenses, or if it's something you have done internally the price lists or --?

[Liren Chen, President & CEO]

Yes, Anja, hey, this is Liren. So yes, you're absolutely right our deal momentum has picked up quite a bit. As we mentioned in the call here, we signed certain license agreement, which according to our own record, as I said in my script, six is the highest number we signed in two decades. And just as a side note here two decades, because that's how long history we can find. We are pretty certain six is the highest number we signed in any year. But back to the momentum stuff here. I really attribute all the credit to the team. We have worked incredibly hard, some of the deals that really early [ph] making. And we worked really well closely with the team, we overcome all the challenges that COVID have imposed to us here. We build on it and we really work around the clock well open [ph] and try to get the deals completed here. So it's really a lot of things coming together. I'm very, very happy with where we are. It's demonstrating the strengths of our technology, the strengths of our portfolio. Like I said, most of the deals gets done without litigation. And you know, but when we have to litigate, obviously, we have a proven record to be able to bring those litigations. So I'll say it's a number of different things coming together.

[Anja Soderstrom, Sidoti]

Okay, thank you. And then also had a question about the CE how that's progressing. In the past, you said you were going to start to go after smaller deals to set benchmark and then sort of once you set the benchmark for the pricing of that you would grasp the larger concept. So where are you in that progress?

[Liren Chen, President & CEO]

Also, we are proceeding well along that strategy. And as you said, we have working on the CE program for several years now. We have initially built a few smaller customers, and assigning the top 10 TV vendor last year was a pretty major milestone. And then we still have some major work to do. And regarding even moving further up regarding the major TV vendors, we know who they are. We are pretty engaging, very active dialogue with them.

[Operator]

And with that, that does conclude our question-and-answer session. I would now like to hand the call back over to Richard Lloyd for any closing or additional remarks.

[Richard Lloyd, Communications Director]

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

[Liren Chen, President & CEO]

Yes. Hey, thanks, everyone for joining us today. I will close in by saying thank you again to all the employees for your dedication and strong executions throughout 2021. I hope everyone stay safe and healthy as we continue to navigate through the pandemic. Thank you.

[Operator]

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.