InterDigital Inc

NASDAQ:IDCC

Earnings Call Analysis

InterDigital Posts Strong Growth and Momentum

InterDigital's 2023 was marked by robust growth, with a 20% increase in annual revenue to $550 million and a 32% rise in its smartphone licensing program. Recurring revenue surged to over $408 million, contributing to an over 80% jump in non-GAAP EPS. The company's innovation was recognized as it filed a record number of new patents, growing its portfolio to over 30,000. The firm continued rewarding shareholders, returning almost $380 million through dividends and buybacks. InterDigital signed eight new license agreements, including with tech giants like Lenovo and Panasonic, while successfully defending its patents in litigation. For 2024, revenue projections are bold, anticipating between $620 million and $670 million, supported by over 30 recent agreements with a collective value exceeding $2.5 billion. True to its innovative edge, InterDigital prepares to showcase its cutting-edge wireless, video, and AI technologies at the forthcoming Mobile World Congress.

An Overview of Current Financials with a Promise for Detailing Future

The executives kick off the earnings call by addressing the first quarter's performance, clarifying that the reported numbers don’t include any potential new agreements that could further enhance their financials. They pledge to provide more detailed updates in the subsequent quarterly reports, as well as annual figures, fostering an environment of transparency for investors.

Artificial Intelligence as a Catalyst for Growth

A pivotal component of the company's strategy is leveraging artificial intelligence (AI) to elevate the value of their intellectual property and foster device-side adoption. The expectation is that AI will not only enhance the worth of their IP per device but also stimulate a rise in device sales over the next year and beyond. This arguably sets the stage for robust renewal opportunities and the potential for securing new customer agreements. Furthermore, the company has made inroads with AI-enhanced technology applications, hinting at a solidifying position in the competitive market landscape.

Revenue Outlook Shaped by New Agreements and Expected Business Growth

Their revenue outlook demonstrates an optimistic start to the year, bolstered by new agreements such as a significant deal with Samsung in the TV sector, resulting in a substantial amount of catch-up sales affecting Q1. While this impact won’t carry into the subsequent quarters, the company has included projections of new business growth, possibly hinting at a confident stance on contract negotiations in progress and forthcoming deals.

Revenue Guidance Inclusive of Catch-Up Payments and Prospective Business

Their full-year revenue guidance thoughtfully incorporates catch-up payments referenced in Q1 alongside an anticipation of new business throughout the year. While the company refrains from discerning between catch-up and recurring revenue for this new expected growth, it highlights the diversity and vibrancy of opportunities on the horizon.

Favorable Tax Adjustments and a Positive Outlook

The executives discuss a recent favorable tax adjustment due to a reversal of valuation allowance, driving the tax rate down to about 10%. As they review the downward trend from 27% to 22% to now 10%, they suggest a long-term tax rate in the mid to high teens. The company envisions an even more attractive rate as the business scales and profits grow, providing a beneficial financial variable for strategic planning.

Strategic Addition to the Leadership Team

In a move to solidify the company's long-term growth strategy, they announce the hire of Ken, a seasoned professional from both life sciences and, notably, Qualcomm's licensing business. Ken’s expertise is expected to add powerful momentum to the business development and strategy operations, underscoring the company’s ability to attract leading industry talent and further enhancing the executive leadership team.

Investment Philosophy and Continued Shareholder Returns

Despite experiencing a strong business position, executives affirm that their investment philosophy and approach to capital allocation remain consistent. The priority is to maintain a robust balance sheet, seek investment opportunities with substantial returns, and allocate excess cash to rewarding shareholders. This well-grounded strategy reflects the company's commitment to prudent financial management and maximizing shareholder value.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the InterDigital Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over today to your speaker, Raiford Garrabrant. Please go ahead.

[Raiford Garrabrant, executive]

Good morning to everyone, and welcome to InterDigital's Fourth Quarter 2023 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 year-end calls, we will offer some highlights about Q4 and fiscal year 2023 before opening up the call for questions. For additional details, you can access our earnings release and 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]

Thank you, Raiford. Good morning, everyone. Thanks for joining us today. 2023 was another outstanding year for InterDigital. We made excellent progress across our business as we signed new agreement and our smartphone and our consumer electronics and IT programs significantly increased our revenue and net income year-over-year, strengthened our innovation engine with a record number of new patent filings and return more capital to shareholders. Today, we will summarize our progress in Q4 our achievements throughout 2023 and why we feel we are really well positioned for further growth in 2024 and beyond.

Revenue for fourth quarter was $106 million, including recurring revenue of just over $103 million, and our adjusted EBITDA was $53 million. In the quarter, we returned about $47 million to our shareholders and expanded our existing repurchase authorization to a total of $300 million. Our status as a world-class innovator was again underlined in the fourth quarter as one of our senior wireless engineers was elected to the Board of ACI, the European standard organization, which played a key role in the development of cellular wireless technology.

Looking across the full year, Q4 capped an outstanding 12 months for the company. Our revenue for 2023 was $550 million, up 20% year-over-year. Revenue from the smartphone licensing program increased by 32% year-over-year. Our recurring revenue increased to a record level of just over $408 million. As we drive growth in our top line, we see an even greater impact on our bottom line, first shown in our more than 80% year-over-year increase for our non-GAAP EPS. In addition, we returned almost $380 million to shareholders through dividends and share buybacks. Rich will go through the numbers in more detail in his section.

First, our excellent financial performance indices, 2023 was full of highlights for the company. On the licensing side, we entered into 8 new license agreements, including cellular and HEVC license with Lenovo, a cellular agreement with TCL and 2 agreements with Panasonic. 2023 was also an exceptional year for our inventors and patent team, which created a record-setting number of inventions and new patent filings up more than 70% year-over-year. taking our total patent portfolio past 30,000 granted patents and applications.

As the quality of our innovation was again recognized as we were named 1 of the top 5 patent holders for 5G patents in terms of both quality and quantity by a leading third-party research company. We take pride in how engineers this evolution of technology globally. In addition to the recent election I noted above, several of our engineers went the election to senior leadership positions for wireless radio and AI standard development organizations. Across our research team, our engineers now hold more than 100 leadership positions in those organizations.

In 2023, or dispute with Lenovo when our patents were tested in litigation, they were repeatedly found to be added and inference by courts in both U.K. and Germany, which is a clear indicator of quality of our innovation. Right before end of the year, we bring a notable victory in our pursuit in compensation for Oppo's use of our patented technology. According Germany rule that infringement our IP and that it should be excluded from the German market. The court ruled resoundingly in our favor, agreed that we conducted licensing negotiation in a third and reasonable manner and other courts has ruled down uphold the quality of patented innovation.

The court's strong craticicsm of Oppo's behavior throughout our negotiation reflects why from time to time, we help reinforce our pattern in litigation. While we always prefer to sign new agreements through our amicable bilateral negotiations, we are firmly committed to defending the value of our IP through enforcement efforts if necessary.

Our progress was recently recognized by Forbes which ranked us as 1 of our market's top 100 most successful mid-cap companies. While I'm particularly pleased by this recognition, we also firmly believe that there is still considerable upside for us in multiple areas. Our business momentum continued into Q1 of 2024. In January, we announced a landmark agreement with Samsung, which licensed their digital TV and TV monitors to arrange our video and WiFi patents and 2 patents that are part of our joint licensing program with Sony. But Rich will explain in more detail, we expect the agreement to have a considerable positive impact on our Q1 result.

Samsung is the largest manufacture TV in the world, and this agreement reflects not only the strength that we see on the CE side, but also more broundly the value of video and wireless innovation. As previously discussed, our video compression technology is important for devices but it also essentially enables the entire distribution platform of streaming and other cloud services, which we continue to see as an attractive third pillar of growth along with the significant opportunity we have in smartphones and CET program. I also want to remind everyone that our new license with Samsung is separate to our license agreement with them for cellular devices, which we announced at the beginning of 2023 and is now being finalized through agitation.

The arbitration hearing is on track to be held this summer with the final resolution expected by not this year. With our recent licensing success, we have signed more than 30 new agreements and renewals with an aggregate contract value of over $2.5 billion since early 2021. This gives us an incredible strong platform from which to deliver further success and another very strong result in 2024.

Looking ahead through this year, we have guided that our revenue will be between $620 million and $670 million for the full year, which reflects our pipeline for contracted revenue and projected growth through new agreements. As we continue our journey to grow the company, we announced on Monday that we have appointed Ken Kaskoun as our new Chief Group Officer. Ken was recently in charge of strategy and business development as a life science company and before that, that strategy in Qualcomm's licensing business. He understands our space very well, and his recruitment underlines our status as a destination for top level talent.

Later this month, we will once again take part in Mobile World Congress in Barcelona. While we have several demonstrations of our innovation in wireless, video and AI, one of our senior video engineers will give a key new presentation on the power of haptics to enhance immersive streaming experience. On the wireless side, our demonstration will focus on integrated sensing and communication, a technology, which will be a key pillar of 6G and where we are already a leader. On the radio and AI side, we will showcase the latest VC technology, coupled with our energy over media solutions and AI expertise to seam high-quality video content by lowering energy usage. I hope to see you at our booth if you are attending Mobile Congress.

With that, I'll hand you over to Rich to talk you through our numbers in more detail.

[Richard J. Brezski, executive]

Thanks, Liren. A year ago at this time, we mentioned that our strong execution throughout 2022 drove excellent financial results and put us in what we believe was the strongest position the company has ever been in. Now after achieving 20% top line growth, significant margin expansion and licensing momentum beyond the smartphone market. We are excited to reiterate our belief that the company has never been better positioned to drive growth.

Our final results for Q4 came in above our preliminary estimates, which we published last month. The improvement was driven primarily by a lower effective tax rate as well as favorable order reports we received in the intervening period. Building on Liren's comments, I'll highlight a few noteworthy items from our full year 2023 results that demonstrate success towards our objective of delivering consistent revenue growth combined with strong margins.

Total revenue accelerated to $550 million, an increase of 20% year-over-year, resulting in a compounded annual growth rate of 15% over the past 4 years. Recurring revenue reached an all-time high of $408 million. Our 2023 revenue included $81 million of CE and IoT revenue. This is more than triple our CE and IoT revenue from 2020 and represents a 19% compounded annual growth rate over the past 4 years. This success demonstrates our ability to grow revenue by capitalizing on the value our fundamental horizontal technologies bring new markets other than smartphones.

Because of the financial leverage inherent in our model, adjusted EBITDA grew 36% and almost twice the rate of revenue growth to $345 million. As a result, our adjusted EBITDA margin continued to improve and rose by 7 points to an exceptional 63%. This represents a 22-point improvement over the past 4 years.

We ended the year with roughly $1 billion in cash and $400 million of net cash. Cash flow continued to be robust with $214 million of cash from operations and $169 million of free cash flow for the year. These strong cash flows enabled us to return a record $379 million to shareholders in 2023. Most of this was through buybacks of nearly $340 million and we also increased our dividend by 14%. After the increase to the share repurchase authorization in December 2023, and our repurchases through the first half of Q1 '24, we have room to buy back another $285 million.

Since we announced our first dividend in December 2010, and we have returned nearly $1.8 billion to shareholders through buybacks and dividends. In that time, we have reduced our outstanding share count by more than 40%, from more than 45 million shares to fewer than 26 million shares.

With all that we accomplished in 2023, the most important thing is that we've built on our strong foundation and have carried that momentum into 2024. The Samsung TV agreement Liren discussed is a significant step toward reaching our goals in CE and IoT. On the strength of the Samsung TV deal, we expect Q1 revenue will be in the range of $245 million to $255 million. This includes $152 million to $160 million of catch-up sales and almost $22 million of recurring revenue or more than $85 million on an annualized basis from CE and IoT.

Our Q1 quarterly guidance does not include any new agreements or renewals we may sign between now and the end of the quarter. We expect Q1 operating expenses will be $149 million to $154 million, including revenue share expense from existing agreements of $66 million to $69 million, an adjusted EBITDA margin of about 50% and non-GAAP diluted earnings per share of roughly $3 to $3.60. Given the momentum in the business, and a strong pipeline of opportunities, we feel it's an appropriate time to introduce full year guidance in addition to our typical quarterly outlook.

For fiscal year 2024, we have guided to total revenue in the range of $620 million to $670 million. We expect an adjusted EBITDA margin of roughly 50% due to the revenue share associated with large catch-up revenue from recent CE licenses. With that, we expect non-GAAP diluted earnings per share of $7.45 to $8.76. Longer term, our goal remains to achieve and sustain a 60% adjusted EBITDA margin on $650 million of annual recurring revenue from device licenses with upside from the greenfield opportunity in video streaming and cloud services.

Before I conclude, I'd like to mention that we'll be attending 3 upcoming conferences; the Susquehanna Tech Conference in New York City on February 29, Sidoti's Virtual Small Cap Conference on March 13 and 14, and the 36th Annual ROTH Conference in Southern California on March 18. Please check with the representatives at those firms, if you would like to schedule a meeting.

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

[Raiford Garrabrant, executive]

Thanks, Rich. At this point, Lisa, we are ready to take questions.

[Operator]

[Operator Instructions] The first question that we have today is coming from Scott Searle of ROTH MKM.

[Scott Searle, analyst]

Congrats guys on, I guess, the improving visibility to be able to give 2024 guidance well above what we were looking for. Liren, to dive in on the first quarter implied in your guidance is recurring revenue takes a little bit of a step down related to, I believe, some expirations with Huawei and Lenovo and yet for the year, you're looking for a relatively big number of $620 million, $670 million. I'm wondering if you could calibrate us through the course of the second to fourth quarters? It sounds like you're clearly expecting some other either renewals or new contract wins to come in there that presumably will have some catch-up payments along with it. It seems like you're very comfortable that the Samsung arbitration is maybe going to be part of that. So I'm wondering if you could kind of calibrate us with your early thoughts in terms of what's in the first quarter and how we should be thinking about the remainder of 2024.

[Lawrence Chen, executive]

Yes. So yes. So basically, if you look at how we acted we were at record high recurring revenue platform. As you pointed out, we have a couple of contracts expiring, but the main one is really our have agreement which we are currently renegotiation, so it's not baked in our Q1 number yet. Aside from Huawei, Scott, as you know, we have quite a few larger opportunities we are pursuing. The top of this is really Oppo and Vivo. Based on our deal momentum based on, frankly, some of the enforcement effort here, including what you mentioned is the Samsung mobile arbitration.

We feel very strong about 2024 revenue opportunity. It's difficult, as always, to pinpoint exactly timing of the deals. And frankly, we are also, at this moment, not breaking down the catch-up payment versus recurring portion needless to say we are pursuing fair value for both catch-up and going forward rating every negotiation. And so in combination, we feel very strong. regarding where we are and we are comfortable providing the annual guidance. And one thing I do want to mention is our Q1 number does not include any new agreements we may find and then we will provide quarterly update going forward as we may provide on the next quarter as well as the annual numbers.

[Scott Searle, analyst]

Got you. Helpful. Maybe just as a follow-up, and I don't know if you'll be able to answer this, but is there a number that you're comfortable with exiting 2024, what that annualized recurring revenue will look like versus the $408 million that you posted in 2024? And I guess some of the newer opportunities, I'm kind of curious where guys like Honor and Transcend kind of fit into the equation?

[Lawrence Chen, executive]

Yes. So Scott, as I said earlier, we currently do not provide the breakdown of the recurring versus catch-up. And I hope by another year as we progress, we'll give you more insight. Regarding Honor and Transcend, if you look at the mobile side, the largest opportunity for us is Oppo, the next is Vivo then the owner who Huawei and Lenovo are frankly in the next category. Transcend as you are aware, currently is one of those vendors that a lot of focus from multiple licensed stores are on them. Primarily historically because of our business model, they were sort of below the radar. Now there's a lot of volume gains. So we are banking together with some other major licensed stores are negotiating with them, and we hope over time we'll be able to add them as our valued licensee.

[Operator]

And our next question will be coming from Jonathan Eisenson with of Bank of America.

[Jonathan Eisenson, analyst]

So my first question is for Liren. How should we think about potential impacts or growth opportunities from AI on edge devices on obviously, handsets and then also on some of the other devices that you guys also cover?

[Lawrence Chen, executive]

Jon, we believe AI will be a very significant boost to our business. And the way we look at it here, there's at multiple aspects for it. Number one, we believe AI will increase the value of our IP on a per yield base. But more adoption of AI technology onto the device side, so we will have a higher value of IP on the per device side. Second thing is really quite a few market reports say AI will be driving an increase of device sales in the next 12 months and going forward. So obviously, with increasing volume and increasing value, we think that's a very good dynamic for our renewal as well as signing up new customers. So that's the second piece.

And the last piece of AI growth of our story is we have demonstrated our technology for AI combinations. Video is very valuable. If you notice, we have press announcement this monthly regarding our collaboration with a leading streaming company where we are combining our video codec with AI for the streaming delivery service. So we believe over time, this will strengthen the third leg of our growth story, which I refer to as an online streaming as well as cloud service.

So having said all this business opportunity, but fundamentally, though, it always translated into our strengths in the AI technology. We believe we have some of the best engineers in the industry, and we frankly have quite a few leadership grew already in the AI standard space. So I'm quite bullish of that impact to us.

[Jonathan Eisenson, analyst]

Got it. That's very helpful. And then my follow-up is for Rich. So I mean it kind of goes off one of the last questions, but diluted EPS guidance obviously suggests a pretty strong first quarter and then if you look at kind of the full year, MACI, a little bit weaker EPS growth throughout the year, can you kind of just give some color there? And obviously, there is potential upside as you talked about from other deals, but that's not baked into the guidance right now. So kind of just how should we think about the EPS growth throughout the year?

[Richard J. Brezski, executive]

Yes. So our first quarter outlook is aided by new agreements, including the Samsung TV agreement that we signed in January. And included in that number is quite a bit of catch-up sales. So therefore, that's a Q1 impact that doesn't repeat in Q2 through Q4. in the Q2 to Q4 time period, we did factor in the potential for new growth into our outlook.

[Operator]

The next question will be coming from Anja Soderstrom of Sidoti.

[Anja Soderstrom, analyst]

Congrats on the nice progress here. First of all, I just want to clarify the full year revenue guidance. It includes the catch-up payments for the first quarter, but does it include any potential catch-up payments in the coming quarters as well? Or is it just pure recurring revenue?

[Richard J. Brezski, executive]

Yes. Anja, it does include the catch-up payments that I just referenced for Q1 and then it also includes our expectations for new business over the balance of the year. As Liren indicated, we're not detailing catch-up versus recurring revenue on that new business growth. because there's a number of different opportunities that could come from, and they each present a different mix.

[Anja Soderstrom, analyst]

Okay. That was helpful. And then you benefited from a lower tax rate this quarter. And how should we think about that going forward? Should we think -- should that continue decreasing or stay steady?

[Richard J. Brezski, executive]

Yes. So good question. The -- in this quarter, in particular, we had a positive tax adjustment related to a reversal of valuation allowance, and that drove our rate for the year down to about 10%. If you look over the last 3 years, it's gone from like 27% to 22% to 10%. Over that entire period, it's about 16%, which is pretty well in line with what we've been talking about for some time as the way we think of our long-term tax rate as being in the mid -- growing to high teens. There's a step-up in [indiscernible] in 2 years, which is one of the tax benefits we enjoy. But overall, we think that as the business becomes more profitable, the tax rate actually gets better. because we're able to leverage some of the fixed elements of our tax base that don't grow with new revenue growth.

[Anja Soderstrom, analyst]

Okay. And in terms of the new hire, Ken Kascoun, what can we expect from here? What are you hoping he will accomplish and why you're hiring a revenue growth officer now?

[Lawrence Chen, executive]

Yes. Anja, this is Liren. Yes, we hired Ken from a life science company, where he was responsible for business development as well as strategy work. But before that, he was at Qualcomm for extended period of time where he was an engineer, he's also the inventor, but his last job was really -- he was in charge of strategy for Qualcomm technology licensing business. And so the reason we bring in is because we are building for the long-term growth for the company, we really want to add more spend to our leadership team. And I think it's hard -- timing-wise, it's very, very good. And also it demonstrates because the company able to attract some of the best talent in our industry to further add to our leadership team.

[Operator]

[Operator Instructions] Our next question will be coming from [ Chris Madison ] of William Blair.

[Unknown Analyst]

This is Chris on for Arjun. Just one quickly for me. Just wanted to touch on -- given the strong position the business is in today, does this change the philosophy or approach to investments and capital allocation as going forward in 2024?

[Richard J. Brezski, executive]

Yes. So as far as the approach, it really doesn't change it at all. I mean, our approach has always been -- we feel it's important to keep a strong balance sheet. But we want to make investments where we see substantial opportunity for return. And then beyond that, we tend to -- given our cash generation have excess cash, and we want to return that to shareholders, and that's exactly what we've been executing on for the last -- well, for many years but certainly over the last year or so.

[Operator]

There are no more questions in the queue, and I would like to turn the call back over to Liren Chen, CEO, for closing remarks. Please go ahead.

[Lawrence Chen, executive]

Yes. Thank you, Lisa. Before we close, I'd like to thank our employees for their dedication and contribution to InterDigital, as well as our many partners and licensees for an outstanding year in 2023. Thank you to everyone who joined the call today, and we look forward to updating you on our progress next quarter.

[Operator]

Thank you for joining. Everyone may disconnect.