InterDigital, Inc. Q2 FY2025 earnings call

• Announced conclusion of arbitration with Samsung, resulting in a $1B+ 8-year license, increasing ARR to $553M and annualized revenue by 44% YOY. - Raised full-year 2025 guidance to $790M-$850M. - Smartphone program has 80% global market under license, ARR at $465M. - CE and IoT program saw significant growth with HP agreement. - 6G development is advancing, with engineers leading 6G standard work and AI integration in cellular networks. - Strong talent strategy with emphasis on mentorship, training, and leadership development.

The company's segment performance includes: Smartphone program: ARR increased 58% YOY to $465 million, with almost 80% of the global smartphone market under license. CE and IoT program: Revenue from this segment increased 175% in Q2 to about $65 million due to the HP agreement, with more than 50% of the PC market under license through the HP contract. Annualized recurring revenue (ARR) reached an all-time high of $553 million in Q2, up 44% YOY. Q2 revenue was $300 million, adjusted EBITDA was $237 million with a 79% margin, and non-GAAP EPS was an all-time high of $6.52.

• Raised full-year 2025 revenue guidance to $790M-$850M, up $110M at midpoint. - Q3 recurring revenue expected to be $136M-$140M from existing contracts. - Adjusted EBITDA margin expected ~52% in Q3, non-GAAP EPS $1.52-$1.72. - Full-year 2025 adjusted EBITDA $551M-$569M, non-GAAP EPS $14.17-$14.77. - Free cash flow for 2025 could exceed $400M.

• Potential impact of new tax legislation, with evaluation ongoing and tax rate expected in mid-to-high teens possibly ticking lower. - Uncertainty around proposed IP-related legislation, with no details available and watching the situation closely with healthy dialogue with policymakers.

Q: Tax rate was a little bit lower. How should we think about that going forward given this new revenue contributions?

A: Yes, the tax rate was a little bit lower. We are still evaluating the impacts of the new tax legislation, but generally think that they're a net positive. We see our kind of long-term tax rate still in the mid-to-high teens, but maybe a tick below what we might have thought otherwise. But we continue to evaluate that.

Q: There was some noise earlier this week or last week about some potential legislation that there would be some sort of tariffs or something on the IP. Do you have any comments around that? Or do you have anything built into your contract where you can pass that on or?

A: Yes, this is Liren. I believe you're referring to a Wall Street Journal article regarding a potential proposal. We actually don't know any details. We are not exactly certain where it will go. So without any details for the proposal for IP, we don't think it's appropriate for us to comment, but we are watching the situation pretty carefully, and we have a very healthy open dialogue with key policymakers in Washington, D.C.

Q: Your updated guidance for the full year, that assumes some more catch-up payment potentially, right?

A: Yes, Anja. So when we look at our guidance and the updated guidance is no different than we've done in the past. We typically look at what we call a multipath approach. So there's different combinations of different opportunities that we think we could bring across the line. And some of those opportunities would include catch-up. That's right.

Q: I'm curious just if you reflect on the outcome [Samsung arbitration], what it says about your tech, your patent portfolio because the 67% uplift, I think, is well above kind of what we were expecting, a lot of investors were expecting. And obviously, the implied kind of royalty rates in that agreement from an economic perspective are quite strong. So what does it say about, I guess, your technology, how you're investing?

A: Regarding the Samsung arbitration result, as we have stated in our press release as well as our earnings remarks here, we are quite pleased with the result. We believe it properly reflects the value of foundational research as well as our IP portfolio. And I do think our team has done a very good job conveying all the value of portfolio with the arbitrator who, in our opinion, properly reached a conclusion. And we also want to thank the Samsung team for their professionalism in this process. Regarding the 67% increase compared to the prior agreement, we think that's very appropriate. Consider the prior agreement was a 10-year agreement at the time didn't really factor in the value of our 5G portfolio as well as a lot of other innovations on videos and AI research we continue to do. I do think this is a very valuable development for our program. And as you know, Arjun, in our program here, a major license agreement tend to be used a comparable license for other customers with time for renewal or sometimes with time to sign up the first customer for the first time. So we believe it will have a positive impact for our overall program, and we are really pleased about the outcome.

Q: The recurring revenue line and what was the contribution of Samsung to this? And what was the expectation -- so going in, did you have any expectations of Samsung to be in recurring revenue?

A: Yes. So we had been booking Samsung at -- based on the prior agreement of $78 million. So we've basically been booking just shy of $20 million a quarter. Based on the new agreement, it's now $33 million of recurring revenue in the quarter.

Q: If I try to forecast for next year and I -- and again, based on the current agreements, what should -- how should recurring revenue trend if -- that's my baseline. So I'm trying to understand my baseline and then do some assumptions about anything else. So how do -- how is the recurring revenue line progresses if you don't get any other contracts?

A: Tal, let me take this question and see if that makes sense. So if you look at here we are, right, we are end of Q2, we are projecting new deals will be done for the rest of the year. But as Rich has commented here, we don't really know exactly which combination will be. So therefore, as the year progress, and then we will, hopefully, by Q4, having a very clear picture on where we are. Leading into next year, we also disclosed in our filings about a few contracts currently scheduled to expire, and you can see on our website. And so if you take out those expiration contracts, that will be the starting point for next year, assuming the current contract expire. But as you know, we always try to get them renewed and very often, we are successful to get them renewed before they expire. So that's sort of the stepping function for starting of next year.

Q: Normally, again, historically, when contracts expire and you renew them, is there growth or is there contraction in the contract? Like this time with Samsung, there was like 40% -- more than 60% growth or whatever with the recurring quarterly recurring revenue at the renewal of Samsung. What happens normally with renewals?

A: Yes. Tal, it actually depends on the situation of certain customers. I'll give you a couple of examples here. As you mentioned here, Samsung, the last contract was very long-term contract, didn't factor in 5G. So this time through arbitration, we are able to get a 67% increase compared to the prior one. The other example is the Apple contract. As we have discussed before, the previous Apple contract was longer term, but not as long as Samsung. So we renewed the Apple contract in September of 2022, and that contract on average was 15% higher than the prior contract. So it really depends on the situation, depending on where the vendor is, how stable their business, have they increased volume, have they used more of our technology. It's a combination of different factors, Tal. But based on those 2 examples here, we do have success record in renewing and higher value if that's appropriate.