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InterDigital, Inc. (IDCC)

Barclays Global Technology, Media and Telecommunications Conference Call

May 22, 2012 10:15 am ET


William J. Merritt – President and Chief Executive Officer


Luke J. Labella – Barclays Capital, Inc.


Luke J. Labella – Barclays Capital, Inc.

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I think we’re good. Good morning, everyone. My name is Luke Labella. I’m part of the Comm Equipment team here at Barclays. And we’re delighted to have InterDigital with us today.

We have the CEO, Bill Merritt, here, who’s going to speak for about 25 minutes, and then we will move to a bit of a Q&A. And I believe, we have a breakout in Liberty Room 4. We’ll confirm that at the end.

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But without further ado…

William J. Merritt

Thank you, and good morning, everyone. I’m Bill Merritt; I’m the President and CEO of InterDigital. I appreciate you all coming out to hear our story today. As you’d expect, the presentation today will include some forward-looking statements. So with regard to those statements, I would point you to our most recent filings with the SEC with regard to the statements on any risks and uncertainties associated therewith.

So let me give you first a high-level view of the company for those of you who don’t know us, right. We are a technology development and licensing company. We’ve been around for just about 40 years. Very much focused on the cellular industry and our inventions today are used in every cellular device that ships.

A little bit about our technology development is that, we don’t look at technologies that we’ll deploy in a year or two. Ever since the company was formed, we’ve always looked at what that next generation of technology would do. So back in the early – actually late 1970s, early 1980s, when the world was really an analog world, we predicted that the world would go digital in terms of cellular technology. And we made that investment and we made it right. We’ve bet on TDMA technology, and ultimately that technology got embedded in both the U.S. standards and the European standards.

And in developing the technology, we not only make those bets, but we actually build the solution. Because sometimes it’s only in building the complete solution that you identify the problems that need to be solved. And that drives a wealth of invention and wealth of knowledge for the company.

That’s what we’ve done. In the mid-1990s, we’ve made a second bet in terms of that the world would move from voice-based communications to data-based communications or from narrow-band to wide-band. Back in 1996, when I joined the company, we were actually delivering video over the air, using what we called a broadband CDMA system. Today that’s known as Wideband CDMA. We’re making similar bets today in terms of what the next network will look like, and I’ll talk about that a little later on.

As a result of that approach to technology development, we end up with a very, very strong – we have a very, very strong patent portfolio, almost 20,000 patents and patent applications. It’s a very deep portfolio of patents. They relate to all the major cellular standards in place today. So, whether it’s GSM, cdma2000, WCDMA, LTE or the generations and technology beyond that which are currently in development.

Approximately 50% of that portfolio has been disclosed as essential or potentially essential to wireless standards. That's a very, very high percentage in terms of our portfolio if you compare that to other portfolios on the market. And the reason for that is, again, the nature of the R&D that we do. We look out into the future. We figure out what we think that next system needs to do. We develop those inventions. And then like many other companies, we participate in the worldwide standards bodies and have those inventions adopted into the standard, which sets up the next part of the business model which is licensing. We’ve had a good level of success in licensing.

Over 50% of the 3G market is under license with us today. We've collected nearly $3 billion in royalties over the last 20 years or so with the company. We offer license agreements on flexible terms either its running royalties or fixed price agreements, but we have license agreements in place with many of the large manufacturers in the business today. So a very, very strong licensing program, which, at the end of the day drives very strong financial results for the company.

We've been a consistently profitable company, a company that has produced very consistent high cash flow. We've taken that cash, reinvested some of it in the business, but we also had a strong track record of returning capital to shareholders both in terms of a strong stock buyback program. Approximately about $600 million to-date in repurchases and we also have a continuing dividend for the company. So a very actually straightforward, very successful business model in terms of technology licensing and development licensing in the cellular space.

So, a little bit more in terms of our opportunity going forward, right. So we have about 50% of the market under license today for 3G handsets. As we all know the 3G market is growing substantially. So if you look at the market today, there will be about 700 million 3G handsets this year, growing to about 1.3 billion 3G and 3G or LTE handsets in the next four years for us. So it's a very strong opportunity for us, because our inventions will be used in all of those phones, are used in all 3G phones, they are used in all LTE phones, therefore, we have a licensing opportunity with respect to all of those units.

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