InterDigital, Inc. (IDCC) Q1 2012 Earnings Call April 25, 2012 6:00 p.m. EDT Executives Janet Point – EVP, Communications and IR Bill Merritt – President and CEO Scott McQuilkin – CFO Analysts Charlie Anderson – Dougherty & Co. Ron Shuttleworth – M Partners Michael Cohen – MDC Financial Research Jonathon Skeels – Davenport & Co. Jeff Kvaal – Barclays Capital Eugene Fox – Cardinal Capital Management Presentation Operator Good day and welcome to InterDigital’s first quarter earnings conference call. Today’s call is being recorded. At this time I would like to turn the call over to Janet Point. Please go ahead. Janet Point All right. Thank you, Brandon.
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In addition, today’s presentation may contain references to free cash flow, a non-GAAP financial measure. A schedule setting out a reconciliation of free cash flow to net cash used and operating activities, the most directly comparable GAAP financial measure is included at the back of the earnings release issued earlier today, which has also been posted in the Investor Relations section of our website at www.interdigital.com.So with that taken care of, I’ll now turn the call over to Bill. Bill Merritt Thanks, and good morning to everyone. I thought I would spend my time this evening talking about -- talking at a high level about the overall licensing environment, how our business is adapting to some changes in that environment, and then the specific work underway at the company to build shareholder value. Let me start with the positive market drivers. Cellular-enabled devices continue to grow rapidly, particularly LTE-enabled devices. Overall in 2012, we anticipate seeing a 26% growth year over year in 3G handsets and 331% increase in LTE handsets. Equally important, we expect to see continued strong growth in other connected devices like tablets, eReaders, machine-to-machine connections, automobiles, and the likes. We also continue to see substantial opportunity for innovation. While that innovation continues to happen within the cellular technology, it is also occurring in other areas of technology. One of the very exciting areas of continuing innovation is that in what we have called the network of networks. At the Mobile World Congress Show in Barcelona this past March, our Smart Access Manager solution was showcased in the Alcatel-Lucent booth and received significant attention. This week we announced the availability of our Smart Access Manager for Android and Windows-based devices. Working with Alcatel-Lucent, we have demonstrated the benefits of policy-based handover between cellular and WiFi systems. Our Smart Access Manager roadmap adds additional features like application segregation, allowing one mobile phone application to use one wireless access system while allowing a second application to use a different wireless access system. We could also add bandwidth aggregation to construct very high-speed data pipes for users.
We also see significant innovation opportunity outside of wireless protocol. For example, substantial innovation is required in security, compression and power-saving technology to allow mobile applications to continue to grow. Indeed, unbeknownst to most, power consumption in the cellular industry is becoming a significant environmental and economic issue and creative solutions are sorely needed. Similarly, compression technologies continue to lie behind the market need.We of course thrive on solving hard problems, possessing one of the most innovative engineering workforces in the mobile industry. As evidence of that, in 2011, nearly 65% of InterDigital’s engineers were either named as inventors on patents that issued in 2011 or named on a new patent application first filed in 2011. Overall, approximately 80% of our engineers are named investors on US patents or patent applications. We are unaware of any other large engineering organization with that depth of innovative capacity. The combination of a large and growing market with the continuing need for innovation in that market are certainly positive signs for the business going forward. That said, we also have our challenges. First, we continue to be watchful of any changes to the legal or regulatory regime regarding patents. To date, the changes to the patent systems have mostly been generally favorable or neutral to us. Those that have had negative implications were not material to us, in part given the size and scope of our patent portfolio. However, more change could underway. For example, we are monitoring and also we’re appropriately actively participating in the dialogue underway today in terms of any licensing obligations we may have under the guidelines of the standard organizations in which we participate. We are partnered with some very large companies in that dialogue that share our interest. We also believe that on issues such as FRAND licensing terms and conditions, a now common defense for accused infringers, our extensive history of licensing many companies both big and small is a strong asset for us. Read the rest of this transcript for free on seekingalpha.com