InterDigital's CEO Discusses Q1 2012 Results - Earnings Call Transcript

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.

Good evening to everyone and welcome to InterDigital’s first quarter 2012 earnings conference call. With me this evening are Bill Merritt, our President and CEO, and Scott McQuilkin, our Chief Financial Officer. Consistent with last quarter’s call, we’ll offer some highlights about the quarter and the company and then we’ll open up the call for questions.

Before we begin our remarks, I need to remind you that in this call we will be making forward-looking statements regarding our current beliefs, plans and expectations which are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ materially from the results and events contemplated by such forward-looking statements. These risks and uncertainties include those set forth in our earnings release published today as well as the details on our annual report on Form 10-K for the year ended December 31, 2011 and from time to time in our other filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof and, except as required by law, we undertake no obligation to update or revise any of them whether as a result of new information, future events or otherwise.

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.

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